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Memorandum CAPITAL of SILICON VALLEY

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Memorandum CAPITAL of SILICON VALLEY PSFSS COMMITTEE: 9/15/16 ITEM: (d) 4 CITY OF SAN JOSE Memorandum CAPITAL OF SILICON VALLEY TO: PUBLIC SAFETY, FINANCE AND FROM: Edgardo Garcia STRATEGIC SUPPORT COMMITTEE SUBJECT: SEE BELOW DATE: August 31,2016 Approved Date 2. SUBJECT: CARDROOM COMPLIANCE WITH TITLE 16 OF THE SAN JOSE MUNICIPAL CODE (GAMING CONTROL REGULATORY PROGRAM) ANNUAL REPORT RECOMMENDATION Accept the annual report on cardroom compliance with Title 16 of the San Jose Municipal Code (Gaming Control Regulatory Program). BACKGROUND Since the adoption of Title 16 of the San Jose Municipal Code (Code) on November 23,1999, the Chief of Police has been required to prepare an annual report evaluating the impact of cardroom gambling on crime ("annual crime report") in the San Jose metropolitan area. Title 16 was further amended on April 7, 2009 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, in his annual crime report, the Chief of Police directed the Gaming Administrator to return to the PSFSS Committee with a separate report ("Cardroom Compliance with Title 16 of the San Jose Municipal Code Report" or "Compliance Report") summarizing work permitting and licensing issues, compliance issues relating to each cardroom and other regulatory matters surrounding the gaming operations in San Jose. The first compliance report covering the fiscal periods of 2012-2013 and 2013-2014 was presented to the PSFSS Committee on February 5, 2015. This Compliance Report covers the fiscal year 2015-2016. HONORABLE MAYOR AND CITY COUNCIL September 1, 2016 Subject: Cardroom Compliance with Title 16 of the San Jose Municipal Code Annual Report Page 2 ANALYSIS The Regulatory Program (Title 16 of the Municipal Code) The Division of Gaming Control (Division) is charged with the responsibilities of providing 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 regulation includes a thorough vetting process of cardroom stockowners, landowners, funding sources, key and gambling enterprise employees; on-going audits and financial reviews to assure that each cardroom has sufficient cash on hand to satisfy its gaming chip float liabilities; the daily verification of cardroom revenues that are subject to the City's gross receipts taxes are properly recorded; any potential violation of Title 16 of the San Jose Municipal Code, the State Gambling Control Act and other gaming laws and regulations are thoroughly investigated; and action taken against a cardroom, including its owners, licensees and/or work permittees who is the subject of regulatory violations to ensure that public health, safety and welfare are protected. Work Permitting During this fiscal reporting period, the Division processed and issued 1,179 work permits, of which 629 were new applications, 326 were renewals and the remaining 224 were re-hires, lost badges, name or position changes, etc. Additionally, the Division denied nine work permit applications at Casino M8trix: six for disqualifying criminal convictions; one for providing false and misleading information; one for failure to cooperate during the background investigation; and one for a previous revocation of a State gaming license. The Division also revoked one work permit for armed robbery arrest and conviction. The Division used a Salesforce time-keeping system to ensure its compliance with the 20 working day timeline set forth in Title 16. During this fiscal period, all work permits were issued within the required timeline. Licensing During this reporting period, the Division issued a total of 39 Licenses and the breakdown is as follows: • Twenty-seven City Key Employee licenses (for employees actively engaged in administration or supervision of the cardroom) were issued to those individuals who had a regular State portable license: 15 were issued to Key Employees at Casino M8trix and 12 to Key Employees at Bay 101. • Seven City Temporary Key Employee licenses were issued to those individuals who had a State Interim Key Employee License: Five to individuals working at Casino M8trix and HONORABLE MAYOR AND CITY COUNCIL September 1, 2016 Subject: Cardroom Compliance with Title 16 of the San Jose Municipal Code Annual Report Page 3 two to individuals working at Bay 101. The Code includes provisions to issue temporary licenses if provisions are met while the full licensure review is underway. • Some employees designated "Key Employees" under the Municipal Code are not required by the State to obtain a State Key Employee licenses. The Division issued three City-designated Key Employee licenses to Key Employees in this category. Two were issued to Key Employees at Casino M8trix and one to a Key Employee at Bay 101. • One temporary gaming license was issued to the funding source owner and one temporary gaming license to a funding source supervisor, both of Blackstone, LLC. A funding