By Bob Crawford
On March 28, 2013, the Boston Herald reported that Vornado Realty Trust, one of the largest shareholders of Suffolk Downs, was divesting its interests in Sterling Suffolk Racecourse, LLC (the Suffolk Downs related entity that had submitted an application for a Massachusetts casino license) because its executives were unwilling to submit to the background checks that are required as part of the application process. At the March 28, 2013 meeting of the Massachusetts Gaming Commission, the Commission unanimously approved allowing Vornado to transfer its interests to a blind trust, over which Vornado would hold no control, so that its interest could be sold without slowing down the application process (noting that any prospective transferee of such interests would have to be willing to comply with the same background check requirements that Vornado had balked at). While the Vornado issue was resolved (other than lingering curiosity as to what specifically they were uncomfortable with disclosing), it served to highlight the depth and breadth of the background checks, as well as their importance to the process.
Questions regarding the need for the initial $400,000 application fee for Phase 1 applicants and the reasons why Vornado may have refused to participate in the background check process begin to become clearer when you see the scope of the Business Entity Disclosure Form and Massachusetts Supplemental Form (copies of which are available on the Commission website). The forms require extensive disclosure not only regarding the financial strength of each applicant and such applicant’s ability to follow through with their proposed casino developments, but are also intended to ensure each applicant meets the “high standards for good character, honesty [and] integrity”, requiring disclosures relating to dozens of topics including:
Compensation of key executives and employees
Current and prior personal investments
Whether any officer or executive has been asked to submit to a polygraph test
Fifteen years of residency information
Motor vehicle license suspensions
205 CMR 116. Those provisions require that not just the actual applicant submit to the background check process, but also each director and officer of such entity, and, in the judgment of the Commission, any other member, shareholder, lender, employee, agent, executive or other related person. This is necessary because each of the applicants is a limited liability company, most of which were formed within the past year explicitly for the purpose of submitting a license application. Given the often complicated multi-tiered structure of many of the entities applying for licenses, the Commission was given broad discretionary powers to require disclosure from potentially hundreds of individuals and entities. On May 6, 2013, the Commission released the list of “qualifiers” for each applicant, those individuals and entities that are initially being required to submit to the background checks as part of the vetting process. For example, Sterling Suffolk Racecourse, LLC, the applicant with the most “qualifiers”, has 56 individuals and entities that are subject to review. Further complicating the process is that many of the “qualifiers” are foreign nationals or entities, such as Dubai World and Infinity World (Cayman) Holding, both “qualifiers” of Blue Tarp reDevelopment, LLC (better known as the MGM applicant). In addition to the disclosure forms, teams comprised of active Massachusetts State Police officers and experts from Spectrum Gaming and Michael & Carroll (which includes former FBI agents, forensic accountants and former prosecutors) are reviewing tens of thousands of pages of documentation and traveling as far as China to conduct interviews and investigations.
In 2009, in a 79-page Special Report to the New Jersey Casino Control Commission, prepared in connection with MGM’s plans to open a casino in New Jersey, significant questions were raised regarding possible ties to Asian organized crime of Stanley Ho, the father Pansy Ho, MGM’s proposed joint venturer. The comprehensiveness of that investigation, which involved several trips to China and Macau and 35 sworn interviews with 17 individuals and various international law enforcement agencies, provides an illustrative example for the current scrutiny of the Massachusetts casino applicants. While Stanley Ho was not directly involved in the proposed development, the report noted that ninety percent of the funds being committed by Pansy Ho were derived from her father, and the report concluded that she was susceptible to her father’s influence, and therefore an unsuitable partner. Neither Pansy Ho nor Stanley Ho is listed as a “qualifier” under MGM’s current application in Massachusetts, but these are the types of red flags that do not show up on the balance sheets of the applicants but will nonetheless be of great importance given the non-financial aspects of the Commission’s determinations on suitability.
Further complicating the issue of background checks is the fact that host communities, those cities and towns in which the applicants propose to build casinos, are actively engaged in negotiations with the applicants to approve the host community agreements which are a requirement for the approval of any application and the granting of a license. On April 22, 2013, the Commission promulgated an emergency regulation that prevents host communities from holding voter referendums until the Commission had made its suitability determinations. The regulation, however, contained some exceptions which allow for host communities to conduct public referendums prior to the suitability determinations, so long as the governing body of the city or town approves such action and take other steps, including an extensive public education campaign. However, the dangers of holding such a public vote are obvious, because even if an applicant enters into a host community agreement and receives the necessary public vote, their application might be deemed unsuitable as a result of issues uncovered during the background check process.
While the host community agreement negotiations, and potential public votes, are beginning to come together, the background checks are not expected to be completed for at least another month.