Online global gambling giant PokerStars will face intense regulatory scrutiny when its parent company seeks approval to buy the struggling Atlantic Club Casino Hotel.
The proposed deal represents the first time in Atlantic City that an Internet gambling company would join up with a brick-and-mortar casino, giving a glimpse of the future in the emerging field of online wagering in the United States.
PokerStars’ past, however, may ultimately determine whether PokerStars’ parent company, the Rational Group, gets to take over the Atlantic Club, industry officials said.
In July, PokerStars agreed to pay $547 million to the U.S. Justice Department and $184 million to poker players overseas to settle a case — including charges of money laundering, bank fraud and illegal gambling — stemming from its online betting operations. PokerStars, the world’s largest online poker operator, admitted no guilt or wrongdoing in the settlement.
The Justice Department settlement cleared the way for PokerStars to enter the U.S. market and begin taking online bets once Internet gambling is legalized in the United States. However, parent company Rational Club still needs a New Jersey license to buy the Atlantic Club.
Analysts say the Division of Gaming Enforcement and the Casino Control Commission, the New Jersey agencies that regulate Atlantic City’s $3 billion casino industry, will undoubtedly focus on PokerStars’ run-in with the Justice Department while considering the Atlantic Club’s sale.
“This is why the New Jersey regulators, when they scrutinize the Atlantic Club sale, will take a more in-depth look and pay attention to the Department of Justice settlement,” said Jason Gross, an attorney with the Newark firm Sills Cummis and a former corporate counsel to casino operator Caesars Entertainment.
In 2011, the U.S. government barred online operators PokerStars, Full Tilt Poker and Absolute Poker from using their offshore locations to take Internet bets from U.S. customers. Although PokerStars and other poker websites operate legally in foreign markets, the Justice Department ruled they had no such authority in the United States.
Gross noted that the Rational Group could be further challenged by its ownership of Full Tilt Poker. The Full Tilt Poker brand became a Rational Group subsidiary following the Justice Department settlement.
“Both companies had issues with U.S. law when, in 2011, the Department of Justice closed down their websites after they continued accepting U.S. bets,” Gross said of PokerStars and Full Tilt Poker. “Here you have these two companies, both owned by Rational Group, that went farther than most companies, and it may create further issues.”
Gross declined to predict whether the Rational Group will win New Jersey approval. But his comments underscore the belief that it could be a bruising regulatory fight for the company to acquire the Atlantic Club.
Israel Posner, a casino analyst with Richard Stockton College, said the Rational Group likely will have to prove to New Jersey regulators that it has purged PokerStars of any executives connected to its troubled past.
“They must show that the deal they have agreed to with the Department of Justice has given them a blank slate,” said Posner, who is executive director of Stockton’s Lloyd D. Levenson Institute of Gaming, Hospitality and Tourism. “Whether or not the CCC and DGE will approve them, that has to be looked at.”
Michael Frawley, Atlantic Club’s chief operating officer, declined to speculate on whether the Rational Group will receive regulatory approval, but he said he believes the Rational Group and its representatives will undergo the same review that other casino owners and executives have faced in New Jersey.
“They are going to go through the process just like everyone else,” he said. “It’s the same stringent requirements. … They haven’t changed a bit.”
The Rational Group, based on the Isle of Man in the United Kingdom, said it welcomes New Jersey’s regulatory scrutiny of the Atlantic Club deal.
“Our agreement to acquire the Atlantic Club Casino Hotel is subject to completion, and we look forward to working with the relevant parties, including the New Jersey Division of Gaming Enforcement, to finalize that process,” Rational Group spokesman Eric Hollreiser said in a statement.
The sale is seen as a lifeline for the Atlantic Club, which posted a $13.6 million operating loss through the first three quarters of 2012 and saw its gambling revenue fall 11 percent last year to $127.2 million.
By purchasing the Atlantic Club, the Rational Group is hoping to gain a foothold in Atlantic City’s nascent Internet gambling market. Gov. Chris Christie has conditionally vetoed New Jersey’s proposed Internet gambling law, saying he wants it limited to a 10-year trial period. The state Legislature is expected later this month to amend the Internet bill to conform to the governor’s wishes for a 10-year test.
Hollreiser urged the Legislature to act quickly on an amended bill, noting that New Jersey has an opportunity to become a leader of Internet gambling in the United States. He also described Internet gambling as a catalyst for new jobs and economic development, and added that the Rational Group is “committed to play our part in that process.”
“The distinctive environment that I-gaming can create for New Jersey is unprecedented, and we are pleased that Gov. Christie sees the significant benefits of mixing online and offline gaming,” Hollreiser said.
Meanwhile, New Jersey regulators are promising to conduct a comprehensive investigation to make sure the Rational Group meets the requirements of the state Casino Control Act. But they declined to comment on specifics of the case before it comes up for a formal vote.
“As with any investigation, the division will thoroughly examine the merits of the petition in accordance with the Act and will detail its findings in a report to the commission,” Division of Gaming Enforcement spokeswoman Lisa Spengler said in a statement.
Rational Group filed for what is known as “interim casino authorization,” a preliminary step to take over the Atlantic Club while regulators continue their background investigation on the company’s suitability for a New Jersey license. The Division of Gaming Enforcement has up to 90 days to submit a report recommending approval or denial of interim casino authorization. The Casino Control Commission then has 30 days to hold a hearing and vote on the matter.
“We will review all of the material in this matter as it comes in and will hold a hearing as quickly as possible,” said Matthew Levinson, the commission’s chairman.
If the commission approves, interim authorization will be granted for nine months, although it could be extended for three months if additional time is needed. After that time is over, the commission would take a final vote on the license. In the interim, a trustee is put in place to oversee the casino and would sell it if the commission denies the license — which is what happened in December 2007 when the former owner of Tropicana Casino and Resort was found unqualified to hold a license.
“The state’s integrity concerns are protected by the creation of a trust that holds the licensed property until the investigation is complete and a hearing is held on the buyer’s qualification,” Levinson said.
Although Levinson declined to comment on the specifics of the Rational Group case, he did say that the company’s foreign ownership would not unduly complicate the investigation and licensing process. Foreign companies have held part or full ownership of Atlantic City casinos in the past, most notably Bahamas-based Sun International Hotels’ former ownership of Resorts Casino Hotel.
“There is nothing unusual or unprecedented about having a foreign company apply for qualification,” Levinson said. “There have been a number of foreign companies that have applied for — and received — some level of licensing or qualification in the past after they underwent the same kind of thorough investigation that U.S. companies faced.”
Staff Writer Hoa Nguyen contributed to this report.
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