Can Corporate Banishment Save Las Vegas Sands?

In mid-2009, Steve Jacobs was hired to run the Macau operations of casino giant Las Vegas Sands. A year later he was fired, by Sheldon Adelson.

What came next is exactly what Americans would expect: Jacobs sued.

In the U.S., high-powered, wealthy executives are usually not fired. Disputes are usually settled behind closed doors, with the ex-exec leaving to “pursue his own interests” or “to spend more time with his family.” But when men and women who are used to ordering others around are themselves ordered out the door, and they have got money, they file wrongful termination suits.

There is nothing that unusual in Jacob’s complaint. He sued for breach of contract and “tortious discharge in violation of public policy.” Named as defendants are the Nevada parent company, Las Vegas Sands Corp. (“LVSC”), and its majority-owned subsidiary, Sands China Ltd, interestingly, a Cayman Islands corporation. Later, Jacobs amended the complaint to name Adelson personally, for defamation, but that cause of action was thrown out.

The tone of the complaint was, well . . ., here are some examples: “The management of LVSC (which was led at the time by the company’s longtime and well-respected President and Chief Operating Officer, William Weidner) and the company’s Board of Directors (which is led by the company’s notoriously bellicose Chief Executive Officer and majority shareholder, Sheldon G. Adelson)…” And this one was in bold, as a section heading: “Jacobs Saves the Titanic.”

What is difficult for laymen, and particularly non-Americans, to understand is that a wrongful termination suit, if it is to have any chance of succeeding, must allege that the company, and especially the top exec who did the firing, did really awful things. One of the legally strongest claims is that the plaintiff was fired for refusing to follow orders to do something illegal.

Jacobs’ complaint alleges “the repeated and outrageous demands made upon him by Adelson which included…”
a. “that Jacobs use improper ‘leverage’ against senior government officials of Macau…
b. “that Jacobs threaten to withhold Sands China business from prominent Chinese banks…”
c. “that secret investigations be performed regarding the business and financial affairs of various high-ranking members of the Macau government…”
d. “that Sands China continue to use the legal services of” a Macau attorney [who was also involved with the government] even though this “posed serious risks under the criminal provisions of the United States code commonly known as the Foreign Corrupt Practices Act (“FCPA”)…
e. “that Jacobs refrain from disclosing truthful and material information to the Board of Directors of Sands China…”

The civil lawsuit would probably have not engendered much interest, outside of gossip among casino executives, except for coincidences of timing and location. One of the central themes of the administration of President Barack Obama has been that the Great Recession was caused by the deregulation and subsequent wrongdoing of Wall Street. So, every allegation of corporate malfeasance has to be at least investigated.

And Jacobs’ complaint expressly mentions a federal felony, the FCPA. When something like that appears in a public document involving a major U.S. company doing business in China, the Department of Justice has almost no choice but to investigate.

This was probably enough to also spur an investigation by the Securities and Exchange Commission. But the allegation that Adelson prevented Jacobs, President of Sands China, from giving information to its Board had to be investigated, including by the Hong Kong’s Securities and Futures Commission, since those shares are traded on the Hong Kong exchange. As LVSC itself put it in a recent S.E.C. filing:

On February 9, 2011, LVSC received a subpoena from the Securities and Exchange Commission requesting that the Company produce documents relating to its compliance with the Foreign Corrupt Practices Act (the “FCPA”). The Company has also been advised by the Department of Justice that it is conducting a similar investigation. It is the Company’s belief that the subpoena may have emanated from allegations contained in the lawsuit filed by Steven C. Jacobs described above. The Company intends to cooperate with the investigations. Based on proceedings to date, management is currently unable to determine the probability of the outcome of this matter or the range of reasonably possible loss, if any.

I have no inside information, or way of knowing who will win the civil suit. If history is any guide, Jacobs’ chances are not good, especially because he has the burden of proof.

It is also extremely rare for a wrongful termination suit like this to result in any criminal convictions. Even if the Department of Justice or the various regulators turn up any smoke, they know that does not mean there is an underlying fire, at least not one they would be willing to try and prove in court. Sometimes the investigations are simply dropped, with or without a press release. Sometimes the corporations pay millions of dollars to settle, but without an admission of guilt.

Of course, in the unlikely event of a criminal conviction, LVSC would be in danger of losing its gaming licenses, which means losing everything.

There is a slightly greater chance that gaming regulators might decide to investigate or even impose punishments without any conviction. Every jurisdiction is free to decide its own standards. New Jersey ruled that MGM could not be partners with Pansy Ho in Macau, even though Pansy had never even been charged with a crime. (MGM, of course, chose Macau and Pansy, without losing its license in any other jurisdiction).

Assuming the absolute worst, is there any way for LVSC to avoid losing its rights to run casinos? More than a few shareholders probably wished that this problem would just go away, even before it was revealed that Adelson and his wife donated $17 million to a super-PAC trying to elect Newt Gingrich president.

There is a little-known legal doctrine, “corporate banishment,” that might work. The idea is that the bad apples can be removed, saving the rest of the corporate barrel.

It has been used with legal gaming. Caesars Palace, Las Vegas, was built in 1966 by Nate Jacobsen and Jay Sarno. Jacobsen sold Caesars to Clifford S. Perlman and Stuart Z. Perlman. Nevada regulators approved them both.

The problem arose when Caesars applied for a license to open one of the first casinos in Atlantic City. New Jersey’s Division of Gaming Enforcement, part of the Attorney General’s office, objected to the licensing of the four principals. These included Clifford, owner of 10% and Chairman of the Board of Caesars World, Inc.; and, Stuart, owner of 8% and Vice Chairman.

Clifford had an on-going relationship with Alvin I. Malnik, an alleged business associate of Meyer Lansky. Lansky was the treasurer for the mob for half a century. Clifford continued to have dealings with Malnik even after being warned not to do so, by Nevada Gaming authorities.

The New Jersey Casino Control Commission found the Perlmans unsuitable. However, it said it would issue the license, on the condition that the company that would run the casino buy out the Perlmans and exclude them from any further management roles. This idea of corporate banishment was approved by the New Jersey Supreme Court.

The remaining Board of Directors originally agreed to pay the Perlmans $99 million, a fantastic sum at the time. After a suit by unhappy shareholders, the Perlmans agreed to sell for $92 million.

But corporate banishment only works if the individual can be forced out, or agrees to go. In 1962, Hugh Hefner was convicted of paying a bribe to the Commissioner of the New York State Liquor Authority and the state Chairman of the Republican Party to get a liquor license for the New York City Playboy Club. Even though everyone agreed that Hefner had been the real victim, twenty years later, the N.J. Casino Control Commission told Playboy International it would only get a gaming license if Hefner had nothing to do with the company. This was not about to happen.

So, if the unthinkable really does come to pass, would the “notoriously bellicose” Sheldon G. Adelson agree to be banished from the company he created? And, if so, what would be the price?

© Copyright 2012, I. Nelson Rose, Encino, California. All rights reserved worldwide. Gambling and the Law® is a registered trademark of Professor I. Nelson Rose, www.GamblingAndTheLaw.com.

Prof. Rose is recognized as one of the world’s leading experts on gambling law, and is a consultant and expert witness for governments and industry. His latest books, INTERNET GAMING LAW (1st and 2nd editions), BLACKJACK AND THE LAW and GAMING LAW: CASES AND MATERIALS, are available through his website, www.GAMBLINGANDTHELAW.com.