source is also known as "Third Party Provider of Propositional Player Services", and it operates within the cardroom, required to be licensed, and acts as a banker (i.e., to take all losers and pay all winners) at the California-style games. Gaming Fund Group Inc. (and its financial source Game Source, LLC), is the funding source operating at Bay 101; and Blackstone, LLC1 is a funding source operating at Casino M8trix. Note: The Division also completed one background investigation for a stockowner license applicant intending to purchase shares of Garden City, Inc. currently held by Eric Swallow. The issuance of the applicant's City license is on hold until such time as the applicant has received the appropriate license from the California Gambling Control Commission. Compliance Review of Cardroom Operations In connection with the Division's review of both of the cardroom operations, the Division took the following actions: Casino M8trix • The Division discovered in January 2016 that Casino M8trix, without notifying the Division, and was unilaterally deducting gaming chips from the table drop boxes into which table revenues (collection fees - gaming chips) were deposited. Because the deduction was made prior to the recordation of table revenue, it resulted in the City's 15% tax being negatively impacted. This comprehensive investigation is complete and is pending resolution of other matters (outlined below). • The Division discovered that the Compliance Director violated his licensing conditions; violated the City's minimum internal control standards regulations; and provided untruthful information to Division investigators. A "Notice of Intent to Take Regulatory Action" was sent to the Compliance Director on April 20, 2016 and the matter is pending an administrative hearing, scheduled for late September 2016. • The Division issued a warning notice to Casino M8trix in November 2015 for violating the Division's Accounting Regulations, Sections 1.070 and 1.080 relative to its table count and key control procedures. In response to the Division's letter, the Compliance 1 Blackstone, LLC took over as the funding source of Casino M8trix on March 22, 2016. Prior to Blackstone, LLC, the funding source at Casino M8trix was PT Gaming, LLC. HONORABLE MAYOR AND CITY COUNCIL September 1, 2016 Subject: Cardroom Compliance with Title 16 of the San Jose Municipal Code Annual Report Page 4 Director submitted amendments to M8trix's internal control document which the Division objected to because the amendments failed to comply with Division regulations. As of this date, these violations have not reoccurred, but permanent internal control measures still need to be revised and approved by the Division and implemented by Casino M8trix in fiscal year 2016-2017. • The Division issued a warning notice to M8trix in October 2015 for violating the Division's Accounting Regulations relative to its Food and Beverage accounting procedures. Casino M8trix took corrective actions and this case was closed. • The Division reviewed Casino M8trix's internal audit work and determined that it was insufficient. As a result, Casino M8trix had its outside CPA firm re-design all walkthrough procedures to stay in compliance with the Division's Minimum Internal Control Standards Regulations. Bay 101 • The Division conducted a quarterly review of Bay 101's cash receipts and found Bay 101 to be in compliance with gaming regulations. • The Division discovered that Bay 101 was playing a California-style game (Ultimate Texas Hold'em Bad Beat Bonus) in such a manner that a portion of the table fees collection procedures were unauthorized in violation of Title 16 of the San Jose Municipal Code. The Division issued Bay 101a warning letter on November 2, 2015 and Bay 101 immediately conformed to the approved procedures and discontinued this practice. • The Division reviewed Bay 101's document retention and destruction procedures, and observed Bay 101's table drop box removal and related key controls and table collection fees count procedures, and determined that Bay 101 is in compliance with the Division's Minimum Internal Control Standards Regulations. Other Regulatory Matters • The Division coordinated with AT&T, managers for the property where the Division offices are located, the City Department of Information Technology (IT), Police Department IT personnel, and both Bay 101 and Casino M8trix to install direct fiber optics lines to the Division's new offices for remote access to the cardrooms' surveillance systems. The installation began in June 2015 and was completed in February 2016. • The Division performed an investigation into the suitability of three individuals attempting to purchase shares of Garden City, Inc. currently held by Eric Swallow. The Division discovered that these individuals were involved in or otherwise operated a cardroom in Chula Vista, California, but without a State Gambling License.
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