Shingle Springs Defeats Slot Machine Supplier's Claim for $250 Million

SOURCE: Red Hawk Casino
Shingle Springs Defeats Slot Machine Supplier's Claim for $250 Million


PLACERVILLE, CA--(Marketwire - Dec 23, 2011) - On Dec. 22, 2011, an El Dorado County jury rejected a gaming machine supplier's claim for $250 million in damages against the Shingle Springs Band of Miwok Indians, in connection with the Tribe's cancellation of a machine lease agreement in 1999 for a failed tent casino venture called Crystal Mountain.

The jury did award a lesser amount of damages to Sharp Image Gaming, Inc., in the amount of $20.4 million, over the gaming contract, which the United States government has declared illegal and unenforceable -- a fact that the jury was not allowed to know. The jury also awarded an additional $10 million for monies invested in the failed venture. The Tribe will appeal.

"We will never stop defending ourselves against Sharp's effort to enrich itself through an illegal contract, which the Tribe cancelled in 1999, since the Tribe could not participate in an illegal agreement," said Nicholas Fonseca, Chairman of the Tribe. "The irony is not only that the federal government has deemed Sharp's contract illegal, but that the State's Bureau of Gambling Control has found Sharp to be unsuitable to sell or lease gaming machines in the State of California."

The jury was not allowed to know key pieces of evidence, including the fact that the federal agency that regulates Indian gaming and that is charged with reviewing gaming contracts -- the National Indian Gaming Commission -- issued a finding that Sharp's contract violated federal law and was thus illegal and void.

That finding -- issued in April 2009 -- was the result of a formal administrative proceeding in which Sharp participated.

The agency found that Sharp's contract violated federal law in a number of ways, including overreaching provisions that purportedly gave the contractor 30 percent "off the top" of all casino revenues, even before operating expenses. The NIGC's final agency action was consistent with earlier agency conclusions about the contract's illegal status; agency representatives told the Tribe in 1998 and 1999 that the contract would not pass federal muster and would not be federally approved as the law requires. After Sharp sued for alleged breach of contract in 2007, the NIGC's general counsel issued a publicly-available advisory opinion in 2008 that found the contract violates federal law and is void. The jury was not allowed to know about the 2008 NIGC opinion either.

Backed by case precedent and clear law, the Tribe's position is that the NIGC's final agency action in 2009 legally barred Sharp's ability to enforce its overreaching contract in state court. The state court rejected that position, and found that the NIGC's voiding of the contract does not matter. The Tribe filed suit in federal court to enforce that NIGC's federal agency action, and that federal lawsuit remains pending.

The jury also was unaware that Sharp is out of business and could not have supplied gaming machines to the Tribe anyway. The California Bureau of Gambling Control, which is the agency within the Department of Justice charged with protecting the integrity of gaming in the State of California, recommended to the California Gambling Control Commission that Sharp be found "unsuitable" to sell or lease gaming machine contracts in the State. This action was based on an investigation into Sharp and its principal, Chris Anderson, and came in November 2008, a month before Red Hawk opened to the public in December 2008.

"Because of that finding by the Bureau, we could not have used Sharp's machines under our Compact, even if Sharp remained in business," Chairman Fonseca said. "So the idea that Sharp somehow suffered money damages from being denied the right to supply gaming machines that it could not legally supply to anyone in this state makes no sense. It is really too bad the jury was not able to know this fact either."

Sharp had entered the contract with the Tribe in 1997, in an effort to establish gaming on the Tribe's reservation through a temporary tent facility. However, the lack of access to the Tribe's then landlocked reservation doomed the effort. The Tribe terminated the contract in 1999, after Sharp acknowledged it was unable to resolve the access problem for the reservation and based on information received from NIGC and BIA officials that the contract violated federal requirements.

The Tribe then proceeded to secure access for its reservation with the assistance of new and independent financial investors. The reservation became landlocked in the 1960s through the realignment of Highway 50. Although the access problem was not of the Tribe's making and could have been resolved by the Department of Interior for a cost of less than $5,000, the Tribe ultimately was only able to secure the access that was essential to any economic development on the reservation, including a gaming facility, through its own development of a highway interchange, which ultimately cost the Tribe nearly $70 million to construct and which faced years of legal challenges. After defeating those legal challenges and after beginning construction of the interchange and Red Hawk Casino, Sharp filed suit, claiming the exclusive right to supply all gaming machines to Red Hawk, and seeking 30 percent gross profits from Red Hawk revenues without performing at Red Hawk or being involved in its development in any way. Sharp claims the right to be paid before all others paid by Red Hawk, including the investors who assumed the risk of developing Red Hawk and the lenders who financed it.

"Because of evidentiary rulings that kept critical evidence from the jury, the Tribe was literally left without the ability to defend itself," said Ivor Samson, lead trial counsel for the Tribe. "We are confident that at the end of the day, an appellate court will be surprised by the sheer degree and number of serious legal errors infecting the rulings at the trial court level, and that the Tribe's rights ultimately will be vindicated, and the rulings reversed on the merits."

Sharp was a significant supplier of gaming devices during what is known as the "gray market" days in Indian gaming, and its principal testified at trial that he supplied what are known as "Class III" (essentially slot machines) to most of the gaming tribes in California during the pre-1999 time period, a time when tribes lacked gaming compacts with the State of California. Federal law forbids Las Vegas-style, Class III gaming in California without a tribal-state compact.