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Casino Control: Setting the Bar

The New Jersey regulatory system set the standard for all new casino markets

Casino Control: Setting the Bar

“Keep your filthy hands off Atlantic City and keep the hell out of our state!”

This was the famous line directed at organized crime by former New Jersey Governor Brendan Byrne after he signed the Casino Control Act in 1977, officially ushering in Atlantic City’s gaming era. At the time, many reporters undoubtedly licked their chops, looking forward to the times they could throw that line back in Byrne’s face.

After all, this was New Jersey, right? How, they reasoned, could a business like casinos-their only record at the time being the infamous and, at the time, still-strong mob control of gaming in Nevada-avoid mob infiltration in a state that was one of the cradles of the Cosa Nostra in America?

Thirty years after the first casino opened, reporters have had almost no occasion to bring that quote up in a story, because, by and large, organized crime has kept its “filthy hands” off Atlantic City gaming.

New Jersey succeeded in keeping the business clean by starting out with a regulatory structure that some called cumbersome, and others complained was absolutely stifling to the normal conduct of business. Those initial rules would be relaxed eventually, but not at the expense of strict integrity within the industry, and not before the gaming industry had begun its expansion beyond Nevada and New Jersey to become a nationwide business that was recognized and respected.

“We had to ensure integrity in the very beginning,” comments Linda Kassekert, chairwoman of the New Jersey Casino Control Commission. “We had to prove ourselves, being the second jurisdiction after Nevada to get gaming, that this was a business as pure as it could be, as clean as it could be… Had my forebears not been as stringent, we might be looking at a very different Atlantic City today. Just the fact that we have such a good national, and even worldwide, reputation is really a testament to those early days.”

The Other Extreme

Those early days were legendary in their definition of the term “strict regulation,” and, some would argue, “over-regulation.”

“I think ‘cumbersome’ is a mild word, because initially, the regulations were beyond cumbersome,” recalls Mac Seelig, founder and president of AC Coin & Slot, one of the first vendors to Atlantic City casinos. “They were costly to all of us as vendors-the additional costs we had just to get licensed, to have the state come and inspect our facilities, and so on. The legal fees alone on our side were just unconscionable.”

Seelig adds that when the initial regulations were relaxed in the 1990s, all realized that they had been necessary to establish the reputation for integrity that New Jersey gaming has since enjoyed. “The job was done so well by the operators and the regulators initially that it left all of us, those still here standing, doing very well,” he says.

That didn’t change how difficult it was initially to do business in Atlantic City. However, as noted by the people who created that initial regulatory structure, the difficulties arose from safeguards deemed necessary to maintain a squeaky-clean local version of an industry that traditionally was anything but squeaky-clean.

“Remember, when we built the regulatory structure, first, we were working from scratch,” says Judge Steven Perskie, who, as an attorney and a state lawmaker in the 1970s, was a main force in drafting what would become the Casino Control Act. “We had nothing to go by. Second, we were dealing with the specter of an industry that had a corrupt reputation, in a city and state that both had corrupt reputations.”

Perskie, who would go on to serve as perhaps the most influential head of the Casino Control Commission during the 1990s, says he actually drafted and published what would become the Casino Control Act before the 1976 election, so voters would get a complete picture of what the casinos would look like. Though borrowing the best from the statutes of jurisdictions where gaming was legal, he didn’t simply copy existing rules.

“We had to create a structure that met New Jersey’s needs,” he says. “We were acutely aware of New Jersey’s climate and history, so we made the strategic decision that the regulatory system was the key-because the regulatory system had to be and to be seen as being independent and strong, and free from political pressures, completely isolated from the normal New Jersey political system.

“That’s how we came up with the idea for a two-agency system-the Casino Control Commission, an independent agency; and the Division of Gaming Enforcement, which is organized within the Attorney General’s office.” It is a system that eventually would become a model for new gaming jurisdictions across the world.

“It kept the mob out,” says Pat Dodd, a state senator in the 1970s who was later a Casino Control Commission member under Walter Read and Perskie. “That was the major success of the Casino Control Act.”

Joel Sterns, the attorney representing Resorts during the licensing hearings, explains that his clients were part of the process of writing the regulations, but had no problem with integrity issues.

“We wanted to concentrate on business issues,” says Sterns. “If they wanted a cocktail waitress to fill out 100 pages to get a license, that was OK with us. Just let us run our business and make money for our company and the state.”

Tough Years, Tough Decisions

While the Casino Control Act would go on to become the model for new gaming jurisdictions, the early years of gaming in Atlantic City would see strict application of the law by regulators who were mainly from the realm of law enforcement.

