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Monday, June 6, 2016

Casino M8trix owner fined millions by state gambling regulators, stripped of gaming license

Casino M8trix owner fined millions by state gambling regulators, stripped of gaming license

Jun 5, 2016

San Jose's Casino M8trix is setting records for all the wrong reasons.
On May 26, the California Gambling Control Commission stripped M8trix owner Eric Swallow of his ownership license and fined him a record $13.7 million for violating state gaming regulations. Chief among these was misleading regulators about the nature of, and financial ties to, companies the card room paid over $80 million from 2009 to 2013, according to Commission documents.
Swallow could still be in good financial shape even after paying, according to the decision, which cites an unnamed potential purchaser estimating the value of Swallow's 50 percent stake at $50 million. Swallow has already declared his desire to sell his stake, and one potential buyer is John Park, who owns five card rooms in California and filed for an ownership license with San Jose in April 2015.
It's not a surprise Swallow was stripped of his license. I n December, an administrative law judge recommended the Commission take that action based on an investigation by the Bureau of Gambling Control. But the size of the penalty dwarfs the judge's recommended $430,000 amount.

The decision goes into effect June 27, but the story may not be over.
In an email, Swallow's attorney Allen Ruby wrote that his client intends to challenge the decision, most likely in Superior Court, and that the first steps in that process will take place within the next 60 days.

The huge penalty blows away the previous record $1.5 million fine levied against (wait for it) Casino M8trix and co-owner Peter Lunardi in May 2015 for related accusations. That fine was part of a settlement with Peter and his wife Jeanine Lunardithat allowed them to keep their gaming licenses. The Lunardis control the other 50 percent of Garden City Inc., the entity that owns M8trix.

In 2008, Swallow and the Lunardis set up three limited liability companies in Nevada, which does not have an income tax, to ostensibly provide software, table games and consulting services to Garden City Casino, the card room that was replaced by M8trix in 2012. From 2009 to 2013, these LLCs received $81,762,000 from Garden City.

The Commission found that Garden City paid well-over market prices for the services rendered by the LLCs and that a significant amount of the payments were in reality distributions of profits to entities not licensed by the Commission, a practice prohibited by California's Gambling Control Act.

To be clear, setting up the LLCs was not found to violate state regulations, and the distributions to the LLCs were not part of the formal accusations filed by the Bureau that formed the basis of the case. But giving misleading information to Bureau agents does violate the Act.

One accusation upheld by the commission has to do with Dolchee LLC, which received more than $47 million from 2009 to 2013, according to the Bureau.

The Bureau stated that Swallow said the large payments were justified by gaming analytical software provided by Dolchee to manage Garden City operations. Peter Lunardi, former Garden City CFO Deven Kumar and former accountant Jerome Bellotti (who helped set up the LLCs) said they were unaware this software existed, and thought Dolchee only licensed the use of their games like "Baccarat Gold" and "Pai Gow Tiles" to the card room.

Furthermore, Lunardi and Kumar have previously testified that there were payments to Dolchee that were distributions of profits, not for services.

The commission stated "when an applicant and owner misrepresents the nature of his cardroom’s financial relationships, makes distributions to unlicensed entities, and misrepresents corresponding material facts, he obstructs the statutory oversight of both the (Bureau) and Commission ... (Swallow's) conduct collectively was a clear violation of the (Act)."

One point Swallow plans on contesting in court is the size of the $13.7 million fine. Ruby wrote that the amount is because individual violations have a $20,000 maximum which, if followed, would have resulted in a fine of a few hundred thousand dollars.

The Commission acknowledges the $20,000 limit on legally defined "fines," but states that the $13.7 million is a "penalty," which does not have any limits.

The Swallow decision came almost four weeks after former M8trix compliance officer Bob Lytle, also the former chief of the Bureau, reached a settlement with the Commission that resulted in his ownership licenses for two Sacramento-area card rooms being revoked and a fine of at least $75,000.

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