A five-year dispute between California’s American Indian tribes and the state’s card rooms is moving toward potential litigation that could force major reforms of what many believe to be the worst-regulated segment of the legal gambling industry.
Failed efforts by the state Gambling Control Commission (GCC) and Bureau of Gambling Control (BGC) to regulate and police the state’s 74 licensed card rooms may result in litigation over constitutional provisions giving tribes exclusivity to operate casino gambling, sources say.
A court-mandated settlement of the conflict may not bode well for the card rooms, which tribal lawyers contend have been circumventing provisions of the state constitution and penal and business codes prohibiting house-banked games such as blackjack, pai gow poker and baccarat.
A strict interpretation of state gambling laws limiting the ability of card rooms to bank high-stakes table games could cripple an $850 million industry responsible for some 22,000 jobs and millions of dollars in state and municipal taxes.
Proposition 1A in 2000—approved by 63 percent of the voters—amended the state constitution to give tribes statewide exclusivity to operate casinos.
“Tribes aren’t interested in putting the card rooms out of business. That’s not the point here,” says Steve Stallings, chairman of the California Nations Indian Gaming Association, a group of 32 casino and non-gaming tribes. “But, clearly, when the type of games and practices regarding banked games infringe on tribal exclusivity, card rooms are crossing the line.”
Bad to Worse
Relations between tribes and card rooms, says lobbyist David Quintana, “are the worst they’ve ever been.”
Chairmen Bo Mazzetti of the Rincon Band of Luiseño Indians and Kevin Day of the Tuolumne Band of Me-Wuk met with Attorney General Xavier Becerra in April to voice their opposition to card room practices. Seven other tribes were also seeking to meet with Becerra.
“When we hear back from the AG, I think the tribes and CNIGA will take some direction,” Stallings says.
“I think it’s folly to believe this issue will not be ultimately solved by litigation,” tribal attorney Scott Crowell says.
Card rooms say they operate in compliance with BGC game rules and GCC regulations governing licensed third-party proposition player (TPPP) banking firms.
“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.”
But tribes believe GCC regulations and BGC game rules violate state law and constitutional provisions giving them exclusivity to operate casinos.
“The card rooms’ strongest defense is that there are regulations in place that essentially make no sense that are sanctioning illegal activity,” Crowell says. “It’s not Law School 101, but Social Studies 101 that statutes trump regulations, and constitutional provisions trump statutes.
“House-banked games not on Indian lands violate constitutional provisions, and regulations cannot sanction unconstitutional behavior, period.”
Tribes are angry that card rooms are able to offer high-stakes, house-banked games by failing to rotate the player/dealer position and abusing the use of TPPP firms.
Leland Kinter, chairman of the Yocha Dehe Wintun Nation, tossed down the gauntlet at a recent state Assembly hearing.
“The California penal code expressly bars the playing of blackjack as a prohibited game,” Kinter said. “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.
“In addition, the card rooms are effectively playing house-banked games. Card rooms no longer rotate the bank in the playing of their games and allow so-called third-party proposition players, essentially a partner of the card rooms, to maintain that bank.
“This practice directly violates the California Constitution and penal code and the tribal exclusivity granted to tribes by California voters.”
Tribes and card rooms wield considerable clout, accounting for 80,000 jobs and millions of dollars in taxes and revenue to state and local governments. The industries are also a lucrative source of campaign contributions.
The political implications are not lost on the GCC, the regulatory and adjudication arm of the gambling control apparatus whose commissioners are appointed by Governor Jerry Brown. The same is true of the BGC, the enforcement agency in AG Becerra’s Department of Justice.
BGC officials declined interviews, asking that questions be emailed through Becerra’s press office.
The governor’s office also refused to discuss the dispute.
“I don’t expect we’ll be commenting,” Brown spokeswoman Deborah Hoffman says.
Card Room Industry Evolution
Card rooms have undergone an evolution from strictly poker with the house getting a fee, or “rake,” from each hand, to Asian and “California games,” versions of blackjack, pai gow poker and baccarat.
The games have promulgated widespread use of TPPP firms to bank the games.
The high-stakes Asian/California games and TPPPs have helped card rooms compete with tribal government casinos which, since the passage of Proposition 1A, have grown into an $8 billion industry with 63 state-licensed operations.
The card room industry has dwindled from 232 clubs in the late 1990s to about 75 today, according to state officials. But the inventory of gambling tables has dropped only slightly, from 1,945 in 1997 to the current 1,879.
State and municipal regulations and internal operating controls have not kept up with the industry’s evolution.
A number of card room managers have been slow to develop internal operating controls and federally mandated anti-money laundering and suspicious cash transaction procedures not necessary with poker.