The first chairman of the Casino Control Commission, the late Joseph P. Lordi, was a former Essex County prosecutor (as was Byrne), and both the commission and the DGE were replete with law enforcement experience.

“Joe Lordi ran the commission as a startup agency very well,” comments G. Michael Brown, who went on from a position as prosecutor under Lordi in Essex County to become the second director of the DGE in 1980. “He had been the Alcoholic Beverage Control director and first assistant prosecutor under Byrne-he became prosecutor when Byrne became governor, after which Byrne drafted him to head the new agency. He wanted law enforcement presence on the commission.”

Byrne also sent the word down to the early commission that the Casino Control Act was to be interpreted strictly-much to the chagrin of operators during the early 1980s.

And to make matters worse, the election of Tom Kean as governor, and appointment of Walter Read as commission chairman, ushered in a period that was very much adversarial between the regulators and operators in Atlantic City.

Dennis Gomes, former president of the Tropicana and now head of Cordish+Gomes Gaming, was an investigator for the DGE at the time. His law-enforcement reputation was stellar. He had helped to bring down Frank “Lefty” Rosenthal, one of the last mob associates to still control a Las Vegas casino, during his time as a Nevada investigator. In New Jersey, Gomes said he was given free reign with a special task force.

“We were told that we had complete autonomy in our investigatory procedures,” he says.

After he crossed international borders to prove that Resorts had been making payments to relatives of Bahamian politicians, his group was disbanded.

“We were disappointed, but there was a lot of pressure to get Resorts licensed,” he says.

The regulatory controls, designed to keep organized crime out, extended to every aspect of casino operations. At least 5 percent of slots had to be nickel games. A certain number of $2 and $5 blackjack tables needed to be in play at all times. Minor changes in operations-even the colors of the bathrooms, by some accounts-had to be approved by the commission. Any introduction of new games had to be approved by the legislature.

“Unfortunately, we placed burdens on businesses and on ourselves-we didn’t know when to stop,” says Dodd. “It wasn’t until the late 1980s that it became very clear that we were doing it wrong.”

The 1980s also were marked by several controversial licensing decisions, leading up to the most controversial of all, the denial of a gaming license to Hilton Hotels Corporation in May of 1985.

It wasn’t the first controversial decision-the DGE recommended against licensing for Resorts International, the first casino, citing a total of 17 points to which objections could be raised. Brown, who worked on the Resorts licensing hearing as an attorney for the commission, says the panel ultimately decided none of the points rose to the level required for a license denial.

Sterns agrees. “We were able to explain that all the objections were minor issues,” he says. “Even the issue of payments to Bahamian companies could be justified as normal payments for services rendered.”

After the Resorts licensing, the commission adopted a policy of conditional licensing, which had major ramifications for the companies involved. Stuart and Clifford Perlman, the founders of Caesars World, were found unsuitable because of past business dealings with alleged criminal figures. Caesars Boardwalk Regency (later Caesars Atlantic City) was given the condition of the Perlmans’ resignation before a license would be issued. The Perlmans resigned.

Bally’s Park Place (now Bally’s Atlantic City) encountered a similar problem-the board ruled that William O’Donnell, founder of Bally Manufacturing, was unsuitable for licensing. O’Donnell stepped down from the famous company he had founded, to allow it to cash in Atlantic City gaming. “It was heart-wrenching,” comments Brown. “Bill O’Donnell had founded Bally, and had relationships with some vending machine companies that were wrong 30 years ago. He had seven children; we let him give his stock to his seven children.”

Playboy was next; the commission found CEO Hugh Hefner unsuitable for licensing. Playboy chose to keep Hef, selling its half-interest in the Playboy Casino to partner Elsinore Corporation.

The granddaddy of them all, though, was the Hilton decision. No one expected Hilton to be denied a license, least of all the famous company’s executives, who oversaw construction of a Marina District casino hotel that was nearly complete at the time of the decision. When the commission denied Hilton’s license, it sent a chill through the industry that undoubtedly caused some companies to second-guess investing in Atlantic City. (The near-complete casino, along with its hired employees, were snatched up by Donald Trump for what is today Trump Marina.)

According to those involved with the decision, the Hilton was denied licensing because of an arrogant attitude toward the commission’s concerns.

The board questioned Hilton executives, and their lawyer, Bud Foley, about two separate problems-one involved the company’s 13-year employment of a Chicago attorney with alleged links to organized crime; the other involved an internal corporate investigation into alleged misconduct by Hilton executives in San Francisco. The latter investigation produced a report that company executives withheld from the commission until the day it was to render its decision.

