Gansevoort–Caesars Breakup Shows Casinos’ Vulnerability to Regulators

Caesars Entertainment may not be the only company to fall victim to Massachusetts’ concerns about ‘suitability’ of gaming operators

Expect new renderings from Caesars soon, as this new casino hotel will no longer carry the Gansevoort name.

Expect new renderings from Caesars soon, as this new hotel will no longer carry the Gansevoort name.

Over the weekend, the Massachusetts Gaming Commission shuffled the deck on Caesars Entertainment. The gaming giant is pushing a three-pronged strategy to strengthen its tenuous market position: a revival of its mammoth Las Vegas portfolio, with increased incremental spending thanks to Linq; the success of its online gaming site; and domestic expansion.

But those expansion plans came under threat when the Commission reportedly issued a negative statement on Caesars’ suitability for doing business in Massachusetts, questioning its ties with Gansevoort Hotel Group, with which the company was partnering to convert Bill’s Gamblin’ Hall into Gansevoort Las Vegas.  The fallout was quick: Caesars’ partners in a proposed casino at East Boston’s Suffolk Downs asked it to withdraw from the bid—which the company did—and Caesars terminated the Gansevoort deal.

What’s the issue? The report has yet to be officially released, but according to Global Gaming Business, regulators raised three concerns: Caesars’ financial stability, the since-settled lawsuit by former VIP gambler Ken Watanabe, and the possibility that one of the partners in the Gansevoort Hotel Group has connections to Russian organized crime.

Some in the investment community believe that Caesars has been pushed to the brink of insolvency by its $23.5 billion debt load—a burden that is unprecedented in the history of the industry. In the end the dollars will speak for themselves—either Caesars will be able to turn things around, or it will end up defaulting on its debt payments and likely head towards bankruptcy.

Caesars, meanwhile, notes that it is currently licensed in more jurisdictions than any other gaming operator and also charges that Massachusetts’s suitability requirements are “arbitrary, unreasonable, and inconsistent with those that exist in every other jurisdiction.”

This isn’t the first time that a respected Nevada operator has foundered on the shoals of another jurisdiction’s suitability standards. Two famous examples involve companies that have been absorbed into the Caesars Entertainment collective.

In the late 1970s, New Jersey regulators were reluctant to license Caesars World to do business in the Garden State, though the company was one of the most dynamic in gaming: They objected to the company’s dealings with Alvin Malnik, a Florida lawyer allegedly tied to mobster Meyer Lansky. In exchange for granting the company a license, the New Jersey Casino Control Commission ultimately required it to part ways with its chairman and vice chairman, Clifford and Stuart Perlman, who had helmed the company since purchasing Caesars Palace from Jay Sarno in 1969.

In 1985, Hilton Hotels was about to open a just-completed $320 million casino in the country’s hottest gambling market, Atlantic City, when the Casino Control Commission took issue with the company’s retention of Sidney Korshak, a Chicago labor lawyer whose name had been linked to the mob. The company was forced to sell its hotel to Donald Trump, who opened it that year (with characteristic Trump modesty, he renamed it Trump’s Castle; it is now the Golden Nugget).

Both companies protested the “arbitrary” decisions from regulators, yet in the end there wasn’t much they could do about it. But standards change. In 1991, for example, the New Jersey Casino Control Commission voted to license Hilton Hotels; apparently six years had changed more than a few minds. The state’s Division of Gaming Enforcement is also reconsidering its 2009 demand that MGM sever ties with Macau gambling king Stanley Ho and his daughter Pansy.

Clearly, what regulators find acceptable can vary from year to year and from state to state.

The big question today is how strictly Massachusetts regulators will assess companies’ suitability based on their operations in Macau. Steve Wynn cautioned the Commission not to judge Macau operations by Massachusetts standards. He and the other Nevada company up for Massachusetts licensure, MGM Resorts, may have cause for concern. Massachusetts just held Caesars to a higher standard of suitability than did New Jersey, which four years ago found MGM’s Macau property to be based on a collaboration with an “unsuitable” partner. If held to the same standards as Caesars, MGM’s prospects in Massachusetts seem dim.

As for the now-nameless development on the former Bill’s site, Gansevoort’s departure raises some interesting questions. Caesars says the project is still going forward and will open in early 2014. It’s possible that the new hotel would be named Drai’s, as Victor Drai is already intimately involved with it, and his eponymous nightclub is to be a major element. Of course, Caesars executives could also spin the naming wheel, ending up with something as non-sequitur as the Imperial Palace’s transformation into The Quad.

What do you think Caesars Entertainment should call the hotel it’s building at the former Bill’s Gamblin’ Hall site? Tell us in the comments.

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