Sports Betting Progress In California Faces Possible Roadblock Over Card Room Games

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California sports betting roadblock

A nearly six-year-old dispute over the legality of games being offered in California card rooms may jeopardize pending legislation to permit sports betting in what is arguably the country’s largest and most diversified statewide gambling industry.

The war between the Golden State’s American Indian casinos and card rooms also illustrates the myriad legal and regulatory issues confronting tribes in 28 other states as the US Supreme Court and Congress contemplate repealing a federal prohibition on sports betting.

“It’s a mixed bag at this point,” Debbie Thundercloud, executive director of the National Indian Gaming Association, said last week when asked if legalized sports betting would be a benefit or liability to the nearly 250 tribes operating government casinos nationwide.

“It’s too early to tell. We’ll probably have more research completed by the end of January or February. We plan to go out to different regional associations and gather input from the tribes. We can do more of an analysis once we gather that information.”

Unlike commercial casinos subject to state regulation and taxation, tribes operate under constraints of the Indian Gaming Regulatory Act (IGRA), tribal-state regulatory agreements, or compacts, and in some cases state constitutional amendments.

Tribes also face a plethora of political challenges.

“There’s a lot of moving pieces to this,” Thundercloud says.

A lawsuit in California?

A coalition of about a half-dozen politically powerful California tribes is threatening to file a lawsuit, alleging the $1 billion card room industry is operating banked table games in violation of state law and a constitutional guarantee that tribes alone can offer casino-style gambling.

If the dispute over the legality of the games remains unresolved, the coalition and other tribes say they will use their political clout to fight any potential statewide legislation or ballot referendum that would enable California’s approximately 75 card rooms to offer sports betting.

That was the message tribal representatives delivered last week in meetings Friday with aides to Gov. Jerry Brown and Wednesday with the staff of the state Assembly Government Organization Committee and Chairman Adam Gray.

Gray is sponsoring legislation calling for a referendum on sports betting in California should the US Supreme Court and Congress repeal current prohibitions in all but four states. Gray’s bill does not yet specify who would be eligible to offer sports wagering in California.

A legislative solution on card rooms

Joginder Dhillon, a Brown senior advisor who attended the meetings, urged tribal leaders to avoid filing a lawsuit against the state and/or card rooms, suggesting a legislative solution to the ongoing dispute.

“Joe Dhillon is trying to keep all sides happy,” says a tribal representative at the meetings who requested anonymity. “He’s thinking of this from the legislative perspective.”

“I don’t think the tribes are going to wait too long for a resolution, especially considering the slippery slope of sports betting and the potential expansion of gaming in general,” says Steve Stallings, chairman of the California Nations Indian Gaming Association, a group of 31 tribes.

“These issues are all linked.”

Lobbyist David Quintana says the failure of California regulators to get card rooms in compliance with state law will prompt tribes to oppose legislation that would allow card rooms to offer sports betting.

“That’s no doubt,” Quintana says. “Of course, that would be a part of it.”

During the decade of debate over California online poker, several tribes fought legislative efforts to allow horse racing tracks to be eligible for licensure, terming it an expansion of legal gambling in opposition to public policy. Tribal leaders were receptive to the notion of licensing card rooms.

The situation will likely be reversed in the debate over sports betting.

“I am incredibly happy with the relationship we have now with our tribal colleagues,” says Robyn Black of Eclipse Government Affairs, a racing industry lobbyist.

“We are enthusiastic about sports wagering. We’re very pro-sports wagering. We are very pro-sports betting as long as it’s existing licensees and limited to wagering at brick and mortar facilities.”

Regulatory system has failed to resolve dispute

The state’s politically bifurcated regulatory system – the Bureau of Gambling Control (BGC) under Xavier Becerra and a judicial Gambling Control Commission (GCC) under Gov. Brown – has been working without success to bring card room regulations in conformity with state law.

Tribes have grown impatient with the commission, which has promised reforms to the licensing of about 20 third-party proposition player (TPPPs) firms used to bank what are known as California/Asian games; largely versions of blackjack and pai gow poker.

The profitable use of TPPPs by card rooms conflict with Business and Professions Code Section 19984, which states “in no event shall a gambling enterprise or the house have any interest, whether direct or indirect, in funds wagered, lost, or won.”

“The [GCC] is currently working on proposed regulatory changes of the licensing process for the cardroom industry, which includes the third party providers for proposition layer services registrants/licensees,” CGCC executive director Stacey Luna Baxter says.

“Once proposed language is finalized, it will be distributed to all stakeholders for review and comment.”

The GCC issued an almost identical statement three years ago.

“I don’t anticipate our office will be weighing in at this time,” Brown deputy press secretary Ali Bay says of the dispute. “If something changes, I will let you know.”

The rotating deal problem

Tribes also have lashed out at the BGC’s failure to revise and enforce game rules, enabling TPPPs to bank high-stakes games for the house without “continuously and systematically” rotating the deal among players as required by law.

Game rules adopted by the BGC appear to violate the intent of California Penal Code 330.11, which states “the player-dealer position … must be continuously and systematically rotated” among players. The code does not mandate acceptance of the deal by every player.

Avoiding rotation of the player/dealer/banker position – which has a statistical advantage in the outcome of the game – is necessary to the ability of a card room to offer high-stakes wagers.

The dispute between tribes and card room operators largely stems from a controversial 2007 opinion by disgraced former BGC Chief Bob Lytle that the deal need not be rotated, but merely offered to players at the table. The opinion, issued just days before Lytle resigned to work as a card room consultant, was later rescinded.

