News for the Hospitality Executive
|By Steve Wiegand, The Sacramento Bee, Calif.
Knight Ridder/Tribune Business News
Jun. 9, 2003 - LAS VEGAS -- There are ghosts in this city, among the pyramids and pirate ships and palaces. Ghosts with names like Bugsy and Moe and Tony the Ant.
They are the spirits of some of Nevada gambling's first generation of entrepreneurs, people who skimmed profits, laundered money and buried their problems in shallow desert graves.
The "wise guys" are gone, most gambling industry experts will tell you, replaced by closely monitored and scrutinized, publicly traded mega-corporations.
"Casinos are the most highly regulated form of business in the world, and yet with a terrible reputation and history in the public mind," said Nelson Rose, a Whittier Law School professor and an expert in gambling law.
"A lot of times the companies quite literally get into trouble just for the company they keep, or kept."
Nearly every big modern casino company has had things go bump in the night, and Station Casinos Inc., the firm that today begins operations of the Thunder Valley Casino for a Placer County Indian tribe, has its own ghosts, with names like Carl, and Lance, and the state of Missouri.
"They (Station executives) are young guys, very energetic, very aggressive," said Bobby Siller, a member of the Nevada Gaming Control Board. "Some of the casinos are pretty cookie-cutter in their approach, but these guys like to take chances and do things different, and sometimes that can create friction."
It can also create profits. From a modest gambling and bingo joint for locals with annual revenues of less than $3 million, the company has grown in 27 years to a casino giant, with 2002 net revenues of $792.9 million. Station has a work force of about 10,000 and has full ownership of eight casino-hotels in the Las Vegas area and half ownership of two others.
Under its seven-year contract with the United Auburn Indian Community, Station will receive 24 percent of the casino's annual net revenues, plus 2 percent of the cost of building the casino, in return for its gambling experience and expertise. That could amount to more than $50 million a year for the company.
While two Nevada gambling companies manage Indian casinos in Southern California, Station will be the first in Northern California.
According to many gambling industry analysts, the United Auburn tribe made a good choice: Station has a reputation for building successful, "friendly" casinos that appeal to local residents and casual gamblers who might drive 30 minutes to a casino, but not two hours.
"They have a good company for this kind of operation," said William Thompson, professor of public administration at the University of Nevada, Las Vegas, and a leading authority on gambling's economic and social impacts. "I don't buy casino stocks, but if I bought casino stocks, I would buy Station."
But the company also has a reputation for aggressiveness, and that has contributed to a string of controversies:
-- Company patriarch Frank Fertitta Jr.'s connection to a 1980s scandal, in which mobsters skimmed millions of dollars from several Las Vegas casinos, raised eyebrows when the company tried to establish itself in the Indiana and Missouri gambling markets.
-- After winning licenses to operate casinos in Missouri, Station was fined a total of $1.9 million between 1997 and 2000 for violations that included dumping fill materials in the Missouri River, allowing a 12-year-old girl to play slot machines and refusing to testify before a state regulatory agency looking into corruption charges. The company surrendered its Missouri licenses and sold its properties there in 2000.
-- The company also paid a $475,000 fine in Nevada in 2000 to settle a complaint the Nevada Gaming Control Board filed against Station for financing an anonymous campaign mailer. The mailer was aimed at a Clark County commissioner who had angered Station executives by voting in favor of a rival firm's development proposal after pledging to vote against it.
"Every major gaming company has stumbled from time to time," Station general counsel and corporate vice president Scott Nielson said during an interview at the company's offices at Palace Station, its first hotel-casino.
"It's a very tightly regulated business, and it would be almost impossible to completely avoid some violations over the years."
Station's modest headquarters belies its success. The offices are above the casino's bingo hall, and the reception area is decorated in "early midtown dentist office" style, with plenty of black-and-white pictures of the old days. Occasionally, the monotonous songs of the slot machines make their way up the stairs.
The company's leadership -- which is topped by Fertitta's sons Frank III, the chairman and CEO, and Lorenzo, the president -- is young (the average age of the top five executives is 43), well compensated (the top five average $4.3 million a year) and experienced.
It is also flexible.
"We saw there was public support in California for Indian gambling," Nielson said. "So we thought that since it was going to be a reality, rather than turn our back to it, we should check and see if there were some opportunities there for us."
Opportunity was what a 21-year-old Texan named Frank Fertitta Jr. was seeking when he came to Las Vegas in 1960. Starting as a bellman, Fertitta became a blackjack dealer, then worked his way up into management.
