When Vic Taucer, a prominent gambling industry table game consultant, visited six Bay Area card rooms in March and April of 2014, he said he was astounded at the lack of internal operating controls, particularly at the Casino Royale in North Sacramento, California.
“The first thing I searched out was whether there were any valid operating controls,” Taucer recalls of his investigation for the United Auburn Indian Community, operator of the nearby Thunder Valley Casino Resort. “There were none.”
Taucer documented 389 deals of blackjack, baccarat and pai gow poker from March 11 to April 2 and seldom saw dealers offer to rotate the player/banking position, an apparent violation of state law and California Bureau of Gambling Control (BGC) rules.
Of 94 hands of blackjack dealt on March 11, Taucer says, dealers with Pacific Gaming Services, a banking firm employed by Casino Royale to run the games, offered to rotate the banker/dealer position just five times.
On another visit, a Thunder Valley casino employee noted a familiar face at the Casino Royale Casino cage buying $20,000 worth of chips.
“It was one of our regular players,” says a tribal official who requested anonymity.
A Sacramento Superior Court judge in a civil lawsuit filed by four gamblers, including two citizens of the United Auburn Indian Community, tentatively ruled in June that failure of Casino Royale to “continuously and systematically” rotate the banker/dealer position constituted illegal gambling in violation of state law.
The judge did not award damages because Casino Royale in November 2014 was shut down by the CBGC for not having sufficient funds to pay gamblers.
But the ruling on the legality of the games—if upheld by an appellate court—could prove significant in a growing, vitriolic dispute between California Indian tribes and the card room industry, which consists of some 80 clubs.
Tribes are angry that card rooms are using outside banking firms to offer high-stakes versions of blackjack, baccarat and other “California games” that replicate house-banked table games in the state’s 60 Indian casinos.
Tribes contend the games are illegal and violate their constitutional exclusivity to offer casino gambling. And they are miffed that the card rooms are luring their most valued players.
“The California penal code expressly bars the playing of 21, in other words, blackjack, as a prohibited game. Yet you can drive down streets and highways in our state and see billboards on which card rooms boldly advertise that they play Las Vegas-style blackjack,” Leland Kinter, chairman of the Yocha Dehe Wintum Nation, told an Assembly committee.
“In addition, the card rooms are effectively playing house-banked games,” Kinter said. “Card rooms no longer rotate the bank in the playing of their games and allow so-called third-party proposition players (TPPPs), essentially a partner of the card rooms, to maintain that bank.”
Card room operators contend the games are allowed under state law and gambling regulations.
“The tribal community has very strong feelings about the issues,” says Kyle Kirkland, president of the California Gaming Association, a card room lobby and trade group. “The card rooms feel very strongly about our position. We feel like we operate lawfully.”
The controversy is shining an embarrassing light on card room operations and the state’s bifurcated regulatory system—which consists of an adjudicatory California Gambling Control Commission (CGCC) under Governor Jerry Brown and a BGC enforcement agency under Attorney General Kamala Harris’ Department of Justice (DOJ).
Bob Lytle, who formerly headed DOJ’s gambling enforcement, was accused by Harris last December of violating conflict-of-interest and confidential business codes in connection with his consulting work for a card room targeted in a skimming investigation.
A number of CGCC officials linked to Lytle have since recused themselves from deliberating license issues. (See page 40.)
It was also disclosed that Lytle wrote a December 20, 2007 opinion letter nine days before leaving the DOJ to work for the card rooms that suggested the bank in table games need only be offered to players and not necessarily rotated.
Tribes contend card rooms are using Lytle’s opinion letter to circumvent the law. But it’s not clear whether Lytle’s letter is bureau policy.
“It may be wrong to make the assumption the Lytle memo is the policy of the bureau,” said a source close to the issue who requested anonymity. “Certainly they (bureau agents) have been acting that way.
“But Lytle was not an attorney. It would be surprising to me for a non-attorney to interpret the law and create policy. There may be a legal opinion, somewhere, that formed the basis for Lytle issuing the memo.”
BGC officials did not agree to requests for interviews.
Tribes are pressuring the BGC to take enforcement action against the card rooms. The BGC contends regulations and state law dealing with TPPPs and banker/dealer are vague, particularly on whether the deal need be actually rotated or simply offered to the various players.
The BGC also admits it lacks manpower and resources, a predicament blamed on the state legislature and Attorney General Harris, who has never ranked gambling control high on her list of DOJ priorities.
Brown may have a similar disregard for the CGCC, stacking the commission with career bureaucrats with little or no background in gambling or business.
“The state simply cannot enforce the laws on the books now to stop illegal activity rampant in California card rooms,” Kinter says.
“The Bureau of Gambling Control has asked the state legislature for additional resources,” Harris spokeswoman Kristin Ford says.
