Nevada regulators set to question Station on Missouri contacts

David Strow

Thursday, Sept. 7, 2000 | 10:52 a.m.

Back when Las Vegas was little more than a simple desert fort, the Midwest was a haven for gamblers.

Along the Mississippi River in the 19th century, from St. Louis to New Orleans, riverboat gamblers plied their trade along North America's mightiest river. For these gamblers, a state like Missouri was their home turf.

Missouri has proven rich soil for gambling's Midwestern renaissance of the 1990s. In the fiscal year ending June 30, 2000, Missouri's 14 riverboat casinos won $979 million from gamblers, a 9 percent increase from the previous year.

But that environment turned into a regulatory nightmare for two of modern gaming's most prominent names -- Hilton Hotels Corp., the predecessor of Park Place Entertainment Corp. of Las Vegas, and Station Casinos Inc. of Las Vegas.

Missouri's investigation of possible communications between Station's former attorney and Missouri's former top gaming regulator, combined with Station's refusal to testify in a public hearing on the issue, have some in the Midwest howling for blood, even while Station tries to sell off its Missouri holdings to a group of its executives.

"Call it gaming if you want, but we're talking gambling," the St. Louis Post-Dispatch said in a Wednesday editorial. "And the gambling industry is full of tough, smart and shrewd people who are used to getting what they want. They're used to playing with suckers.

"What Missouri needs ... is a watchdog that will stop scratching itself behind the ears and actually take a big ol' chomp out of somebody's leg. That somebody should be Station Casinos."

"It's clearer than ever that too many people, some of them public offficials, have taken foolish actions when it comes to gambling," wrote Kansas City Star columnist Yael Abouhalkah in a Sept. 3 column. "Gambling infects and corrupts almost everything it touches. Now Station Casinos is in the cross-hairs of regulators. Here's a bet: The company will sell its gambling dens and flee Kansas City by ... mid-2001."

Despite calls from Missouri that gaming regulators have been far too soft on operators -- the Post-Dispatch referred to the gaming commission as a "pussycat" -- gaming analysts view the matter far differently. They view the Station situation as yet another example of harsh treatment of a gaming operator at the hands of Missouri regulators.

Establishing gaming in Missouri is risky enough, they point out, because Missouri requires riverboat operators to complete a casino's construction before it can even apply for a license, and places a $500-per-visit "loss limit" on riverboat gamblers. After the experience of Hilton and Station, several analysts said, few companies will want to brave the waters in Missouri.

"Missouri has been a difficult regulatory environment for Station Casinos, as well as all other operators," said Andrew Zarnett, gaming analyst for Deutsche Banc Alex. Brown. "I think there's little chance any new operator will want to make an investment in Missouri, given the way they have treated Station Casinos and Hilton Hotels prior to this recent event.

"They (Missouri regulators) have clearly shown that they are not friendly to gaming companies."

Despite this, Zarnett doesn't believe other gaming companies in Missouri like Harrah's Entertainment Inc. of Las Vegas will be rushing to leave, primarily because he believes there would be few buyers for the casinos.

"Everyone in that state has to stick it out," Zarnett said. "I don't think there's that many buyers for assets in the state of Missouri that would want to be scrutinized by the Missouri Gaming Commission. No one in their right mind will put themselves through that, given what Station and Hilton have had to go through."

Troubles with Flamingo

Ironically, both Hilton's and Station's troubles in Missouri began in one place -- the Flamingo Hilton riverboat casino in Kansas City.

After securing the site for the riverboat in 1993, representatives from Hilton met with Elbert Anderson, former chairman of the Kansas City Port Authority. After thanking Anderson for his help, a Hilton employee asked Anderson for what he wanted in return. Anderson asked for $1 million in local grants. One-quarter of this grant money went to KC Perspectives, a company operated by a woman with whom Anderson was romantically involved.

Both Hilton and Anderson later insisted that this wasn't an attempt at bribery. But in August 1998, after two years of federal investigations, Hilton settled with federal prosecutors investigating the Anderson case, paying the federal government $655,000. Though the Flamingo kept its license, Hilton agreed to sell the casino as soon as practical. Hilton did not admit wrongdoing.

