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August 1, 2014

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New Jersey could come between MGM Mirage, Macau

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Bloomberg News file

Casino billionaire Stanley Ho and daughter Pansy Ho attend a groundbreaking ceremony for an MGM Mirage casino in 2005 in Macau.

This month’s abrupt departure of MGM Mirage executive Gary Jacobs stems from East Coast regulators’ concerns about Jacobs’ handling of the company’s business partnership in the Chinese enclave of Macau, knowledgeable sources say.

Because MGM Mirage has a half-interest in the Borgata resort in Atlantic City, New Jersey gaming enforcement spent several years investigating a joint venture the corporation set up in Macau — and wound up recommending that MGM break ties with its Macau business partner.

During that investigation, which wrapped up in May, regulators noted that Jacobs — who structured the Macau deal as MGM Mirage’s general counsel and served as the company’s point-man in Macau — was not forthcoming with information for regulators about the deal and how it was vetted by the company, according to sources with direct knowledge of the investigation.

Jacobs, who worked at MGM Mirage for nearly a decade, could not be reached for comment.

MGM Mirage’s interest in Macau — a booming casino market fraught with controversy — has opened the company to the kind of scrutiny that casino operators haven’t seen for decades.

Macau, the only part of China where casino gambling is legal, is the world’s most lucrative gambling destination, eclipsing Nevada’s gambling revenue.

MGM Mirage is planning an expansion in Macau and an initial public offering of stock to capitalize on Chinese demand for gambling-based resorts.

The company’s problems in New Jersey, however, go back to the way it got its foot in the door in China in 2004 — through a partnership with Pansy Ho to develop the $1.3 billion MGM Grand Macau, a 600-room luxury resort. Ho is the daughter of Stanley Ho, who held a decades-long monopoly on the casino business until 2001, when the Macau government — in an effort to not only fuel non-gambling, mass-market tourism through the construction of Las Vegas-style megaresorts, but also rinse the taint of organized crime from Macau’s casinos — invited foreign companies to bid on licenses to build competing properties in Macau.

Las Vegas competitors Wynn Resorts and Las Vegas Sands — which now generate most of their earnings from Macau — won two of the three initial licenses to build casinos there.

The third license remained with Stanley Ho’s casino company.

MGM Mirage, not wanting to be shut out of a lucrative market with long-term growth potential, found another route into Macau.

Knowing that U.S. regulators would not approve of a Nevada casino company doing business directly with Stanley Ho, MGM Mirage formed a joint venture with his daughter, Pansy Ho, that involved a payment to her father’s casino company, in the form of a secondary license or “subconcession,” to do business there.

Though never convicted of a crime, Stanley Ho has reputed links to Chinese organized crime.

Stanley Ho’s contention that he isn’t tied to criminal activity doesn’t hold much weight with U.S. regulators, who believe his renting of gambling rooms to third parties allows casinos to turn a blind eye to shady practices kept at arm’s length.

Whether the influx of American casino operators has cleaned up these rooms in recent years isn’t clear, as Nevada regulators have limited authority to regulate how business is done in Macau.

But as recently as 2007, Macau regulators noted that gang-linked VIP rooms — where Macau casinos generate the vast majority of their business — are an ingrained problem.

Nevada gaming regulators approved the Macau partnership in 2007 — two years after MGM Mirage had begun to develop MGM Grand Macau and nine months before the resort was scheduled to open for business. Though uncomfortable with Stanley Ho’s reputation and armed with volumes about his alleged misdeeds, Nevada’s Gaming Control Board and Gaming Commission concluded that Pansy Ho, a capable business executive in her own right, was a suitable business partner for MGM Mirage and that the company had structured the joint venture to avoid influence from her father.

While much of Pansy Ho’s initial investment of $80 million in the MGM deal came from her father, she insisted to Nevada regulators that her father didn’t influence her business operations. And regulators noted that negative publicity about her father wasn’t sufficient enough to prove that Nevada’s reputation would be harmed as a result of the deal.