“There needs to be more transparency,” says Saverio Scheri, president of White Sand Gaming, which has consulted with card rooms and municipal officials. “There needs to be more attention to not only the regulations but accounting practices.”
“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,” gaming attorney and author Tony Cabot says. “You need different internal controls than with poker. You also have the contractual arrangement between the banker and the house.”
Card room attorney Keith Sharp says regulatory compliance problems are not systemic throughout the industry.
“The regulations are in good shape,” he says. “But regulators and industry folks recognize that some regulations work well and others don’t work as well, or work at all. Regulations can be changed. That’s what we’re going through now with third-party regulations.
“The guys I represent in the card room industry welcome fair and efficient regulations.”
Kirkland made similar remarks to the San Diego Union-Tribune, acknowledging that the industry’s evolution has outpaced regulations.
“The industry, I think, is realizing we have to become more sophisticated,” he told the newspaper.
Others are harsher in their appraisals.
Table games expert Vic Taucer, president of Casino Creations, said card room internal operating controls “are virtually nonexistent.” Gambling industry consultant George Joseph refers to card rooms as “the Wild, Wild West.”
Richard Schuetz, who retired in 2015 from the GCC, says card rooms are the “worst-regulated segment” of legal gambling, an opinion echoed by others knowledgeable of the industry.
“It’s the Galapagos Islands,” he quips.
Regulators Struggle With Industry Compliance
The profitable use of TPPPs by card rooms conflicts with Business and Professions Code Section 19984, which states, “In no event shall a gambling enterprise or the house have any interest, whether direct or indirect, in funds wagered, lost or won.”
Meanwhile, game rules adopted by the BGC appear to violate the intent of California Penal Code 330.11, which states, “The player-dealer position must be continuously and systematically rotated” among players. The code does not mandate acceptance of the deal by every player.
Business and professions codes allow card rooms to contract with banking services, which profit from a statistical advantage in the pay of the games. Twenty TPPP firms are listed as licensees on the GCC website.
But the codes do not define how contracts are to be structured and what services can be provided by the TPPPs—advertising, supplies, etc.—without violating state law prohibiting card rooms from having a “direct or indirect” benefit from the outcome of wagers.
Nefarious business arrangements between TPPPs and card rooms have been blamed for at least a few of several recent federal money laundering, skimming and loan-sharking investigations.
Beginning with Artichoke Joe’s and the Oaks Card Club in suburban San Francisco in 2011, there have been more federal and state anti-money laundering and skimming raids, investigations and shutdowns of card rooms than the nearly 1,000 commercial and tribal casinos nationwide.
The list includes Hawaiian Gardens, Bicycle Club and Normandie Club in suburban Los Angeles, M8trix Casino in San Jose and the Palomar and Seven Mile card rooms near San Diego.
Lucrative TPPP partnerships enable card room operators to stop taking collection fees on the wagers, which is allowed under the penal code. Dropping the fees enables clubs to lure high rollers from tribal casinos. Tables account for up to 25 percent of a tribal casino’s revenues.
The United Auburn Indian Community, owner of the Thunder Valley Resort in the Sacramento suburb of Lincoln, flew into a rage when a valued gambler was spotted three years ago at nearby Casino Royale buying $20,000 in chips. The club has since closed.
The GCC two years ago shelved draft regulations aimed at reforms and transparency in TPPP-card room contractual arrangements. Commissioners pledged to take up the challenge again this summer.
Some card room operators complain that the draft proposals are confusing and onerous. They blame tribes for fueling the fires of regulatory reform in an effort to put card rooms out of business.
Some tribal officials suggest forcing card rooms to take collection fees from gamblers would go a long way to resolving the dispute.
“If card rooms agree to adopt a collection fee policy, they may never hear another peep out of us,” a tribal regulator says.
Not all tribes agree with that assessment.
“The problem with that solution is you’re sanctioning an illegal result,” a tribal attorney says.
Mitchell Goldstein, president of Gold Gaming Consultants, a TPPP firm, warned BGC officials at a 2015 hearing that by forcing card rooms to take collection fees “you’ve destroyed a huge industry and all of the families that support it.”
Tribal officials believe the ability of card rooms to avoid imposing a collection fee is evidence operators are at least indirectly profiting from the outcome of the games, violating state law.
“How is it these (club-TPPP) contracts can enable a card room to avoid a collection fee, to waive it altogether, and still be able to operate?” Tuari Bigknife, attorney general for the Viejas Band of Kumeyaay Indians, asked commissioners at a hearing on the issue. “What percentage of the total expenses generated by a card room is paid by a TPPP under contract?