Vegas was booming, but Fertitta figured there was still something missing: A casino for the locals, where casino employees could blow off steam after work without bosses looking over their shoulders or having to share space with the tourists.
In 1976, Fertitta scraped together enough to buy a small casino off the Strip with a partner, Carl Thomas. The casino became known as the Bingo Palace and later Palace Station.
Both Thomas and Fertitta had other jobs as well. When Thomas was made chief executive officer of four casinos owned by the Argent Corp., he brought Fertitta in to be general manager at one of them, the Fremont.
But Thomas also had other partners. They were Giuseppe Nicoli "Mr. Nick" Civella and Carl "the Cork" Civella, brothers and bosses of the La Cosa Nostra chapter in Kansas City.
In the 1980s, federal prosecutors charged that Thomas, the Civellas and others conspired to "skim" money from the Argent casinos by taking it from the counting rooms before it was on the casinos' books.
After a 1985 trial in Kansas City, a dozen defendants were convicted. Thomas, who by then was serving a 15-year sentence for a skimming conviction in a related case, testified against his former partners in return for immunity from prosecution.
In his testimony, Thomas did not implicate Fertitta, who had bought out Thomas' interest in the Bingo Palace when the skimming charges first surfaced.
Fertitta has consistently and vociferously denied any involvement, and never was indicted or charged.
But one witness who had been fired by Fertitta, former Fremont security chief Harold McBride, testified Fertitta had been involved in the skimming. Fertitta's name also surfaced in FBI wiretaps of conversations between the Civellas and Thomas.
After a four-year investigation into the allegations, the Nevada Gaming Control Board voted 2 to 1 in 1989 not to initiate disciplinary action against Fertitta.
But the shadow was there.
Fertitta Jr. stepped down as board chairman of the company in favor of his son Frank III in 1993, when the company went public. He is currently on the board of trustees for the University of Nevada, Las Vegas.
The skimming case, however, still came up when Station applied to run riverboat casinos in Indiana and Missouri.
"As far as St. Charles riverboat gambling is concerned, we want to know not only about Frank Fertitta III, but his father and Palace Station as well," St. Charles, Mo., Mayor Grace Nichols told a local newspaper at the time.
The company eventually gave up the idea of an Indiana riverboat, but won Missouri licenses in St. Charles and Kansas City -- with the understanding that Frank Fertitta Jr. would have absolutely no role in the company's operations.
Missouri was generally not a pleasant experience for Station.
Neither casino did as well as expected, and the company ran afoul of the state's regulations.
According to Missouri Gaming Commission records, Station paid a $250,000 fine in 1997 for allowing a 12-year-old girl to play the slot machines at its St. Charles riverboat casino. In 1999, it paid a $500,000 fine for illegally dumping rock and soil into the Missouri River while doing work on its St. Charles boat. It also paid a $75,000 fine for violating water use regulations at its Kansas City site.
But the coup de grace came in 2000, when the commission launched an investigation of dealings between Station and a St. Louis attorney whom Station hired when it first started looking at the Missouri market.
The attorney, Michael Lazaroff, pleaded guilty in federal court to defrauding his law firm by taking $500,000 in bonuses from Station and not turning it over to the firm. He also pleaded guilty to defrauding clients, including Station, by padding his expenses, and of concealing the source of campaign contributions.
Gambling commission investigators also found Lazaroff had made 205 private phone calls to former commission Chairman Robert Wolfson, which was against Missouri law.
Testifying before the commission in August 2000, Lazaroff said he had used his personal relationship with Wolfson to increase Station's chances of landing a Kansas City gambling license, and that Station officials knew about it.
"They from time to time would ask me to run things by Chairman Wolfson and see what he knew about it," Lazaroff testified.
Station officials denied they knew Lazaroff was doing anything wrong, but refused to testify at the commission's public hearings, despite subpoenas. A Station attorney indignantly told the commission the company objected to the hearing being public and to not being able to cross-examine Lazaroff.
The commission then voted unanimously to strip Station and its top executives of their Missouri licenses. And in November 2000, Station agreed to pay a $1 million fine, voluntarily surrender its licenses and get out of the state.
In an interview, Station counsel Nielson attributed many of the company's problems in Missouri to cultural differences.
"Some of the things that are common practice or well accepted in Nevada aren't necessarily going to be accepted in another jurisdiction, and I think that's an important lesson to learn," he said.
"And you also had a situation where the regulatory people were ex-highway patrolmen ... and some of them didn't like gaming, and some didn't like people from Las Vegas, period."
