California Forum

Million-dollar gambling investigation in California reveals need for better regulation

California’s politically bifurcated system of regulating about 80 card rooms and providing oversight for 59 tribal casinos is highly dysfunctional, incapable of regulating what gambling is already legal in the state, let alone Internet poker, freelance writer Dave Palermo says.
California’s politically bifurcated system of regulating about 80 card rooms and providing oversight for 59 tribal casinos is highly dysfunctional, incapable of regulating what gambling is already legal in the state, let alone Internet poker, freelance writer Dave Palermo says. Bee file

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The nation’s gambling industry was stunned last month when California Attorney General Kamala Harris accused the state’s former casino enforcement chief of engaging in a conflict of interest on behalf of a San Jose card club targeted in a $119 million skimming investigation.

Bob Lytle, who resigned from the Bureau of Gambling Control in 2007 to work as a compliance officer for Casino M8trix, received confidential information on the Casino M8trix investigation from a bureau agent in 2013, according to the complaint filed by Harris.

“(Lytle’s) receipt of such information and documents potentially compromised the effectiveness, and undermined the integrity, of the bureau’s investigations,” Harris said in the complaint filed Dec. 23 with the state Gambling Control Commission.

The formal accusation against the onetime top casino enforcement officer is a rarity in gambling regulatory history.

“The legal gaming industry is as thoroughly regulated as any business in the United States,” said I. Nelson Rose, a Whittier Law School professor and gambling author. “It always surprises me when you get one of these scandals. They are rare.

“This is worrisome. This is major. It’s hard for me to believe.”

One would think a sophisticated state like California would have a regulatory system capable of preventing, or at least adjudicating, actions such as those alleged in the Lytle complaint.

California boasts having the nation’s largest gambling industry with American Indian casinos, card rooms, race tracks and the lottery generating net revenues of roughly $10.4 billion a year.

And the Legislature is again considering growing the gambling market even more with Internet poker.

Unfortunately, California’s politically bifurcated system of regulating about 80 card rooms and providing oversight for 59 tribal casinos is highly dysfunctional, incapable of regulating what gambling is already legal in the state, let alone Internet poker.

California is the only state in the country with a gambling regulatory system divided among two constitutionally elected officials, Gov. Jerry Brown and Attorney General Harris. Untangling the bureaucracy and dealing with the Lytle corruption case is not going to be easy.

In California, investigating and enforcing gambling laws is handled by the Bureau of Gambling Control under Harris. Promulgating regulations and adjudicating licenses is a function of the Gambling Control Commission, under Brown.

It’s a situation ripe for failure.

“If you get an attorney general and governor with different views on how gambling should be regulated, it does make things somewhat difficult,” said Commission Chairman Richard Lopes, a master of the understatement.

One agency often doesn’t know what the other is doing. Sharing information is problematic. Commission hearings are often slowed by bickering over agency jurisdictional issues.

The four-member Gambling Control Commission appointed by Brown is largely inexperienced in gambling matters and struggles with regulating card rooms, which Commissioner Richard Schuetz calls the “worse regulated segment” of the nation’s gambling industry.

Meanwhile, Harris has given the Bureau of Gambling Control little in the way of staff and resources.

Field agents are largely gun-toting law enforcement officers, more interested in seeking out crime than conducting regulatory compliance audits. The agency is limited by union and civil service rules from recruiting experienced regulators from outside the Justice Department.

Bureau officials in commission and legislative hearings acknowledge they lack the skills and manpower to ensure casinos and card rooms are complying with regulations.

“The culture has to change,” Lopes said of the bureau’s law enforcement mentality.

Federal law gives tribal governments primacy to regulate their casinos, which Lopes calls the “best regulated casinos on the planet.” For example, San Manuel Band of Mission Indians in San Bernardino County has more regulators than the bureau, which has some 150 employees and a $28 million budget.

Card rooms, evolving from poker-only to high-stakes versions of blackjack, pai gow and baccarat requiring the use of banking firms, are another matter. Industry experts contend card clubs lack internal operating controls and adequate surveillance.

“It’s the wild, wild west,” independent card-cheating consultant George Joseph said.

“Internal controls are nil,” agrees Vic Taucer, an independent table games consultant.

Dave Vialpando, a former bureau supervisor who now works for a tribal gambling commission, believes the enforcement agency “does have some well qualified and dedicated agents.”

“But if you ask me if the bureau is adequately prepared to regulate the industry, I’d say, ‘Absolutely not.’

“I don’t think there’s a lack of skills,” Vialpando said. “There’s a lack of sufficient resources.”

Harris is seeking a fine and revocation of Lytle’s licenses as a key employee and partner in two Sacramento card clubs. It is not a criminal investigation, although Harris contends Lytle violated conflict of interest, information protection and revolving door provisions of the Professions and Business Code, all misdemeanors.

Bureau officials will not comment on why criminal charges were not pursued against Lytle. Nor will they discuss why James Parker, the former agent supervisor accused of leaking the information, was not named in the complaint.

“I look forward to a hearing,” Lytle told GamblingCompliance.com, an Internet news service. “I look forward to proving that I didn’t do anything wrong.”

The case will go before an administrative law judge. Then it goes to the Gambling Control Commission for a final ruling.

Casino M8trix, which advertises as a “high-tech, high-touch entertainment destination” in the Silicon Valley, is accused of funneling profits through shell companies to avoid taxes.

It was no surprise the commission and bureau squabbled at a May hearing over whether to revoke M8trix’s license or impose operating conditions on the club.

“If you want to deny, deny,” bureau attorney William Torngren told commissioners.

“We don’t know everything,” Commissioner Tiffany Conklin shot back. “You are the only agency that can make that determination.”

The casino and eight-story hotel remains open pending a commission review of its license.

If legislators consider expanding California gambling with Internet poker, some industry observers are suggesting they reconsider the wisdom of a politically bifurcated regulatory system.

“California is one of the world’s largest gaming markets,” said Mark Lipparelli, an industry consultant and former chairman of the Nevada Gaming Control Board. “That it does not have a consolidated gaming regulatory body presents tough challenges and complexities.”

William Thompson, professor emeritus at the University of Nevada, Las Vegas, and a gambling author, said California should take this investigation, “shake it hard and let people know they are taking action.”

Good luck with that.

Dave Palermo is a freelance writer who specializes in Indian tribal government gambling.

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