Andrew Wheat

Gaming Texas Gambling Law

Gambling is in Gordon Graves’ blood. He once ran the company that became GTECH Holdings Corp., the apparent lifetime contractor of Texas Lottery. Now he’s chairman of Aces Wired Inc., a Dallas company he founded in 2004 to exploit—and expand—quirks in state gambling law. But a recent legal opinion by Attorney General Greg Abbott suggests that one such quirk that Graves was banking on existed more in the eye of the beholder than it did in Texas law.

In recent years, Aces set up approximately 200 “eight-liners” in amusement centers in Amarillo, Copperas Cove, Corpus Christi, Fort Worth, Killeen, and the Tigua Reservation in El Paso, according to federal securities documents filed last November. Eight-liners, video games that resemble slot machines, are illegal in Texas unless they pay out nothing more than cheap novelties.

Eight-liners are popular and lucrative, so impresarios constantly prospect for legal loopholes. In a 2003 decision written by now-Chief Justice Wallace Jefferson, the Texas Supreme Court ruled that a prevalent type of eight-liner that awards gift certificates to retail stores was illegal.

Graves’ subsequent contribution to this cat-and-mouse game is an eight-liner that keeps track of winnings on an electronic card that can be redeemed for merchandise at participating retail stores. Aces has been making the case to investors—and some local prosecutors—that this technology passes legal muster in Texas.

To promote its 24-hour, 50-machine facility on Interstate 40 in Amarillo, for example, Aces has run ads resembling news articles under the headline, “Ace Gaming Provides Fun, Safe Place to Play Casino-like Games.” Claiming the games are legal, the ad says winnings can be redeemed at Home Depot, HEB, Target, and other stores. Aces recently reported plans to expand to Texas racetracks, as well as other facilities in Austin, Dallas, Harlingen, Houston, and San Antonio. Through the Public Information Act, the Observer learned that Aces or its intermediaries have supplied prosecutors in Bexar, Potter, and Tarrant counties with briefs arguing that its machines are legal.

Enter Abbott, who on March 7 issued a nonbinding opinion that electronic-card gambling machines are illegal. Securities and Exchange Commission disclosures that Aces filed two weeks later reveal that Abbott’s opinion hit the company like a wrecking ball. Because of the opinion, Aces told investors, it is forestalling expansion plans in Fort Worth and Corpus Christi, and shelving its plan to open three new gaming centers. The growth would have quadrupled the 220 machines Aces already operates. Instead, Aces said it shuttered a Corpus Christi gaming center and removed 40 machines from a Tigua gaming center in El Paso. Rather than expanding, Aces unplugged almost half of its machines.

Yet Aces recently told investors that “state laws pertaining to gambling are interpreted and enforced usually at the county level.” Aces also said a state court was considering “the question of whether the Company’s operations are legal under Texas law” because of a lawsuit that Aces filed three days after the Abbott opinion. The suit seeks to enforce a lease that Aces signed for a gaming facility in Corpus Christi. The company hopes the judge’s final ruling will declare Aces’ activities legal in spite of Abbott’s opinion.

One attorney for Aces in Corpus is none other than Andy Taylor—a leading defender of the GOP’s controversial 2002 takeover of the Texas House. Taylor represented both the Texas Association of Business and DeLay’s Texans for a Republican Majority PAC against allegations that they illegally spent almost $2.5 million in corporate funds to influence the outcome of that election. After DeLay got the Texas Legislature to carve out new GOP congressional districts for Texas, Attorney General Abbott paid Taylor at least $773,399 in taxpayer funds to defend the legality of the maps.

The Observer has also learned that Potter County Attorney Scott Brumley has been investigating Aces and other eight-liner operators in Amarillo. He issued a warning in January that prosecutions likely will follow. “The unabashed nature of Aces Wired’s marketing strategy has emboldened other eight-liner operations throughout Potter County,” Brumley wrote in response to an Observer inquiry.

If this strategy fails, the company still holds some cards. Aces is paying six lobbyists led by ex-Gov. Bush’s legislative director, Dan Shelley, up to $650,000 this year. In the last election, Aces officials gave Lt. Gov. David Dewhurst $78,500 and Gov. Rick Perry $89,000. Graves, who contributed $319,125 to state candidates in the last election, gave Abbott $35,000. Aces also enhanced its clout with Democratic lawmakers when it recruited Houston trial lawyer Michael Gallagher to its board.

This session, lawmakers of both parties have introduced bills to legalize everything from slot machines to casinos. Aces stands ready to exploit any relaxation of gaming rules. “We believe that we will be well positioned if and when video lottery terminals [VLTs] or class II electronic bingo games are legalized in Texas,” Aces reported in recent securities filings. “Because our games are server-based, we could easily convert our games to VLTs or electronic bingo if either were deemed legal.” Yet Graves tells the Observer that he does not expect significant gaming legislation to pass this session. An opening could occur, he says, if the state suddenly needs to spend billions of dollars on the children’s Medicaid program as a result of a court order in a pending lawsuit. Graves declined further discussion of Ace’s business plans because the company is preparing a public stock offering.

Computer software that can simulate virtually any game has obliterated traditional lines among different types of gambling. In fact, gambling opponents fear that Aces is pressing Texas Lottery commissioners—who serve at Perry’s pleasure—for a rule change authorizing video confirmation of bingo winners. Critics say that such a change could pave the way for electronic bingo games that also resemble slot machines. The fact that Aces representatives helped write the proposed rule has fed these concerns. The working group that drafted the proposal last November included the commission’s Bingo Advisory Committee—headed by Aces executive Knowles Cornwell—and Austin attorney Stephen Fenoglio, who also represents Aces in its Corpus Christi litigation.

Flagging “possible unintended consequences” of the proposed rule, gambling critic Suzii Paynter of the Texas Baptist Christian Life Commission recently wrote the Lottery Commission that “traditional bingo games have been transformed to ‘Las Vegas Style’ slot machines under the guise of simply offering existing approved games electronically.”

At recent Lottery Commission hearings, Commissioner Thomas Clowe and representatives of bingo companies—including Aces Wired—denied the proposed rule change opens the door to electronic bingo. Yet there is no doubt that there has been a push to legalize electronic bingo games in Texas.

Near the close of the regular 2005 session, then-Sen. Ken Armbrister, a Democrat from Victoria who recently became Perry’s legislative director, got the Senate to amend a school-finance bill with language legalizing electronic bingo. Although the underlying bill (HB 3) failed for unrelated reasons, Armbrister’s move alarmed gambling opponents.

Last fall Sen. Jane Nelson, a Lewisville Republican, asked the attorney general if legalizing electronic bingo would require a constitutional amendment, which Graves said is “harder to pass than a gall stone.” Abbott previously found that a constitutional tweak would be needed to legalize “video lottery” slots since voters could not have foreseen today’s electronic variations when they approved charitable bingo and a state lottery in 1980. In December, Nelson urged the Lottery Commission not to act on its proposed rule until the attorney general issued the legal opinion she requested. Meanwhile, Sen. Juan Hinojosa, a McAllen Democrat who received $2,500 from Graves, has introduced a bill (SB 1552) to authorize charitable raffle operations using the video technology and electronic cards that are Aces’ specialty. (Hinojosa and other South Texas Democrats have long supported expanding gaming.) Even if Abbott and the courts shoot down these schemes, smart money says the company is still in the game.

Contributing writer Andrew “Snake Eyes” Wheat is research director for the Austin-based Texans for Public Justice.

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