Reading Between the Lines

Golden State gambling in a regulatory quandary

California’s apparent inability to police its $1.8 billion card-room industry is angering American Indian tribes and jeopardizing future expansion and regulation of what is arguably the country’s largest and most diverse statewide gambling industry.

Tribes are threatening litigation against state regulators and card rooms over the legality of banked games being played in California’s 87 card rooms. The card rooms have over the past decade been the target of more federal fraud, loan-sharking and money laundering investigations than any segment of the nation’s legal gambling industry.

A six-year-old dispute between tribes, card rooms and state regulators boiled over at a February meeting of the California Nations Indian Gaming Association (CNIGA), a group of 34 casino and non-casino tribes.

“It’s time to quit messing around with these guys,” Bo Mazzetti, chairman of the Rincon Band of Luiseño Indians, said of the California Gambling Control Commission (CGCC) and its enforcement agency, the Bureau of Gambling Control (BGC).

“Tribes need to get together, file a lawsuit and be done with it,” Mazzetti told a cheering crowd of 400 attendees gathered at Harrah’s Resort Southern California near Temecula.

Potentially landmark litigation could have a major impact on the future of what is arguably the nation’s largest and most diversified gambling empire with casinos, card rooms, parimutuel racing and a lottery generating more than $11 billion a year and employing nearly 100,000 workers.

 

Card-Room Conundrum

California over the past decade has been struggling with gambling expansion, including online poker, sports betting, daily fantasy sports (DFS) and wagering on the internet. Tribes at the CNIGA conference called for a clear policy on all forms of gambling expansion.

Meanwhile, legislators question the lack of resources needed to regulate card rooms and provide oversight of tribal government gambling.

Critics contend the state’s politically bifurcated regulatory system—a BGC under Attorney General Xavier Becerra and a GCC under Governor Jerry Brown—failed to adequately police the card-room industry as it evolved from strict poker to high-stakes versions of blackjack, pai gow poker and other games more commonly offered at Nevada casinos.

Perhaps more disturbing, Indian tribes and others accuse regulators of acting on behalf of the industry in crafting regulations aimed at facilitating the card-room evolution to banked card games in an effort to compete with the state’s $8.4 billion tribal casino industry.

Tribal attorneys contend CGCC regulations governing third-party proposition player (TPPP) banking firms and BGC game rules on rotation of the deal—directives enabling the facilities to offer what are known as “California/Asian” games—conflict with state laws and business codes.

California/Asian games also fly in the face of a constitutional amendment giving tribes the exclusive right under tribal-state regulatory agreements, or compacts, to operate casino gambling—specifically, slot machines and banked and percentage card games.

A laissez-faire regulatory climate by the GCC and BGC has enabled many of California’s 87 licensed card rooms to evolve into pseudo-casinos with hundreds of table games and upscale restaurants and hotels.

“The state seems to have this Faustian bargain with the card rooms—if you provide jobs and taxes, we will not fund an appropriate regulatory environment, and you can open up a great many additional sources of revenue,” former CGCC Commissioner Richard Schuetz says.

“I always was of the impression that many in the state had the attitude that the tribes make enough, and let’s give the card rooms a break—even if it does totally contort the law.”

Belated GCC and BGC efforts to walk back regulations to comply with state laws and the constitution promise to be politically problematic.

The card-room industry now generates roughly $1 billion a year in gross revenues, employs some 22,000 workers and contributes millions of dollars in taxes to several municipalities. Card-room advocates contend getting regulations to comply with state law could cripple their business.

“Every card room has an assemblyman and senator in its district,” CNIGA Chairman Steve Stallings says. “Then they have the cities and the impact on tax revenues and employment.

“The fact this has gone on for so long and the fact they have built bigger facilities and hired more employees creates a political and economic justification to let this go on.”

