The impeachment drama alleging that President Donald Trump used a foreign government to investigate a political rival to gain a personal advantage mirrors a circumstance long present in the gaming industry—specifically, when gaming companies use the power of gaming regulators, typically through a license investigation, for personal advantage.
Nevada folklore includes the tale of a gaming company that employed an individual to keep track of license applications. This individual’s regular responsibilities included conducting private investigations that regulators could then use to discredit potential competitors in the licensing process. His scathing reports were so systematically provided, according to legend, that the gaming agents nicknamed him “Agent Orange.”
Other ways exist for third parties to weaponize the regulatory process. Gaming laws often define what happens if regulators deny a license to a shareholder, including requiring the company to redeem the stock and setting the price of the redemption. Other times, a shareholder’s agreement gives the company broader rights to redeem if the regulators initiate a regulatory investigation.
The purpose of stock buyback provisions in shareholder agreements is to give companies the ability to exercise in good faith to redeem the shares of a person whose mere involvement in a company can threaten the company’s ability to get or retain the necessary licenses to conduct business.
In general, buyback provisions should be extraordinary remedies. Shareholders owning less than a certain percentage of the stock (5 percent or 10 percent) typically do not have to obtain a license but are subject to discretionary licensing. The purpose of not requiring every shareholder to obtain a license is to encourage investment. Most shareholders acquire stock for investment purposes with no expectation that they will one day have to undergo costly and intrusive investigations.
A company, however, can abuse the regulatory system. Suppose a person bought at $5 per share, and, much later, the value skyrocketed to $100 per share. If the law or shareholder’s agreement sets the redemption price at the purchase price, then the company would stand to make $95 per share if a shareholder is found unsuitable to hold a license.
This strategy works if the shareholder cannot sell in a public market. With tradeable stock, the company may try to convince regulators to prohibit the sale of the stock and force redemption under the terms of the shareholder’s agreement or the law at less than fair market value.
A second and equally problematic scenario is where management or shareholders want to eliminate rival shareholders by enticing regulators to invoke discretionary licensing. For example, a management group with the support of 45 percent of the existing shareholders can get to 51 percent by eliminating a 9 percent unlicensed shareholder through licensing.
Another method used by competitors is to provide negative information to encourage regulators to instigate an investigation. A competitor can then use the fact of a pending investigation to disparage the competitor in the marketplace.
Why should regulators be concerned about offensive misuse of the regulatory process? First is the waste of agency resources if the allegations are false or unsupported. Second, investors will have less interest in investing in the gaming industry or new companies in entering the business if they believe others can readily abuse the regulatory system with significant impacts, including damage to reputation and cost. The accused has a disproportionate expense and time commitment to disprove false or misleading allegations, and costs compound if the claims spread to regulators in many jurisdictions. Third, where the attacks are personal, they cause emotional distress and life disruption.
Indeed, gaming regulators want and expect that when licensees encounter unsuitable acts or individuals, they should report them. So, balance is essential. Regulators should ask:
Does the accuser have an ulterior motive? Is the accuser intentionally providing false or misleading information or doing so with disregard for the truth? Is the timing of the accusations a matter of concern?
If the information is accurate, reasonably supported by facts, and material to the shareholder’s suitability, companies should be free to report it even if ulterior motives are evident. The regulators should be skeptical in the presence of ulterior motives.
When encountered with surreptitiously provided disinformation, regulators most often only reject the allegations. Ulterior motives combined with false, misleading or immaterial information require a stronger response.
First, the licensed company is attempting to abuse the system and is wasting agency resources. Almost every justice system recognizes that filing false information with police is a crime. Likewise, similar consequences should befall an offending licensee.
Second, a regulator’s failure to take a more proactive response can harm its jurisdiction. An offender will likely attempt to spread false or misleading allegations to all regulators that have the power to harm their shareholder or rival. If it finds a single authority that through incompetence or corruption pursues the claims, the consequences are universal because a shareholder cannot divest in one place and not all others.
Instead, regulators should take affirmative action to maintain the integrity of the regulatory process by initiating disciplinary action if a licensed person or entity (1) knowingly files false or misleading information or does so in reckless disregard of its truth, (2) selectively targets specific shareholders where the allegations are common among many shareholders or are immaterial to suitability, or (3) knows or should have known of the allegations significantly before it reported them to the regulators.