The agency, she adds, “works with limited resources to investigate, license and regulate a widespread industry touching on a number of different issues.”
Representatives from as many as 10 tribes—including the politically powerful Pechanga, Agua Caliente and Viejas Indian bands—on June 26 took their complaints directly to Harris.
Tribal leaders and Harris would not comment.
“Everyone kind of agreed that we weren’t going to go to the press on this,” says one of those attending the meeting. “We don’t want to do anything to disrupt any progress. We’re optimistic we can work through this and reach some kind of resolution.”
Wild Wild West
California’s card room industry dates back more than 100 years. But long gone are the days when clubs thrived on poker games with player bets building the pots and the house taking a collection fee, or “rake,” off the wagers.
The mostly family-owned card rooms were largely unregulated until passage in 1998 of the Gambling Control Act, which established the CGCC and, in 2007, the enforcement bureau under Harris.
Meanwhile, competition from tribal casinos prompted a decade-plus evolution of card rooms from poker to high-stakes variations of blackjack and other “California games” bankrolled by TPPP firms. It was soon common to see player/bankers with $50,000 in chips stacked on the green felt.
Regulators and industry experts believe modern regulations, surveillance and internal operating controls have struggled to keep up with the industry’s evolution from poker to casino-style games.
The commission is updating internal controls and amending TPPP regulations to increase accounting and financial reporting requirements and better define the contractual relationship between banking firms and card room owners.
Meanwhile, the BGC is holding workshops on collection fees and, according to some sources, assessing its enforcement policy on player/dealer rotation.
“This is a very newly regulated industry, so to compare us now with Vegas is, you know, unfair,” CGCC Commissioner Tiffany Conklin says. “You might want to compare us to when it gambling was new in Las Vegas. We’re finally having these regulations in place and getting enforced.
“The industry does evolve so quickly, we’re trying to keep up with the technology and the new types of gaming and the new types of issues that evolve,” she says.
With exceptions, such as the larger Los Angeles-area clubs, sources say compliance with internal operating controls and federal Title 31 money laundering and cash transaction guidelines in many card rooms is nonexistent, poorly implemented or not applicable to TPPP-banked games.
“When you switch over to the type of games in California now—non-poker games that by law are supposed to be player-banked, but most of the time it’s a third-party banker—it certainly makes the situation far more complicated,” says Nevada gaming attorney and author Tony Cabot.
“You need different internal controls than with poker. You also have the contractual arrangement between the banker and the house.”
“If card rooms are going to have a banking game, which they do, even though outside operators are banking the game and not the house, the card rooms still have to operate as such,” says Taucer, who along with his Bay Area work also scrutinized Southern California card rooms.
“I would like to see valid internal controls, Gambling Control Commission approval of those controls, and then I want to see operators match what is written. None of that is happening.”
There are 35 TPPPs licensed by California regulators who, in many cases, dominate play in the smaller card rooms, sharing profits with the owners.
“At the end of the day the money left on the table belongs to the banking group, not the card room,” says Dave Vialpando, a former BGC supervisory agent who now serves as a tribal casino regulator.
Industry consultant George Joseph calls card rooms “the Wild Wild West, no question.”
Industry’s ‘Galapagos Islands’
CGCC Commissioner Richard Schuetz, who has operated commercial and American Indian casinos in several states, likens the evolution from poker to TPPPs to the “Galapagos Islands,” and calls California card rooms the “worst regulated segment” of the nation’s gambling industry.
“We need to tighten up the regulations,” Schuetz says, to avoid scandals that could embarrass the industry.
It may be a bit late.
The litany of card rooms targeted in Title 31, money laundering, loan-sharking and skimming investigations includes Casino M8trix in San Jose (2014), Artichoke Joe’s in San Bruno (2011), the Oaks Club in Emery (2011), Normandie Casino in Gardena (2013), Palomar Card Club in San Diego (2014) and Village Club Card Room, Chula Vista (2014), to name a few.
“There’ve been more raids on California card rooms than all the tribal and commercial casinos in the country, combined,” notes one industry regulator.
Meanwhile, several banking firms with questionable business ties to the card rooms have paid fines of $250,000 to $550,000 for violating state law.
Card room attorney David Fried rejects the notion the industry lacks sufficient regulations.
“The card rooms are heavily regulated,” Fried says. “The amount of minutiae they have to comply with in our regulatory rule book is hundreds of pages long.”
“We have put in some pretty strict internal control standards,” Kirkland says. “I can tell you they’re pretty detailed. It’s not as though we’re all just out there winging it.
“Some of the regulations are complicated. You have to continue to retrain your staff to make sure you do the best job you can. It has been a learning curve for the card rooms and for the regulators.”
