Clubs’ cash flow suspect

By Liz Benston, Jeff German, Michael Mishak

Thursday, Feb. 28, 2008 | 2 a.m.

The burgeoning nightclub scene has brought a new kind of money to Las Vegas — and an old kind of trouble. The scene is awash in cash to an extent reminiscent of Las Vegas’ early days.

An IRS investigation into two of the Strip’s hottest clubs, Pure at Caesars Palace and LAX at Luxor, has demonstrated the potential for abuse by employees and managers. But of greater worry to casino executives and state gaming regulators is damage the case could do to the carefully guarded reputation that modern Las Vegas’ casinos and resorts have for running transparent and legitimate businesses.

Gaming Control Board Chairman Dennis Neilander said Wednesday he doesn’t recall the IRS conducting a raid inside a casino since the waning days of the mob in Las Vegas in the 1980s. His agency, he said, will be watching the IRS investigation closely and is prepared to take action over any alleged violations.

Several major casinos already have informed the Control Board that they are conducting internal reviews of the cash practices at the nightclubs operating on their properties.

Pure and LAX are both operated by Pure Management Group as a partner of the casinos. Pure Management, which manages more than 10 restaurants and clubs at casinos along the Strip, is run by two innovators of the nightclub scene, Robert Frey and Steve Davidovici.

Pure opened on New Year’s Eve in 2004 next to the sports book at Caesars Palace, which is owned by Harrah’s Entertainment. The $14 million club quickly became a haven for jet-setters and big-name celebrities. Accommodating more than 1,500 people, Pure claims to be the nation’s top revenue-producing nightclub.

LAX, inside MGM Mirage’s Luxor, reportedly cost $20 million to develop.

Pure Management’s revenues have grown sharply. In August, Davidovici told the Los Angeles Times annual revenues had jumped in the past five years from $25 million to more than $120 million.

Neither the IRS nor the company would discuss the IRS action, although Pure Management issued a statement last week saying it is “fully cooperating with this IRS investigation and looks forward to a quick and satisfactory resolution.”

The probe has shaken executives at the MGM Mirage.

“The issue is a big concern to us,” said Alan Feldman, a senior vice president. “The IRS and the Department of Treasury raiding the offices of one of our partners is not something we take lightly. This is a circumstance where the responsible thing to do is to monitor things very closely.

“We should not need to remind any one of our partners about our expectations of them and of their compliance with all rules and regulations,” Feldman said.

Gary Thompson, a spokesman for Harrah’s Entertainment, said: “If there was something illegal going on that would obviously be of great concern to us. But we don’t know if there was any such activity going on.”

Nightclub insiders say the investigation is focusing on the common practice of employees’ soliciting tips from patrons to get inside the crowded clubs and whether all of those tips have been reported to the IRS.

Many of the tens of thousands of patrons who go to Pure, LAX and other clubs along the Strip each week learn quickly that they must wait for hours in line to get inside — unless they slip the doorman some cash.

Inside, hosts and waitresses also can signal that they expect money up front for services normally included in the cover charge.

“It’s a sophisticated tourist shakedown,” an experienced nightclubber says. “You pay to skip the line at the door. Then you pay a host to take you to a table. Then you pay up to $1,000 for a bottle of alcohol. And at the end of your stay, you tip the waitress for all of the great fun you’ve had.”

At some nightclubs, the cash payments are pooled and distributed each night up the management chain in a process those familiar with the nightclub scene call “breaking the bank.”

The practice of paying doormen to get inside a club is not unique to Las Vegas, but it does have urgency here.

“You only have a certain amount of time in Las Vegas,” said Xania Woodman, a former independent club VIP host who edits the nightlife section of Las Vegas Weekly and covers the industry. “Next in line does not necessarily mean next in the club. You can either spend time or spend money; I always suggested you spend money.”

The IRS investigation, she said, has stunned the city’s club industry.

“This has been done so long that it’s become the way,” Woodman said. “It’s talked about so openly that everyone is completely shocked. It’s our vocabulary. Whatever paradigm shift comes, it’s clear there will be a new way of doing things.”

Nightclubs have become major cash cows for casinos. Some clubs share revenue with the casino. But even properties that collect rent from clubs benefit by attracting hordes of spendthrift clubgoers who spend money elsewhere in the resort.

Operators say a successful club can generate from $10 million to $50 million a year in revenue. But the most intriguing feature about Las Vegas nightclubs isn’t the revenue but their huge profit margins. Most of the money is made on liquor, which can have profit margins as high as 95 percent. Many clubs make the bulk of their money on “bottle service.” Typically, customers will pay hundreds of dollars per bottle for the privilege of sitting at a VIP table — and they may be required to buy more bottles, depending on the size of their group.

At Pure and other high-end clubs, many tables are reserved for customers paying for bottle service, which includes the services of a cocktail waitress who pours and serves drinks to the group.

On a typical night, club operators say, hundreds of thousands of dollars could be moving through any given club in the form of tips to doormen, VIP hosts, servers and bartenders, as well as payments for bottle service.

Unlike casino cashiers, who are accustomed to handling large sums and are subject to criminal background checks, employers say many nightclub workers are young and relatively inexperienced in money-handling. Much of the cash they touch is being slipped from hand to hand in the dark.

“It’s like running a casino without cash cages, cameras, people wearing jumpsuits without pockets and controlled access,” said one casino executive who declined to be named. “Or more like running a bank without regulatory oversight. It’s an accounting nightmare.”

Doormen often walk up and down the line to make it easier for those waiting to offer money to skip ahead. Women often can jump ahead for free, but it can cost a man $100 or more to jump the line.

The IRS visits to Pure and LAX weren’t the only sign of trouble with this tipping practice.

In October 2006 a former Pure patron, Ira Kiener, filed suit in District Court against the club, Davidovici and Caesars Palace following a 2005 altercation with Davidovici over an “entry fee” the patron and his party of 12 paid to jump in front of the line.

After paying $30 apiece to move up, Kleiner and his lawyer, Michael Koning, allege, the group discovered that some of its members weren’t let inside. A dispute erupted with Davidovici. Eventually, Kleiner and others were kicked out of the club but did not get their money back.

Kleiner alleges he was wrongfully detained by Caesars Palace security officers after the altercation. The case is set for trial in July.

Although regulators were caught off guard by the IRS visits to Pure and LAX, Jerry Markling, chief of the Control Board’s Enforcement Division, said regulators are well aware of the growing problem nightclubs have brought to the Strip.

In February 2006, the Nevada Gaming Control Board distributed an industrywide memorandum warning the casinos that they would be held accountable for any trouble occurring in those clubs — even if most of the clubs are run by independent operators.

Among the concerns of regulators at the time were incidents of violence, public drunkenness and drug distribution at the clubs.

Agents with the Control Board’s Enforcement Division met with executives of the casinos and the clubs to explain the potential repercussions of allowing the activities to continue.

In the wake of the IRS raid, Markling said he wanted to again remind the casinos that they are “responsible for the activities that take place on their properties.”

Sun reporter Mary Manning contributed to this story.