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October 21, 2014

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MGM Mirage disputes N.J. regulators’ authority to vet its partner in 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.

When New Jersey casino regulators said last year that MGM Mirage needed to cut ties with an “unsuitable” business partner in China, the casino giant said it would defend itself against allegations raised in New Jersey, where MGM Mirage owns a 50 percent stake in the Borgata resort.

For the past eight months, both sides — with reputations and track records to uphold — have been gearing up for battle. Or reconciliation.

Defending itself in a hearing is an unappealing option for MGM Mirage given New Jersey’s regulatory structure and the hard line the state has taken on organized crime. And yet, MGM Mirage has indicated that it is willing to put up a fight in New Jersey in order to do business there and maintain its business partnership in Macau.

For now, New Jersey controls the battlefield. Regulators may decide to haul MGM Mirage into a public hearing and force the airing of dirty laundry rather than give the company time to negotiate the sale of its Borgata interest, which would remove the company from regulatory scrutiny there.

In years past, casino regulators have allowed companies to save face by signing agreements to drop pending investigations in return for the swift exit of an offending executive, the sale of a property or another transaction that could solve the problem.

Some industry experts believe MGM Mirage will sell its Borgata interest to avoid the regulatory scrutiny and maintain its business partnership in Macau. New Jersey regulators could force MGM Mirage to dissolve the deal, which includes a half interest in the MGM Grand Macau resort, rights to develop future resorts in Macau and a foothold in the world’s biggest and most lucrative gambling market.

One scenario has Boyd Gaming, which owns the other half of Borgata and operates the resort, buying MGM Mirage’s stake.

But MGM Mirage has not yet shopped the Borgata for sale because the company is still weighing its options with New Jersey regulators, according to a source with direct knowledge of the situation.

Boyd declined to comment on the potential purchase of MGM Mirage’s Borgata stake.

Regulators red-flagged MGM Mirage’s 2004 deal with Pansy Ho because she is the daughter of controversial Macau casino boss Stanley Ho, who has reputed ties to Asian organized crime.

Nevada gaming regulators signed off on the partnership in 2007, saying that MGM Mirage had structured the Ho partnership in such a way that her father would not be able to exert his influence on the business. Nevada regulators said Ho, who ran a ferry and tourism company founded by her father, is a suitable partner because she is a successful and ethical businesswoman in her own right.

Because Ho didn’t need a Nevada casino license to do business with the company in Macau, MGM Mirage didn’t have to prove to Nevada regulators that she was a suitable partner. In passing judgment on Ho, Nevada regulators said they had no reason to believe she wouldn’t act ethically and that her father’s alleged associations — while distasteful — were not enough to harm Nevada.

It’s a different ballgame in New Jersey, where companies must renew their casino licenses every five years. Casino companies must prove their worthiness, and those of partners, at each renewal hearing as if they are obtaining licenses for the first time.

This gives regulators more leverage over companies by allowing them to raise concerns that have cropped up in the course of business.

In recent months, New Jersey regulators have informed MGM Mirage executives that the company must prove that Pansy Ho is a suitable business partner in order to do business in the state. Because this is a difficult, if not impossible hurdle, MGM Mirage believes New Jersey regulators are overstepping their authority.

New Jersey’s Division of Gaming Enforcement outlined this battle in a letter to the state’s Casino Control Commission last July.

“It is well settled that applicants and licensees must affirmatively demonstrate their good character, honesty and integrity and that the burden of proving those elements rests with the applicant or licensee,” the Division of Gaming Enforcement wrote.

According to the letter, MGM Mirage argues the company shouldn’t have that burden of proof given that the upcoming hearing wasn’t intended to reopen the Borgata license. The Division of Gaming Enforcement, in the letter, calls that “Alice in Wonderland logic” because license holders “have the burden of affirmatively demonstrating their good character, honesty and integrity at all times that they hold a license.”

“We have acknowledged we disagree with Gaming Enforcement but we are working together to resolve the matter,” MGM Mirage spokesman Alan Feldman said Friday.

A spokesman for the Division of Gaming Enforcement declined to comment. A spokesman for the Casino Control Commission said regulators are in the process of scheduling a hearing to discuss Pansy Ho’s suitability.

The repeat licensing requirement is a cornerstone of New Jersey’s regulatory system, which was intended to counter the state’s corrupt political climate and keep the mob out of Atlantic City at a time when organized crime still had influence in some Las Vegas casinos, said Israel Posner, executive director of the Stockton Institute for Gaming Management at Richard Stockton College in Atlantic City.

“Imagine trying to legalize gambling in a city and state with a reputation for corruption,” Posner said. “The only way casino gaming could have gotten off the ground in New Jersey was having a very high standard of licensure. And Wall Street investors demanded that as well given the high degree of uncertainty about whether investments would be funneled off someplace else.”

Casino companies over the years have chafed under the New Jersey system, preferring Nevada’s model of licensing companies once.

Nevada regulators recently clarified their authority to use incriminating information against a license holder at any time — regardless of whether the activity occurred before or after the company or individual was licensed. While Nevada regulators may discipline a company at any point, including fining or revoking licenses, they shoulder the burden of proving the company broke laws.

Companies have complained about over-regulation in New Jersey, a state that once required casinos be relicensed every year, offer a certain amount of nongambling space and host nightly showroom entertainment. Las Vegas casino operator Steve Wynn openly griped about overbearing regulations in New Jersey before selling his Golden Nugget resort in Atlantic City to a competitor.

New Jersey has loosened many of its casino regulations over time — while tightly gripping a no-tolerance policy for people in any way associated with organized crime, Posner said.

The system has succeeded in wiping the casino industry’s slate clean of criminal elements there but may discourage investment from companies wary of the state’s strict methods, he said. MGM Mirage’s potential exit from New Jersey “may be more of a loss for Atlantic City than for MGM, by losing a potential investor,” he added.

Borgata has been one of Atlantic City’s most profitable casinos but has lost revenue along with other casinos there, as the recession and competition from newer casinos in neighboring states have taken their toll.

MGM Grand Macau initially lost money but is improving, generating $50 million in operating income in the third quarter.

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