Date SUBJECT: CARDROOM COMPLIANCE WITH TITLE 16 OF THE SAN JOSE MUNICIPAL CODE REPORT

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1 PSFSS COMMITTEE: 9/17/2015 ITEM: (d) 2 CITY OF SAN JOSE CAPITAL OF SILICON VALLEY Memorandum TO: PUBLIC SAFETY, FINANCE, AND STRATEGIC SUPPORT COMMITTEE FROM: Larry Esquivel SUBJECT: SEE BELOW DATE: Approved _U. J?- 1 - Date -rk SUBJECT: CARDROOM COMPLIANCE WITH TITLE 16 OF THE SAN JOSE MUNICIPAL CODE REPORT RECOMMENDATION Accept the annual report on cardroom compliance with Title 16 of the San Jose Municipal Code (Gaming Control Regulatory Program). BACKGROUND With the adoption of Title 16 of the San Jose Municipal Code (Code) on November 23, 1999, the Chief of Police is required to prepare an annual report evaluating the impact of cardroom gambling on crime ("annual crime report") in the San Jose metropolitan area. On April 7,2009, Title 16 was amended to provide the Chief of Police an opportunity to also report on regulatory issues pertaining to cardroom gambling in San Jose. From 2009 through 2013, the annual crime report focused on the impact of cardroom gambling on crime and was presented to the Public Safety, Finance and Strategic Support (PSFSS) Committee. On April 10, 2014, as part of the annual crime report, the Police Department offered to return to the PSFSS Committee with a separate report summarizing compliance issues related to each cardroom. On February 5,2015, the Department presented the PSFSS Committee with a separate report summarizing work permitting and licensing issues, cardroom compliance issues and other regulatory matters related to gaming operations in San Jose. The report was entitled, "Cardroom Compliance with Title 16 of the San Jose Municipal Code Report" and covered Fiscal Years and

2 Page 2 It is the Department's intent to continue to provide the PSFSS Committee with a complete picture of cardroom operations in the City. Accordingly, this report will include a summary of various cardroom compliance issues handled during Fiscal Year ANALYSIS The Regulatory Program (Title 16 of the Municipal Code) The Division of Gaming Control (Division) is required to provide comprehensive oversight of two large gambling establishments in the City of San Jose which generate annual gaming revenue exceeding $100 million. The City, in addition to the State, has established regulatory controls over these gambling operations to protect the public interest. The regulations include a thorough vetting process of cardroom stockowners, landowners, funding sources, and key and gambling enterprise employees; periodic audits and financial reviews to assure proper counting and recording of cardroom revenues that are subject to the City's gross receipts taxes; investigation of potential violations of Title 16 of the Code, the State Gambling Control Act and other gaming laws and regulations; and, the authority to take administrative action against cardroom permittees and licensees in cases of regulatory violations to ensure future compliance. Work Permitting Compliance During this reporting period, each cardroom worked with the Division to ensure that persons employed with the cardroom were appropriately permitted. As a result, the Division processed and issued four hundred and fifty-seven (457) work permits. Two hundred and eleven (211) were new applications, one hundred and four (104) were renewals and the remaining one hundred and forty-two (142) were re-hires, lost badges, or name or position changes. Licensing Compliance During this reporting period, each cardroom also worked with the Division to ensure that persons employed with the cardroom were appropriately licensed. As a result, the Division issued a total of fifty-two (52) licenses as follows: Ten (10) City Key Employee licenses were issued to those individuals who had a regular State portable license: seven (7) were issued to Key Employees at Casino M8trix and three (3) were issued to Key Employees at Bay 101. Eight (8) City Temporary Key Employee licenses were issued to those individuals working at Casino M8rix who had a State Interim Key Employee License. Bay 101 did not have any applications for a City Temporary Key Employee license. Nine (9) City-designated Temporary Key Employee licenses were issued to those that the State did not require to have a State Key Employee license: eight (8) were issued to Key Employees at Casino M8trix and one (1) was issued to a Key Employee at Bay 101.

