A Loomis-based corporation and its owner pleaded guilty Thursday in Sacramento federal court to conducting an illegal gambling business by providing computerized “sweepstakes” games that were once available in coffeehouses statewide.
Capital Sweepstakes Systems Inc. and Kevin Freels, a 41-year-old Loomis resident, agreed to forfeit more than $1.5 million in in profits – previously seized by the government – realized from the use of gaming software and hardware provided by the company to so-called Internet sweepstakes cafes.
As part of a parallel civil settlement with the California Attorney General’s Office, Capital Sweepstakes agreed to cough up to the state an additional $700,000.
According to federal court papers, from January 2013 to September 2014, Capital Sweepstakes supplied software and hardware systems to cafes throughout California. Freels is the president of the company and assisted in overseeing its operations and financial dealings. He “received a significant portion of the revenues,” said U.S. Attorney Benjamin Wagner in announcing the guilty pleas.
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The California Supreme Court unanimously ruled last month that the type of slot machine gambling made possible by these systems is illegal under state law.
The company and Freels pleaded guilty to violating a federal law governing gambling, and are scheduled to be sentenced on Nov. 5 by U.S. District Judge Morrison C. England Jr. Capital Sweepstakes faces a maximum $500,000 fine and five years on probation, while Freels is facing a maximum five years in prison and a $250,000 fine.
Many Internet sweepstakes cafes in Sacramento, West Sacramento and Stockton used Capital Sweepstakes’ computerized gaming equipment, according to prosecutors. They say the company also had placed its equipment in other states, including Hawaii and Texas.
Thursday’s pleas “are the result of Capital Sweepstakes’ attempt to avoid (state and federal) laws, while building a sprawling and lucrative enterprise based upon a purported sweepstakes game that was in fact the functional equivalent of a slot machine,” Wagner stated.
“Capital Sweepstakes profited by targeting low-income communities, misrepresenting their unregulated slot-machine-style operations as legal enterprises and creating magnets for crime,” said Attorney General Kamala Harris.
At the coffeehouses, which served a variety of drinks and snacks, customers purchased sweepstakes entries, often loaded onto plastic cards with magnetic strips. Customers swiped the cards at computer terminals and played games with names such as Hot Luck Keno, Tropical Treasures, Dreamcatcher, and Lucky Puppy. The results were predetermined by the software. Customers could win cash prizes payable at the cafes. Capital Sweepstakes was able to remotely track the activity on its servers and received a percentage of the profits.
The Internet sweepstakes cafe apparatus argued before the state Supreme Court that the games were legal because the results were predetermined by the software, not by the machines. The court ruled that it didn’t matter because the results still amounted to chance.
When someone “plays a game to learn the outcome, which is governed by chance, the user is playing a slot machine,” Justice Ming W. Chin wrote for the court.
While the legal jousting was going on, the Legislature passed a law prohibiting the coffeehouse games, and Gov. Jerry Brown signed it last year.
According to the American Gaming Association, a trade group representing the casino industry, the Internet sweepstakes games have been offered in 12 states and have generated more than $10 billion annually.
Denny Walsh: 916-321-1189