The Anderson flap led to the resignation of several Hilton executives, including President and Chief Operating Officer Raymond Avansino, who resigned under pressure from the Missouri Gaming Commission in 1996. Though Avansino was not ordered to resign, Hilton officials made it clear they'd been told they wouldn't be licensed in Missouri if Avansino and others didn't resign. Avansino was a member of the Nevada Gaming Commission from 1981 to 1984.

The Avansino matter re-emerged during last week's hearings, after several commission witnesses testified that former Missouri Gaming Commission Chairman Robert Wolfson had said he knew Avansino had received a severance package to leave the company, contradicting testimony by Hilton Chairman Stephen Bollenbach in 1996. The source of this information was a letter given to Wolfson, apparently by former Station attorney Michael Lazaroff. Lazaroff had also represented Avansino.

Nevada, however, did not subject Avansino to the same treatment as Missouri. Avansino, now a Reno attorney, was named to the Nevada Ethics Commission in September 1999.

To this day, gaming opponents fume over Missouri's decision to allow the sale of the riverboat.

"They (Missouri gaming regulators) have been lapdogs to this point," said Tom Grey, executive director of the National Coalition Against Legalized Gambling.

Like the legendary Hope Diamond, the Flamingo riverboat soon proved a curse for Station, which hoped to acquire the casino in an expansion of its Missouri empire.

After Atlantic City casino mogul Donald Trump's bid to acquire the riverboat stalled before the Missouri Gaming Commission, Station entered the picture. On Sept. 13, 1999, Station announced plans to pick up the riverboat for $22.5 million -- a mere fraction of the $300 million it cost Hilton to build in 1997.

But Station did not count on Joseph Canfora, the Missouri executive who helped Station build and open its first Kansas City casino in 1997. Fired by Station just two months after opening Station Casino Kansas City, Canfora slapped Station with a wrongful termination lawsuit. The two sides settled under confidential terms.

But Canfora returned. Within days of Station's announcement, Canfora announced he and a group of investors were making a counteroffer for the Flamingo. At this time, Station alleged in a brief, "Canfora suggested to the MGC staff that they should look into several bonuses that Station had paid to (St. Louis gaming attorney) Michael Lazaroff."

Canfora, it turned out, had just thrown a legal grenade into Station's Missouri operations.

Two months later, Station pulled out of its deal to acquire the Flamingo, and Lazaroff, Station's long-time gaming attorney in Missouri, resigned from the St. Louis law firm Thompson Coburn. Three months later, Lazaroff pleaded guilty to federal fraud charges over bonus payments received from his clients that he hid from his law partners.

But Station wasn't in the clear, as the Missouri Gaming Commission and federal investigators began probing where $500,000 in bonus payments made by Station to Lazaroff went.

It wasn't the first time Station had butted heads with Missouri. Over the past several years, Missouri has fined Station repeatedly, including two $250,000 fines for not catching minors gambling on its riverboats and a $75,000 fine for using city tap water instead of river water in a moat surrounding its Kansas City property. Currently, Station is facing possible fines over alleged violations of Missouri's $500 loss limit rule -- an allegation made against all four Kansas City casinos and Harrah's in St. Louis.

But it soon became clear the Lazaroff investigation could surpass anything seen before. Fears began rising that Lazaroff would claim he was given the money to pay off local officials to Station's benefit, particularly after the Missouri Gaming Commission and a federal grand jury in Kansas City each subpoenaed top Station officials to testify.

On Aug. 29, one day before the commission's hearings were to begin in Kansas City, Station announced it would not honor the commission's subpoenas, and alleged that Lazaroff was using the hearing to lighten his jail sentence. The commission's staff, Station claimed, had known about the bonus payments for years, but done nothing.