 

An Official Veil of Secrecy

Brown senior aide Joginder Dhillon, state Attorney General Xavier Becerra and his predecessor, U.S. Senator Kamala Harris, and officials with the GCC and BGC have declined several requests for interviews.

That’s not surprising. Much of the GCC and BGC criticism stems from the bifurcated nature of the system, a product of the Gaming Control Act of 1997. The system is the only one in the country under two elected officials, the governor and the Office of the Attorney General.

“One of the mistakes made was this concept of bifurcating the system under two constitutional models,” says a former high-ranking state official who worked with Attorney General Dan Lungren in drafting the act.

“They said it was trouble,” says the official, who requested anonymity. “They said, ‘You guys should get rid of it.’ You end up with two agencies competing for jurisdiction and resources, both wanting to do the same things and not trusting each other.

“It hurts the industry. I’ve come to believe that probably is true.”

Brown in a 2012 budget shuffle compounded the problem when he shifted the commission’s investigatory, auditing and compliance duties to the AG’s Department of Justice, despite the fact Harris and Becerra had left the BGC poorly funded and lacking staff and resources.

Schuetz, former GCC Chairman Richard Lopes and other industry experts say the system is fraught with problems.

CGC commission vacancies are filled with career bureaucrats with scant experience in gambling law and regulations. Meanwhile, there has been a high turnover of BGC agents and supervisors. Civil Service and union rules limit efforts to hire experienced regulators from outside the DOJ.

“It’s very difficult to get the right person in the right job,” Lopes, a former high-ranking DOJ official, said before his retirement in 2014.

BGC supervisory agent Tyler Burtis at February’s CNIGA conference acknowledged there have been difficulties staffing the BGC with other than sworn law enforcement officers lacking experience in regulatory compliance.

“We had issues,” Burtis said. “We all knew we had issues. There was always talk that we were knuckle-dragging narcotics agents that don’t know about gambling.

“We’ve had a solid crew of people for several years now. They’ve all gone through training. It used to be when we first started we were hiring people on the way out. We now have a full staff and a list of people waiting to get in. We’ve come a long way.”

But the regulatory morass created by the state’s bifurcated system is problematic.

“California is one of the world’s largest gaming markets with diverse constituents, including tribes, racetracks and card rooms,” says Mark Lipparelli, former chairman of the Nevada Gaming Control Board.

“That it does not have a consolidated gaming regulatory body presents tough challenges and complexities.”

 

Seeking a Solution

Tribes in recent meetings with Brown and Becerra’s staffs have tried without success to mediate the dispute over card-room games.

“Tribal leaders pressed the flesh and said, ‘This is a priority,’” lobbyist Afrack Vargas told attendees at the CNIGA meeting. “We will continue to push the issue and explore all the options, which could include legislation, which could include a lawsuit,” Vargas said, or any measure “to ensure the card rooms are following the law.”

Meanwhile, Dhillon is reporting meeting in private with the Assembly and Senate Government Organization Committees in an effort to devise a legislative solution to the tribal/cardroom dispute that would head off litigation.

“The governor’s office and the GO chairs are trying to come up with a grand solution, to incorporate all of this,” says a tribal source who requested anonymity. “I think that’s a pipe dream. It’s not going to happen.”

Tribes for nearly six years pressed GCC and BGC officials to get card-room regulations in compliance with state law, and their constitutionally guaranteed exclusivity to operate casino gambling. The initial anticipation was the issue would be quickly resolved.

“That was the first thought that I had, that this was an issue that was going to be so easy to explain,” tribal attorney Jeffry Butler says. “Just enforce the law. That’s all we’re asking.”

Nothing came of promises by Dhillon, Harris and more recently Becerra to look into the matter. The GCC for three years has pledged to revise TPPP regulations. The AG has failed in efforts to force card rooms to rotate the deal as required by law.

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.”

California Penal Code 330 prohibits banked and percentage games.

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 deal is seldom if ever rotated in California/Asian games.

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.