But the company also has found trouble closer to home.
In September 2000, Station paid a $475,000 fine to the Nevada Gaming Control Board for failing to adequately supervise one of its executives.
Board investigators said the executive, Mark Brown, authorized the printing and distribution of an anonymous -- and therefore, under Nevada law, illegal -- campaign mailer against then-Clark County Commissioner Lance Malone.
The mailer featured a cartoon of Malone with his pockets stuffed with cash and a caption reading "You just can't trust Lance Malone," and was cited as a key factor in Malone's defeat.
In testimony before the board, Brown said Malone had voted in favor of a proposed project by a Station rival, after taking $40,000 in campaign contributions from Station and pledging to vote against the project.
Brown resigned from Station and the company settled a libel suit filed by Malone for an undisclosed amount. (Malone, who became a political consultant after his defeat, is currently the subject of an FBI probe into political corruption in Las Vegas and San Diego.)
In a more recent incident, Station notified the Gaming Control Board in late April that the company had violated state laws that require it to report large cash transactions to the federal government. State investigators are looking into the violations.
And despite its reputation for running "locals' casinos," not everyone in Las Vegas is a Station fan.
The company is the largest non-union casino employer in town. When it took over a union hotel in 2000, Station fired about 1,000 workers and required them to reapply for their jobs. According to union officials, only 150 were rehired.
"This was something new for Las Vegas," said Courtney Alexander, research director for Hotel Employees and Restaurant Employees Local 226, which represents about 50,000 workers in Las Vegas.
"Casinos are bought and sold all the time, and we had no history of mass terminations when a new owner came in. ... I think it marked a turning point in how Station was viewed as an employer in this town."
Station's Nielson said the firings have done little to affect the company's standing with its customers, or employees.
"We've said all along we are not anti-union, we are just pro-employee," he said. "If our employees believe they want to have someone involved to speak to management for them, they can. We've been here for 27 years, they've never felt the need to do that."
At Thunder Valley, Nielson said, the decision on whether to have unions will be made by the tribe.
In fact, while Station will run the casino's day-to-day operations, a five-member Business Council will make policy decisions.
The council consists of three tribal members and two Station officials, including Nielson, and the tribe has already shown it will wield its influence.
"You should have heard the argument we had over what color the felt would be on the card tables," said tribal chairwoman Jessica Tavares.
(For the record, the tribe won, and the felt will alternate from table to table: tan with rust trim next to a table that is rust with tan trim, to match the exterior colors of the building.)
Nielson grinned a bit ruefully when recalling another battle over the cocktail waitresses' uniforms, which tribal members found too immodest.
"There were members of the board that weren't particularly thrilled at the costumes," he said, "but we assured them there was a method to our madness, and so a slightly modified costume was chosen."
More important will be tribal dominance when it comes to regulating the casino. Under federal law and the tribes' compact with the state, each casino tribe must create its own tribal gaming agency, which becomes that casino's regulatory authority. That means the tribe, not Station, will be in charge of enforcing casino rules, compact provisions and federal law.
"If we don't comply with the rules," Nielson said, "it (the tribal gaming agency) is going to have the ability to sanction us, just like in Nevada."
The company also will have to learn to deal with cultural differences that make Missouri look like a Las Vegas suburb.
Station officials, for example, thought they had found a way to win the Auburn tribe's hearts, through their stomachs.
When tribal chairwoman Tavares mentioned she liked crab legs, Station officials provided a mountain of them at an "appreciation picnic" for the tribe last year.
"Most people didn't even know what they were," she said. "They all said, 'ewww, fish -- I'm not going to eat that." "
The company also gave the tribe's children goody bags full of candy and toys, including colorful rubber king snakes.
"I had to tell them king snakes are about the most bad-luck of omens there are for us," Tavares said.
"We don't want king snakes in our casino."
STATION CASINOS AT A GLANCE: Founded: 1976, with the opening of a 5,000-square-foot gambling hall called The Casino. It later became the Bingo Palace and finally Palace Station.
Properties: Owns and operates eight casino-hotels and has a half interest in two casino-hotels in the Las Vegas area.
Net revenues: $792.9 million in 2002
Assets: $1.6 billion
Work force: About 10,000
52-week stock high (May 20, 2002 -May 20, 2003): $23.95
52-week stock low: $11.21.