Consultant Bill Zender says card room internal control regulations have improved in the past three years “to a point where they’re as good as or better than any gambling operation in the country.”
But he and Kirkland would not vouch for compliance by most of the state’s nearly 80 licensed card rooms.
Vialpando says card rooms are historically family-operated businesses often unaccustomed to state regulations and federal cash transaction laws.
“They’ve had a hard time getting their heads around it, because for years they’ve never had to do all this stuff,” he says.
“Card clubs are at least as vulnerable to use by money launderers… because of their size and because those institutions often lack the controls found at casinos,” Stanley Morris, former director of the Treasury Department’s Financial Crimes Enforcement Network (FinCEN) told Reuters News Service.
Meanwhile, both Schuetz and former CGCC Chairman Richard Lopes have said tribes operate “some of the best regulated casinos on the planet.”
The CGCC and BGC provide oversight of the $7 billion tribal government gambling industry while directly regulating the card rooms.
Tribal governments with large gambling enterprises have annual gambling commission and surveillance budgets in excess of $6 million to regulate a single casino. (The BGC budget is $26 million.) And tribal casino regulators often conduct training for BGC agents and auditors.
The dispute between the politically powerful Indian tribes and card club operators could have dire consequences for an $850 million card room industry that employs 22,700 people while generating $270 million in federal, state and municipal taxes.
Some Los Angeles suburbs and communities such as Fresno and San Jose rely on card rooms for 60 percent or more of their municipal revenues.
A strict regulatory interpretation of rules and laws governing TPPPs, player/dealer rotation, collection fees and “California games” could cripple the industry and bankrupt municipalities.
“If we were to go back to the old days of rotation—if everyone on the table paid a commission—it would have a damaging impact on the card rooms, and it would bankrupt a number of cities,” says a Capitol Hill source who requested anonymity.
“Union city employees, police and firemen would be laid off,” the source says. “The state would have to come to the rescue.”
Kirkland suggests that it would be wise for card rooms and tribes to work together to promote the state’s gaming industry and prevent residents from slipping over the border to Las Vegas, which generates nearly 30 percent of its visitors from California.
“I do think there’s a lot of fighting between the card rooms and the tribes. What we really should be thinking about is the 30 percent of the customers we send out to Nevada every year,” Kirkland says, noting that table games often account for less than 10 percent of a tribal casino’s revenues.
“That’s a much bigger issue for all of us.”
The card room industry worked with a number of tribes on issues such as off-reservation gambling.
And the San Manuel and Morongo Indian bands are partners with the Commerce, Bicycle Club and Hawaiian Gardens casinos in pressing for iPoker legislation. Neither tribe has been active in the controversy over card room games.
With the BGC struggling to regulate card rooms—the agency claims to have a backlog of 2,400 card room licensing investigations—many on Capitol Hill are asking if the state is ready to take on internet gambling.
“The present ability of the state to effectively regulate is among our chief concerns as the legislature considers a major expansion of gaming in California,” Kinter says.
“We must ask ourselves, if the state cannot effectively regulate the card room industry, are they presently in a position to regulate the vast and more complex environment of internet poker?”
A politically bifurcated regulatory system and a lack of skills, manpower and resources are crippling California’s ability to administer and police its card rooms while providing regulatory oversight of American Indian casinos, state officials say.
Two high-ranking Gambling Control Commission officials linked to card room consultant Bob Lytle, a former enforcement chief accused by the Department of Justice (DOJ) of misconduct, have abruptly left their jobs.
And the lack of skilled manpower and resources in the Bureau of Gambling Control raises concern over whether the state can regulate internet poker.
“We’re having a hard time handling what we have now,” Commissioner Richard Schuetz told Pechanga.net. “Combined with the personnel disruptions of late, if we were to go into the internet we would need a great deal of help.”
Commission Chairman Richard Lopes, in announcing his May retirement, said the state should “take a hard look” at its regulatory apparatus and encourage individuals with gambling industry experience to serve on the commission, which crafts regulations.
California has the country’s only political bifurcated regulatory system, with an adjudicatory commission appointed by Governor Jerry Brown and an enforcement bureau under Attorney General Kamala Harris’ DOJ. The system regulates the card club industry, with some 80 facilities, and provides limited oversight of 59 tribal casinos.
Some industry observers applaud the regulatory structure as ensuring a clear separation of judicial and enforcement functions. Others contend it makes it difficult to create a uniform and efficient gambling policy.
“I would recommend that this state take a hard look at what Nevada does, and New Jersey,” Lopes said, calling Nevada the “gold standard” in state regulations. Both states have bifurcated systems under one elected official, the governor.
Communications between the BGC and commission are problematic, Lopes said, with investigatory information between agencies filtered through attorneys and mid-level bureaucrats.