“It is banked gaming, in our viewpoint. It looks like it. It sounds like it. It operates like it. And the folks that go in and play at these facilities think it is.”
Bureau Game Rules Are Ambiguous
While the GCC grapples with TPPP regulations, the BGC has struggled to adopt game rules that comply with state law while continuing to enable card rooms to offer high-stakes, player-banked games.
The effort has been mired in controversy and criticism.
Former enforcement chief Rob Lytle issued a December 2007 opinion letter that stated the deal need not be “continuously and systematically” rotated as stated in Penal Code 330.11, but merely offered to the various players at the table.
Lytle distributed the opinion—worth millions of dollars to the card rooms—about 10 days before resigning his position to become an industry consultant and club owner.
Lytle was later slapped with a formal conflict-of-interest accusation in 2014 by then-AG Kamala Harris and stripped of his consulting and ownership licenses.
The attorney general issued a memo in March 2008 apparently repudiating the Lytle opinion, citing the penal code and referencing the need to “continuously and systematically” rotate the player/dealer position.
But a June 2016 effort by BGC chief Wayne Quint to again resolve the rotation issue generated criticism from both tribes and the card rooms.
Claiming in a letter that the “relevant portion” of 330.11 was that the deal need not be accepted by every player, Quint’s ruling was that the deal be rotated every hour, at which time the game would be “closed” for two minutes.
Card rooms complained the rule would be difficult to enforce and cause them financial hardship. Tribes said it ignored longstanding BGC policy that the deal is to be rotated every two hands, allowing some 40 to 50 hands to be dealt without any rotation.
Tribes claimed the relevant portion of 330.11, as noted in the 1998 decision in Oliver v. Los Angeles County, was the need to “continuously” rotate the deal, which was not mentioned in Quint’s letter.
“The notification doesn’t change the state of the law in California at all,” Bigknife says of Quint’s decision.
“We’re extremely disappointed and a little bewildered by these guidelines,” says Ray Patterson, executive director of the tribal gambling agency for the Yocha Dehe Wintun Nation. “To anybody with any regulatory or operational experience, it makes zero sense what they did.”
Regulatory System Issues
Card rooms were largely unregulated prior to the Gambling Control Act of 1997, which designated the GCC and BGC as primary regulators of the industry with limited oversight of tribal gambling. Federal law gives tribal governments primacy in regulating their casinos.
The Paskenta Band of Nomlaki Indians and Picayune Rancheria of Chukchansi Indians in recent years underwent political upheavals that disrupted gambling operations. But tribal casinos have operated virtually free of scandal.
The same is not true of California’s card room industry.
“I think it is very poorly regulated,” Scheri says. “More attention needs to be paid to these operations. There are some bad actors out there that are really causing problems.”
In stepping away from the CGC in 2015, Schuetz and commission Chairman Richard Lopes urged reform of the politically bifurcated regulatory system, the only one in the country under two constitutionally elected officials. Their opinions are shared by many industry authorities.
“California is one of the world’s largest gaming markets, with diverse constituents, including tribes, racetracks and card rooms,” says Nevada state Senator Mark Lipparelli, a veteran industry regulator and consultant. “That it does not have a consolidated gaming regulatory body presents tough challenges and complexities.”
Lopes and Schuetz noted that the commission is largely comprised of political appointees lacking knowledge of the gambling industry. They also warned of a lack of experience and resources with the BGC, staffed not with career regulators but law enforcement officers unschooled in auditing and gambling compliance.
“The culture has to change,” Lopes said of the BGC, a process that will be difficult with a bureau subject to Civil Service and union rules.
Dave Vialpando, a former BGC agent who now acts as gaming commissioner for the Iipay Nation of Santa Ysabel, says the BGC has “some very well-qualified and dedicated agents.
“But if you ask me if the bureau is adequately prepared to regulate the industry, I’d say absolutely not,” Vialpando says, largely because the agency is overworked and understaffed.
“I see a huge void when it comes to regulatory oversight over gaming in the state of California,” says a high-ranking official of a municipality that generates millions of dollars in tax revenue from card rooms.
“(GCC and BGC) don’t have the expertise. They don’t have the manpower. Nor do they have the political willpower to do anything.”
The California regulatory system has numerous problems, says Schuetz, who left the GCC to become the executive director for the new Bermuda Gaming Commission.
“To begin with, bifurcation of the system with two constitutionally elected officers is a critical problem,” Schuetz says. “It’s like having two CEOs for a major corporation. There are two different leaderships. It’s stupid.
“Two, they need training with the bureau and experience on the commission. You don’t have anybody there who understands the industry. They have all these union and Civil Service employees who don’t know what they’re doing.
“Finally, they need more bodies.”