In the early days of casino regulation in Nevada, regulators approved people with ties to organized crime because of the relative lack of industry expertise among the general population. Some of their sons, daughters and grandchildren have since obtained casino licenses here and have proved themselves to be upstanding citizens.

New Jersey, however, has taken a harder stand on mob influence over the years, forcing several executives with checkered pasts to resign their posts with companies operating Atlantic City casinos. Some of those executives were licensed in Nevada at the time.

In some cases, companies have sold their casinos in Atlantic City rather than sacrifice executives or subject their companies to further scrutiny.

“New Jersey has decided that children can be faulted for the sins of their fathers” and that people can be guilty by association, said I. Nelson Rose, a California-based gaming attorney who has testified in gaming licensing hearings. Nevada, on the other hand, has taken a live-and-let-live approach by not prying as deeply into the backgrounds of some operators’ relatives and past associates.

“The question is where you draw the line,” Rose said. “That’s what regulators are supposed to do.”

In MGM Mirage’s case, regulators with New Jersey’s Division of Gaming Enforcement in 2005 red-flagged the company’s partnership with Ho in a report to the Casino Control Commission — the agency that makes the final determination on licenses or other regulatory matters. In Nevada, casino licenses don’t have to be renewed and can only be revoked as a result of some significant infraction. In New Jersey, Atlantic City casinos must renew their licenses every five years, which allows regulators more leeway to investigate concerns and cite casinos for problems that come up in the course of business.

The 2005 report by the Division of Gaming Enforcement was part of a routine licensing renewal for the Borgata, which MGM Mirage owns with Boyd Gaming Corp. In the report, the New Jersey regulators said they were continuing to investigate the suitability of the Ho deal. They completed that investigation in May and notified MGM Mirage.

In a filing with the Securities and Exchange Commission that month, MGM Mirage disclosed New Jersey’s recommendation that the company break ties with Ho, the investigators’ findings that Ho is “unsuitable” as a business partner, and that MGM Mirage’s due diligence and compliance efforts were found to be “deficient.”

New Jersey’s Gaming Enforcement Division made these nonbinding recommendations to the Casino Control Commission, which is expected to hold a hearing this spring that effectively reopens the 2005 licensing investigation of the Borgata and addresses the suitability of MGM Mirage as a part owner of an Atlantic City property.

Whether New Jersey regulators would ultimately force MGM Mirage to sell its interest in Borgata or forfeit its deal in Macau remains to be seen, as the Macau investigation is the first of its kind involving a foreign business partner.

The departure of Jacobs, which was announced in a required SEC filing without any of the flattering comments typically made by companies whose executives retire, might pave the way for a more favorable outcome in a regulatory hearing, according to sources familiar with the Macau deal, who declined to be identified.

Dan Heneghan, spokesman for New Jersey’s Casino Control Commission, declined to comment on whether Jacobs is discussed in the regulators’ report because it remains confidential until the hearing.

MGM Mirage spokesman Alan Feldman said the company would not comment on why Jacobs resigned. Jacobs, 64, had a job contract through Aug. 3, 2013, according to SEC filings. His resignation agreement calls for him to be paid $3 million over 2 1/2 years.

Nevada Gaming Control Board member Randall Sayre said New Jersey regulators are entitled to their judgment on the Macau deal, but added that Jacobs was “a licensee in good standing” with Nevada regulators during his tenure at MGM Mirage.

“There’s nothing in the system in Nevada at the time of his resignation that was a regulatory concern to this agency,” Sayre said.

Even so, MGM Mirage should expect a difficult hearing in New Jersey, given that regulators — who have recommended against the Macau deal — put the burden of proof on casino operators to prove that their business dealings are above reproach, Rose said.

“To some extent they have to prove a negative — that Stanley Ho doesn’t have connections to organized crime — and that’s going to be tough.”

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