Tribal lobbyist David Quintana is skeptical of a solution—legislative or otherwise—that would prevent tribes from pursuing legal action. Walking back regulations to comply with state law would likely cripple the card-room industry.

“One of the problems is that people are trying to seek a solution that more or less keeps the card rooms whole,” Quintana says. “But you can’t keep them whole when they achieved their success by playing games that are unconstitutional.

“The solutions are sympathetic to any losses the card rooms would suffer. But the games were, in our opinion, not level. Being sympathetic is not in the equation.”

Meanwhile, the political ramifications will likely prevent any serious reformation of the dysfunctional regulatory system.

“This entire system—this bifurcated system with the governor’s office and the Attorney General’s Office—the way it is set up leads to this problem,” Quintana says. “It’s the classic finger-pointing conundrum. Each regulatory body can point at the other one, ‘Oh, that’s their problem.’

“You need one regulatory body. Then that regulatory body can’t point the finger at somebody else. That’s what we’ve seen for the past eight years.”

 

‘Worst-Regulated Industry’

Schuetz, who has operated commercial and American Indian casinos in several states, says card rooms constitute “the worst-regulated segment” of the nation’s gambling industry.

“I’m not saying that to be mean,” Schuetz said. “I’m saying that to be honest. We need to tighten up the regulations.”

Consultants and other industry experts agree with Schuetz. Efforts to draft and enforce internal operating controls for the California/Asian games have been woefully inept.

Much of the lack of financial transparency and internal operating controls center on TPPPs. 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. Dropping the fees enable clubs to lure high rollers from tribal casinos. Tables account for up to 25 percent of a tribal casino’s revenues.

 

Tribes Caught by Surprise

It’s been more than three years since BGC chief Robert Lytle brought down a web of political corruption and official misconduct on the state and its regulatory system.

Lytle in December 2014 was charged in a formal accusation by the state Attorney General’s Office with violating conflict of interest and confidentiality laws in connection with his consulting work for a card room targeted in a $119 million skimming investigation.

It was also disclosed that Lytle, later stripped of his card-room ownership and consulting licenses, issued an opinion letter days before retiring from the BGC in 2007 that the player/dealer position in California/Asian games needed not be rotated, but merely offered each player at the table.

The Lytle opinion, which meant untold millions of dollars to the card rooms, angered the tribes. The AG would later rescind the opinion, but it remains a guiding directive for much of the industry.

Meanwhile, card rooms in the Los Angeles area began stopping the collection fees in California/Asian games, clear evidence they were profiting off TPPPs in apparent violation of state law.

Although long suspicious the BGC exhibited a sympathetic bias toward the card rooms, the tribes were nonetheless not at all concerned with the industry’s evolution toward banked games. They made light of the industry’s inability to control its internal operations and the GCC and BGC’s failure to regulate and enforce gambling laws.

“The tribes kept their eye off things for a few years,” says a tribal regulator who trained BGC agents. “The card rooms weren’t a threat. We didn’t pay any attention them.

“So the card rooms kept pushing the rules. Nobody was interested in tangling with the card rooms because it wasn’t worth the time, and they had all these campaign contributions going to the state.

“Then all of a sudden you have all these violations of the rules and regulations. Then the Lytle thing flares up. Then the card rooms stop taking the collection fees, which is supposed to be their only legal source of income.”

Cutting into the tribes’ market of high-end table game players was the proverbial straw. The play at the tables for some Indian casinos amounts to 10 percent or more of gross revenues.

And unraveling the morass that is the California gambling regulatory system won’t be an easy task.

It will certainly make sports betting, internet gambling, online poker and DFS a quandary for both stakeholders and state officials.

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Dave Palermo is an award-winning metropolitan newspaper reporter. He has written about American Indian governments for more than 20 years, working as an advocate for several tribes and tribal associations. He also has co-authored books on gambling and gambling law. He can be reached at dgpalermo1@gmail.com.