Sources: Station Casinos 2002 Annual Report, Securities and Exchange Commission filings
GAMBLING ANALYSTS BET CASINO WILL MAKE PLENTY: It's a safe bet that the casino opening today in Placer County will make lots of money for the owners, the United Auburn Indian Community, and the operators, Station Casinos Inc.
But the odds on figuring out exactly how much, whose pockets it will come from and where it will go are somewhat longer.
Since Indian tribes aren't required to make public what they take in at their casinos, comparisons to area tribes with gambling halls are no help.
That leaves educated guesses. Bill Eadington, director of the Study for the Center of Gambling and Commercial Gaming at the University of Nevada, Reno, uses a formula based on the number of adult gamblers in an area divided by the number of available slot machines. Revenues from slot machines generally represent about 75 percent of a casino's take.
Eadington estimates an Indian casino near a population the size of the Sacramento area will average a net of about $300 per day per slot machine.
Since Thunder Valley will have 1,906 machines, that comes to about $209 million per year. Add another $70 million from table games such as blackjack, and it comes to about $280 million a year.
That may be conservative, according to a study released last month by CIBC World Markets, an international investment bank.
"The Station Thunder Valley property has, by far, the best location and will have the best facility in the market," CIBC analysts said. "We believe that revenue per slot per day estimates of $300-$400 ... are easily attainable."
For Station Casinos, which will get 24 percent of the net revenue for handling the casino's day-to-day operations, $280 million in annual revenues would mean more than $65 million a year.
Most of that money is expected to come from the casino's back yard: Station Casinos built its reputation as the "locals' casinos" in Las Vegas, and that's one of the reasons the tribe chose the company.
"Our emphasis will be in the Sacramento Valley area," said Scott Nielson, Station's general counsel. "We'd love to have people drive from out-market for two, three, four hours, but that's not going to be our bread and butter."
Using kiosks at area shopping centers, the casino already has signed up thousands of area residents for its "Boarding Pass" program, which rewards players with things like Thunder Valley-themed merchandise and food discounts for logging hours on the slot machines.
Not everyone, however, thinks a "locals' casino" is a good idea for the locals' economy.
"It's a good-news, bad-news thing," said William Thompson, a professor of public administration at the University of Nevada, Las Vegas. "The good is: They (Station) do a fantastic job. The bad is: Whom do they do the job on? The locals."
Thompson asserts the local economy won't benefit significantly because most of the casino's revenues will come from money local gamblers would have spent at other local businesses, such as movie theaters or shoe stores. Now, he says, a big chunk of money will be flowing out of the local economy, to Las Vegas-based Station. He estimates the tribe also will spend 10 to 15 percent of its revenue on out-of-state vendors who provide casino staples such as slot machines.
And, Thompson said, the casino won't attract enough non-local money to make up the difference.
Thompson, who is an outspoken critic of the "social costs" of gambling -- personal bankruptcies, substance abuse, divorce, lost work time -- did an economic impact study in 2000 for a group opposing the Thunder Valley Casino.
He concluded that the annual negative economic impact, including social costs, for the area within a 30-mile radius could be as much as $200 million.
But other studies have found that casino gambling's impacts on communities, both economic and social, are mixed.
A federal government review of gambling studies in the 1990s, for example, found two studies rated the overall economic impacts of casino gambling "negative," seven found it "neutral to slightly positive" and 10 found it "significantly positive."
A series of studies in 2000 by researchers at the University of Nevada, Reno, and the University of Memphis concluded that except for personal bankruptcies, there was little connection between gambling and most societal ills.
The prospect of a casino in Placer County has not caused much of an economic stir of any sort so far. Prices on surrounding parcels in the Sunset Industrial area, where the casino is located, have remained fairly constant.
But some local officials are hopeful it will spur development in the area.
"The tribe is paying for $30 million worth of infrastructure improvements in the area," said Placer County Supervisor Robert Weygandt, who represents the area, "so in that regard, it's going to prove to be very positive."
Weygandt also notes the casino's creation of about 1,800 jobs and the prospect of enticing Bay Area residents and people headed for Reno into leaving their gambling money at Thunder Valley instead.
At least one company is betting the casino will inject cash into the area outside the slots.
Station Casinos has purchased 99 acres across the street from the casino. Company counsel Nielson said the company has no specific plans for development, although speculation has ranged from a hotel to an amusement park.
-- By Steve Wiegand
-----To see more of The Sacramento Bee, or to subscribe to the newspaper, go to http://www.sacbee.com
(c) 2003, The Sacramento Bee, Calif. Distributed by Knight Ridder/Tribune Business News. STN,