"This type of regulatory conduct is not conducive to sound public policy, and smacks of bureaucratic face-saving rather than tough, honest enforcement of the state's gaming laws," Station wrote in an Aug. 29 brief. "Station cannot and will not ... compel its officers and employees to submit to a public pillory in which there are no due process rights and which serves no legitimate regulatory purpose."

It was not a snub the Missouri commission took lightly. Minutes after the hearings started, angered commissioners voted 5-0 to strip Station of its Missouri licenses. Station must appeal by the end of this month to prevent the revocation from becoming official.

Risks in Nevada

The worst fears of Wall Street soon proved unfounded during the Missouri hearings. The staff of the Missouri Gaming Commission, tracking the bonus payments down to the penny, showed more than $400,000 of the bonus funds went to pay off taxes. The remainder was used for home improvements and debt repayment.

Instead, the hearings focused on possible violations of a 1994 Missouri ethics regulation that prohibited contact between commissioners and licensees on matters before the commission.

Numerous witnesses testified that Lazaroff had had such contacts with Wolfson, the former Gaming Commission chairman, though Wolfson denied those charges. Lazaroff insisted he'd done so with the knowledge and approval of Station, though only one witness, Canfora, corroborated that story.

The Missouri Gaming Commission is now awaiting a response brief from Station outlining its answers to last week's testimony. Once in hand, the commission could conceivably take disciplinary action against Station over the Wolfson matter as early as its meeting at month's end.

The ramifications of this could spill over to Station's Nevada licenses. Under Nevada gaming regulations, Nevada's licensees must obey all regulations and laws wherever they do business.

On this basis, the Nevada Gaming Control Board is currently investigating the Lazaroff matter, said board Chairman Steve DuCharme. The board sent a control board agent to the Missouri hearings, has reviewed the meeting's transcripts and is staying in contact with Missouri colleagues for new developments.

"Obviously, we want to get to the bottom of this," DuCharme said. "We have the requirement that they conduct themselves consistent with all laws and regulations wherever they do business. That could result in disciplinary action (in Nevada) if they've violated Missouri law."

DuCharme said the issue will be addressed next week when Station officials come before the control board for approval of Station's proposed $205 million acquisition of the Santa Fe hotel-casino in northwest Las Vegas.

"We'll ask (Station executives) what's going on, what their position is ... they'll try to convince us that this is not something that will be a show stopper with the Santa Fe," DuCharme said.

The last time a regulatory issue in another state triggered a Nevada investigation was during the Flamingo Hilton investigation. When Hilton settled with federal officials in 1998, U.S. Attorney Steven Hill claimed the government could have put together a case that could have cost Hilton all of its gaming licenses across the country.

"If we were to be successful in prosecuting Hilton Gaming or Hilton Kansas City on felony charges it would be all but assured that the gambling regulatory authorities in each state where Hilton has casinos would move quickly to terminate their licenses to operate," Hill said. "In this case, the ends of justice are best met by means of this (settlement) and not by the criminal prosecution of Hilton."

But despite a control board investigation, no disciplinary action eventually resulted in Nevada against Hilton.

"We reviewed that thoroughly, and didn't believe the company's actions warranted additional disciplinary action," DuCharme said.

In fact, DuCharme said he didn't recall a case where a disciplinary action in another state led to action against a Nevada licensee.

Gaming opponent Grey believes that must change with Station.

"If Station was crooked in Missouri, it should cost them in Las Vegas. Why not?" Grey said. "At this point, I think the Nevada commission has a responsibility to the rest of the nation. It's often said they're the model (of gaming regulation). It will be very interesting to see what they do.

"DuCharme had better take a real hard look at this thing."

DuCharme replied that the board isn't going to feel pressured into taking action against Station, even if Missouri eventually imposes penalties on the company.

"The (Missouri) regulation that's in question here is foreign to us, because we discuss interpretation of (regulations) with licensees on a daily basis," DuCharme said. "While Station may ultimately be found in violation of that regulation, we're free to draw our own conclusion of how egregious that is.

"We wouldn't impose our standards of suitability on other states, and we don't expect them to impose their standards on us."

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