“Having two structures is somewhat awkward,” said Lopes, a career law enforcement officer and former DOJ supervisor. “It’s difficult to meander through this and come up with good decisions.”
Lopes also suggested California seek more gambling industry experience in commission and bureau leadership positions.
Other states seek out those with industry experience to assist with regulations, Lopes said. With the exception of Schuetz, a longtime tribal and commercial casino operator, California commissioners are career bureaucrats.
“Nevada embraces that experience to help them navigate difficult decisions when it comes to suitability, regulations, etc.,” Lopes said. “California seems to run away from that, for whatever reason.”
“I hope Chairman Lopes’ suggestions don’t fall on deaf ears because I, too, believe that California needs some fundamental attention paid to its regulatory assets,” Schuetz says. “Quite frankly, California does not represent itself well among the other gambling jurisdictions. The other jurisdictions seem to take gambling much more seriously and commit more resources to the regulation of the industry.”
Commissioner Tiffany Conklin disagrees.
“As much problems as we have and we complain about it, I feel it protects the integrity of the process more to have two separate agencies,” she says. “Sure, there are areas we need to correct and work better on, but scrapping the entire process and working under one constitutional officer isn’t something I’m ready to accept at this point.”
Joginder Dhillon, Brown’s chief adviser on gambling affairs, declined comment.
California statutes require the five commissioners consist of an attorney, a government official, a business person, a law enforcement officer and a member of the public at large. It does not limit gambling experience, though it requires a two-year “cooling off” period for industry executives seeking appointment to the commission.
Brown in a 2012 budget shuffle shifted commission investigatory, auditing and compliance duties to the DOJ, despite the fact political observers contend Harris does not place gambling high on her priorities.
“Brown and Harris are not engaged in this debate,” says a high-ranking Capitol Hill official who requested anonymity.
The commission is amending internal controls and regulations on third-party banking firms.
“The card room sector needs fundamental improvements to ensure that industry is sustainable,” Schuetz says. Tribal governments, he says, “do an excellent job of regulating.”
Lopes and Schuetz commend BGC employees for their diligence, but said the agency lacks skills and manpower. Many field agents and auditors are former narcotics officers with little experience in gambling compliance.
“They do a wonderful job,” Lopes said. “I just think some other states have a little bit better approach to regulating an industry.”
California would be challenged by internet gambling.
“We don’t have enough personnel and we don’t have the skill sets that we need,” Schuetz says. “We need greater training.
“Terrestrial regulation and digital regulation… are fundamentally different issues,” he adds, and not having a gambling testing laboratory puts California at a disadvantage.
Lopes announced his retirement the same day director Tina Littleton voluntarily stepped down to assume a lower-level job with the agency.
Lopes and Littleton had both recused themselves from adjudicating the gambling license of former DOJ enforcement chief Lytle, a card room consultant who in December was accused by Harris of misconduct in connection with a skimming investigation.
Lopes briefly was Lytle’s supervisor when both served with the DOJ.
Littleton in May said she was living with James Parker, a onetime BGC supervisory agent suspected of providing information to Lytle concerning a skimming investigation of the M8trix Casino in San Jose.
Lytle denies violating conflict-of-interest and document disclosure provisions of the Business Code as alleged in Harris’ formal accusation. He faces a hearing before an administrative law judge before the matter is forwarded to the commission for final action.
The bureau is seeking a fine and revocation of Lytle’s licenses as a key employee and owner/interest holder in two Sacramento card rooms.
“Obviously, I’m a strong believer in due process and innocence until proven guilty,” Lytle told Gambling Compliance. “I look forward to a hearing. I look forward to proving that I didn’t do anything wrong.”
Lopes did not mention Lytle in announcing his retirement. He notified the governor’s office of his decision in a March 30 letter, about three months after being reappointed. “I’m eagerly looking forward to the next chapter in my life,” Lopes said.
Meanwhile, Conklin in June recused herself from presiding over the licensing of the Club 101 card room in Fresno, partly owned and operated by Kyle Kirkland, president of the California Gaming Association.
Conklin acknowledged being friends with the wife of Kirkland’s attorney, John Maloney, meeting “socially” with Kirkland at a San Francisco law office and attending a Thanksgiving dinner at Maloney’s Las Vegas home with Kirkland being the only other non-family member.
“My record will reflect that I have no bias regarding Mr. Maloney and his client and have in fact voted against several of Mr. Maloney’s other clients where it was appropriate,” Conklin told commissioners.
“I will be recusing myself… to avoid any bias with my personal relationship with the Maloney family.”
Conklin and Kirkland in separate interviews said they have met infrequently and did not talk about business at the San Francisco meeting or the Thanksgiving dinner.