Death Penalty For Underachieving

#163 © Copyright 2010, all rights reserved worldwide. Gambling and the Law® is a registered trademark of Professor I Nelson Rose, www.GamblingAndTheLaw.com

Why do we regulate casinos?

Historically, the main – if not only – reason was to keep out organized crime.

Although the laws include grand statements about protecting the general public, we don’t really need background checks and fingerprinting of a corporate C.E.O. to prevent a dealer from cheating a player.

The state does have a financial interest in keeping out the bad guys. “O.C.”, as they call themselves, like legal gambling because it is primarily a cash business, ripe for skimming – money that is supposed to go for tax revenue. And tourists might stop coming to casino resorts if gaming’s reputation dropped from merely risqué to patently corrupt.

But taxes and jobs were always secondary reasons for states regulating casinos like nuclear power plants, and not, say, like used car dealers.

The Missouri Gaming Commission has now dramatically announced that governments regulate casinos to make sure they make enough money.

Public safety is still job number one. But regulators, and the market, have driven O.C. so far away that regulators can now focus on income.

In the most drastic way possible, the Commission has made it clear that it will now take a casino license if the operators make business decisions that fail to protect tax revenues.

The ultimate penalty – death – has fallen out of favor among most of the civilized nations of the world.

Except with casino regulators.

Licensees know they can lose their right to conduct gaming if they increase their income by rigging games.

But this is the first time that regulators have ever taken a license primarily because the operators were not winning enough.

On January 27, 2010, the Commission voted unanimously to revoke the license for the President Casino, owned and operated by Pinnacle Entertainment. Based on the recommendation of their Executive Director, Gene McNary, the four Commissioners ordered the casino to discontinue operations by July 1, 2010.

There was no debate.

Legal challenges continued for only a short while. Pinnacle had a pretty good claim that this was eminent domain without compensation, that the state took its valuable license before it had the chance to sell it. The company could have stretched this out for as long as two years before the death sentence was carried out and the casino died . . . Or, given that this is a riverboat casino, perhaps the better word is: sunk.

There is, ostensibly, a traditional safety issue. The President Casino is on a ship, the Admiral, that is going to be ruled unfit on July 19, 2010. The American Bureau of Shipping has determined that the life expectancy on the Admiral’s 60-year-old hull will expire on that date, and the ship appears to be irreparable.

Replacing the actual ship did not appear to be an option, since the Commission had previously ruled that a new ship would require a new license. Missouri law only allows 13 licenses, and there is no guarantee that Pinnacle would get that new one.

Being on water has always been the major obstacle facing riverboat casinos. Hurricane Katrina showed just how dangerous it can be to require gaming establishments to be afloat, rather than a few feet ashore. Operators face expensive problems not encountered by other casino owners, including limited space and constantly recurring inspections and certifications of safety by federal and state agencies.

The President Casino had more trouble than most, sometimes closing due to flooding, and often produced the worst results of the six casinos in the St. Louis area. Its gaming revenue shrank from $70.3 million a year in 2005 and 2006 to only $22.6 million 2009. Part of the 70% drop in revenue was from competition created by Pinnacle itself, by opening its $500 million Lumière Place a block away.

So, Pinnacle may not get a lot of sympathy from the rest of the casino industry. But nobody expected the Commission to revoke the President Casino’s license.

The Commission knew the shape the Admiral was in, when it approved Pinnacle’s purchase of the ship two years ago. And it renewed Pinnacle’s gaming license last year, apparently with the understanding that Pinnacle work to refurbish the facility and regain hull certification.

The Commission today seems at least as interested in money as in safety. McNary wrote to Pinnacle, calling the President Casino “obsolete and underachieving.”

But is capitol – or capital – punishment appropriate?

The Missouri State Legislature has given the Commission the power to fine or even kill casinos for acts it finds are “injurious” to the state. The Commission pointed out the steep drop in gaming revenue directly hurts the state, which gets 21% through a direct tax. Plus, it argued that Pinnacle was simply not doing enough to reverse the trend. This led McNaray to conclude that keeping the President Casino open, is “not in the best interests of the state.”

The decision is controversial. The mayor of St. Louis, Francis Slay, complained about the loss of jobs and city tax revenue. But his objection points directly to the question of whether a casino should ever lose its license simply because its business is way down. “This recommendation is based solely on a questionable economic theory and not on any alleged misconduct.”

Members of the Missouri Legislature introduced bills that would expressly deny the Commission the power to close casinos on economic grounds.

Should government have the right to kill a casino if it is proved that the operators are incompetent?

There is a precedent, of sorts.

On December 12, 2007, the New Jersey Casino Control Commission voted to not renew the license of the Tropicana Hotel and Casino in Atlantic City. Local 54 of UNITE-HERE, the casino industry’s largest labor union, had launched a major attack on the owner, Columbia-Sussex Corporation, for failing to keep its promise to run a “first class” operation. The Tropicana’s business had fallen dramatically, and Columbia-Sussex fired employees it had promised not to fire and cut spending to the point where patrons were complaining about filthy bathrooms.

But although the Tropicana’s problems seemed to arise from the business incompetence of its owners, it lost its license for more traditional reasons – most importantly, not telling regulators the entire truth. The NJCCC held that Columbia-Sussex failed to meet strict operating standards for financial responsibility, character and integrity. NJCCC Chair Linda Kassekert said, “In a word, Tropicana’s regulatory performance over the past year has been abysmal.” She gave as examples the failure to create an independent audit committee and fines of $750,000 for disobeying regulations.

So, the Missouri Gaming Commission is breaking new ground. And maybe that is a good thing.

It is certainly time that we openly recognize that when a limited number of gambling licenses are up for bid, the winners will be the applicants who promise the state the most money, in upfront fees, massive construction projects and continuing jobs. I will go on record as predicting that if the just introduced bill to legalize intra-state Internet poker and other games in California passes, at least one of the three hub operators will be the bidder who offers the state the most money.

It is not necessarily a radical step to apply that same standard to present license holders. In fact, we already take casinos away from their owners when formal bankruptcy procedures are filed.

But the line in the President Casino case may be too fuzzy. Pinnacle is far from bankrupt. Is it the proper place of government regulators to tell them how to conduct their business, if they are doing nothing wrong, other than losing money? Even if that means that the state is losing tax revenue?

And, with a standard as vague as this, every other operator, and potential operator, now has to worry – “Will I be next?”

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© Copyright 2010. Professor I. Nelson 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 (2nd edition just published), Blackjack and the Law and Gaming Law: Cases and Materials, are available through his website, www.GamblingAndTheLaw.com.