Carl Zeitz, one of the two commissioners who voted against Hilton’s licensing in 1985, says it was the attitude of Hilton officials with respect to these concerns that ultimately led to denial of the company’s license.

“There was a lack of acknowledgement by the Hilton corporation of the severity of these issues,” says Zeitz, who is now a consultant to the industry on regulatory issues. “Measured against the standards that had been established in the earlier cases, Hilton was not measuring up as far as being forthcoming in dealing with those issues. They were not treated with the measure of gravity they deserved.”

Perskie agrees, noting that when Hilton came before the commission again in 1991 when he was chairman, they came in with a different application-and a different attitude. “Their application acknowledged that they shouldn’t have been involved with those people,” he says. “They had established a compliance structure within the corporation to monitor all associations and investments. They said, ‘We’ll give you access to it.’ Guess what? That’s all we were looking for.” Hilton was quickly approved for a license on the second try.

A New Era

The election of Jim Florio as New Jersey governor ushered in a new era of cooperation between Atlantic City regulators and operators. Florio’s appointment of Perskie as chairman of the Casino Control Commission began a partnership between the industry and its regulatory agencies that continues to this day.

The changes actually started when Dodd became a commissioner, under Read. Dodd became the lone voice for reform of the commission’s procedures, but when Perskie was appointed chairman, he says, everything changed.

“I had lists-suggestions, not just complaints-on how we could tweak the entire process,” Dodd says. “Perskie adopted virtually everything, and then, to his credit, went on to other innovations. It was a watershed change.”

“When I became chairman,” recalls Perskie, “there were two different realities. One, on a person-to-person basis, we had the finest government agency I’d ever seen. By the same token, though, by 1990, the industry had been here 12 years, and nobody had ever sat down to do a substantive and comprehensive analysis of whether the regulatory structure and its systems were still serving the appropriate public interest.

“The good news is that the system worked; the bad news is that by 1990, it was sclerotic-it was using 1978 techniques and 1978 ideas to deal with an industry and reality in 1990.”

One by one, the restrictive regulations began to give way to more business-friendly rules. Casinos no longer had to go the commission to change the colors in their restaurants, or for that matter, to reconfigure slot floors. Decisions on new casino games are now the responsibility of the commission, not lawmakers in Trenton. The rules on approval of slot machines, once a laborious process in New Jersey, were streamlined to allow slot game approval that is now among the quickest in the industry.

After hundreds of regulatory and administrative changes, Atlantic City casinos entered their golden age, and became darlings of Wall Street in the process.

However, of all the changes made, Perskie notes that the controls in place to prevent crime remained among the most strict in the industry.

Even the more restrictive early days of regulation, though, played an important part in the development of the casino industry in general. For instance, the so-called “50 percent rule,” which held in the beginning that no one slot manufacturer could occupy as much as half of a casino floor, allowed a slot sector dominated in 1978 by one company-Bally-to flourish with a variety of new manufacturers, not the least of which was International Game Technology.

“That was such an evolutionary step for the industry,” notes AC Coin’s Seelig. “It’s the reason IGT and all those other folks are in the position they are today. It was a good thing; it changed technology.”

Even the most restrictive of the early regulations and the toughest commission decisions were not necessarily a bad thing, notes Zeitz. “They were part of a body of decisions that ultimately established principles under which other states realized you can establish a casino industry. Had similar principles been established in other industries, you might not have had an Enron or similar scandals.”

Sterns says even Nevada is better off now that New Jersey regulations proved to be so successful.

“In the beginning, they laughed at us,” says Sterns. “But now, Nevada regulations are the equal to if not even tougher than New Jersey. And all other states look to New Jersey today in addition to Nevada, so the two states really are the gold standard of gaming regulations.”

“Casino gaming is legal in 38 states now, and probably 70 percent of them drafted their regulatory model around New Jersey,” says Brown. “I worked in two states in Australia, and both used the Casino Control Act of New Jersey as the basis for legalizing casinos.

“New Jersey gave legitimacy to the casino industry.”

Frank Legato is editor of Global Gaming Business magazine. He has been writing on gaming topics since 1984, when he launched and served as editor of Casino Gaming magazine. Legato, a nationally recognized expert on slot machines, has served as editor and reporter for a variety of gaming publications, including Public Gaming, IGWB, Casino Journal, Casino Player, Strictly Slots and Atlantic City Insider. He has an B.A. in journalism and an M.A. in communications from Duquesne University in Pittsburgh, PA. He is the author of the books, How To Win Millions Playing Slot Machines... Or Lose Trying, and Atlantic City: In Living Color.