A rule adopted by BGC last year requiring the deal to be rotated every hour was also rescinded.

BGC officials did not respond to requests for comment.

Card room industry says it operates legally

Kyle Kirkland, president of the California Gaming Association, and Jahrett Blonien, an attorney for Communities for California Card rooms, denied requests for interviews.

But the two have previously defended the industry, contending it operates in accordance with regulations and state law.

“The tribal community has very strong feelings about the issues,” Kirkland says. “The card rooms feel very strongly about our position. We feel like we operate lawfully.”

“Basically, we think that what has occurred the past 15 years is legal and fine and defensible,” Blonien told the Sacramento Bee.

Tribes may hold all the legal cards

But most of those familiar with California gambling law believe tribes have a strong legal position.

Industry experts contend the evolution of card rooms from strictly poker to banked California/Asian games has outpaced regulations, creating what they call the most inadequately regulated segment of the legal gambling industry.

Many gambling experts – including former CGCC members and BGC agents – contend state regulators lack the experience and resources to govern the industry. Lack of enforcement of internal operating controls is part of the problem.

“There’re not enough personnel to go around and constantly audit these places to make sure they’re operating correctly,” industry consultant Bill Zender says.

“If you asked me if the bureau is adequately prepared to regulate the industry, I’d say absolutely not,” former BGC supervisory agent Dave Vialpando says.

Card room attorney Keith Sharp insists failure to adhere to gambling regulations is not systemic in the card room industry.

But beginning in 2011 with Artichoke Joe’s and the Oaks Card Club in suburban San Francisco, there have been more federal anti-money laundering (AML) and skimming raids, investigations and shutdowns of card rooms than the nearly 1,000 commercial and tribal casinos nationwide.

The list includes the Hawaiian Gardens, Bicycle Club and Normandie Club in suburban Los Angeles, M8tix Casino in San Jose and the Palomar and Seven Mile card rooms near San Diego.

“I have been saying that there are chronic and material problems regarding the regulation of the card room sector for years now, and the card rooms seem incredibly determined to prove me right,” former CGCC member Richard Schuetz says.

“Is it is an embarrassment to the state. It’s almost gotten to the point where [the card room industry] could be declared a criminal enterprise. It’s time to ask the feds to come in and supervise the activity because the state has proven itself unable to do so.”

“The card rooms have proven they’re willing to act illegally, in more ways than one,” says a tribal official who requested anonymity.

“They have no problem violating the AML or the Bank Secrecy Act. It’s not a concern for them. They’ve proven that. And they’re not concerned with regulations. They’ve proven that as well.”

Politics and taxes cloud the issue

Tightening regulations on TPPP firms and requiring rotation of the deal could potentially cripple a card room industry that employs some 22,000 workers and generates millions of dollars in state and local taxes.

It also could prove politically unwise.

“The card rooms have political power,” Stallings says. “There are also local jurisdictions – the cities – that have a stake in this thing, too.”

Some tribal officials privately acknowledge they would be willing to end the legal dispute with card rooms if operators returned to taking a collection fee from players for each hand dealt, a “rake” that for high-stakes California/Asian games is paid by the TPPPs.

Lucrative TPPP partnerships have enabled card room operators to stop taking collection fees on the wagers, which is allowed under the penal code. Dropping the fees enable clubs to lure high rollers from tribal casinos. Tables account for up to 25 percent of a tribal casino’s revenues.

“There’s always room for negotiations, to try and let the card rooms live,” one tribal representative said. “But we have to change the way the games are played so there’s a difference between what’s happening in the card rooms and what’s happening in the tribal casinos.

“As it is right now, you go to the card rooms or you go to the casinos. It doesn’t matter,” the source says, a situation that, unless resolved legislatively or through regulations, is costing the tribes millions of dollars in lost revenues.

Card room officials testified at a BGC recent hearing that mandating collection fees would have a catastrophic impact on their business.

A veil of secrecy

The sensitivity of the issue is not lost on the tribes.

Although tribes are largely united on the card room dispute, several prominent indigenous governments decline to join the coalition threatening to file a lawsuit.

At last count the group includes includes: Yocha Dehe Wintun Nation, Santa Ynez Band of Chumash Indians, Rincon Band of Luiseno Indians, Vieja Band of Kumeyaay Indians, Agua Caliente Band of Cahuilla Indians and the Sycuan Band of Kumeyaay Nation.

Should the federal prohibition be repealed and tribes at some later date seek to offer sports wagering, indigenous governments in California and elsewhere would have to negotiate amendments to existing tribal-state regulatory agreements.

Compacts in California are based on an exclusivity provision in the state constitution that includes slot machines and banked and percentage table games, but not sports betting.

The negotiation process could be antagonized or otherwise made difficult if the tribes, state and card rooms were battling it out in the courts.

Others suggest it would be best for tribes if sports betting never became legal in California. Some consider sports wagering to be largely a marketing tool that generates little to a casino’s bottom line.

“Tribes right now are just trying to get their arms around the issue,” Quintana says.

Combined, tribal casinos, card rooms, pari-mutuel racing, a lottery and charitable gambling in California generates more than $11 billion annually in gross annual wagers, a figure that rivals that of Nevada with largely commercial casinos.

“Most tribes don’t want any expansion of gaming at all,” one tribal attorney says.

“A lot issues are in flux,” Stallings says. “But things are coming to a head. The tribes know what they want to do. They’re methodically putting the state on notice.

“We need to meet and confer on the issue,” Stallings says of card room games, “and if nothing comes of it the tribes are going to go to court. That’s the message the tribes are delivering to the state.”