3 Page 3 Three (3) Funding Source licenses were issued to the companies acting as Funding Sources at both cardrooms. A funding source is also known as a "Third Party Provider of Propositional Player Services" and operates as a banker (i.e., to take all losers and pay all winners) in the cardroom itself and at the California-style games. For example, Gaming Fund Group Inc. is a funding source operating at Bay 101 and PT Gaming LLC is a funding source operating at Casino M8trix. Eighteen (18) Funding Source licenses were issued to the owners, investors and managers of Gaming Fund Group Inc.; and, four (4) licenses were issued to owners and managers of PT Gaming LLC. Compliance Review of Cardroom Operations In connection with the Division's review of both of the cardroom operations, the Division sent various warning letters, violation letters and/or regulatory action notices to the cardrooms as follows: Casino M8trix September 9, the Division issued a warning letter to Casino M8trix for violating the Division's Minimum Internal Control Standards' (MICS) key control procedures and for failing to follow an approved internal control procedure relating to key controls. Casino M8trix has since amended its internal control document to make the necessary correction. November 26, the Division notified Casino M8trix that it failed to describe its floor podium/satellite cage operational procedures and controls in its internal controls document. Casino M8trix has since amended its internal control document to make the necessary correction. March 2, the Division sent Casino M8trix a Notice of Intent to Take Regulatory Action followed by a Notice of Regulatory Action against Casino M8trix after it discovered that an unpermitted and unlicensed individual was controlling a high limit poker game at Casino M8trix while working under a vendor as a marketing consultant. The Division also discovered that another unpermitted and unlicensed individual was holding himself out as a VP of Marketing and/or Director of Marketing for Casino M8trix, but executing contracts on behalf of Casino M8trix, and indirectly controlling gaming activities at the cardroom. Ultimately, Casino M8trix chose not to contest the regulatory action and instead paid a monetary penalty in the amount of $620,000 to the City and the two individuals who were engaged in the above activities are no longer employed with the cardroom. As of the date of this report, these violations have not recurred.

4 Page 4 Surveillance - There were connectivity issues with Casino M8trix's remote surveillance system beginning in August Notwithstanding the active involvement of the City Manager's Office, the City IT Department and the City Attorney's Office, Casino M8trix failed to bring the system into compliance which impeded the Division's ability to observe the cardroom's operations through the Division's offsite remote system. These deficiencies ultimately resulted in the City hiring an outside consultant to help identify the problems. In the end, the cardroom installed new cameras and upgraded its surveillance system to come into compliance with the Division's MICS. The connectivity issues were finally resolved in February Licensing - The Division did not encounter problems with respect to any licensing investigations during However, the California Bureau of Gambling Control (Bureau) initiated an administrative action against Casino M8trix, Eric Swallow and Pete and Jeanine Lunardi alleging improper receipt of profits from the cardroom's funding source through the cardroom's former General Manager and the use of out-of-state limited liability companies to avoid state tax liabilities and to minimize charitable contributions. As of the date of this report, Casino M8trix and the Lunardis have reached a settlement with the Bureau, while the administrative action against Eric Swallow is still on-going. The Division has cooperated with the Bureau and is awaiting a decision by the California Gambling Control Commission regarding the suitability for licensing of the remaining stockowner. Work Permitting - The Division denied two (2) applications for a work permit because the applicants had prior misdemeanor convictions. The Division also revoked a work permit once it was determined that the permittee had a misdemeanor conviction. Bay 101 May 11, the Division issued a warning letter to Bay 101 for its failure to begin the counting of drop box contents at the designated count time previously approved by the Division; failure to follow its approved internal control procedures relating to key controls; and, failure to follow its approved internal control procedures relating to depositing original count documents to the accounting department. As of the date of this report, Bay 101 has resolved these issues. The Division did not encounter any problems with Bay 101 related to licensing or permitting investigations during Financial Review During this fiscal year, the Division conducted audits of cash advance procedures in the cardroom cages to ensure that the cardrooms were not extending credit to their patrons, which is prohibited under Title 16. The Division also conducted audits of cash disbursements made by the cardrooms to ensure that payments were not made to anyone who may otherwise be considered a hidden owner. And finally, the Division conducted daily table fee collection

5 September 3,2015 Page 5 review to ensure that gaming revenue is properly recorded and the related tax payment to the City is accurate. Neither audit revealed any compliance issues and the Division's review of the cardrooms' table fee collection showed compliance by each cardroom. CONCLUSION The Division will continue to work with Casino M8trix and Bay 101 to monitor their compliance with Title 16 of the San Jose Municipal Code and the regulations promulgated thereunder. The Department will also continue to present to the PSFSS Committee and the City Council a Cardroom Compliance with Title 16 of the San Jose Municipal Code Report to complement the Annual Crime Report. COORDINATION This report was coordinated with the City Manager's Office and the City Attorney's Office. /s/ Larry Esquivel Chief of Police For questions, please contact Richard Teng, Gaming Administrator, in the Division of Gaming at (408)