New Jersey threatens to cage MGM MIRAGE's Macau casino dealFriday, 29 May 2009
The 19th century German general Helmuth von Moltke once remarked that no battle plan survives contact with the enemy. It might equally be said that no business plan survives contact with lawyers.
The board of the casino developer and operator MGM MIRAGE has some grounds for holding the latter view following a report compiled by state attorneys in New Jersey effectively asking the company to choose between its Atlantic City casino operation and its 50:50 partnership with Pansy Ho in the US$1.25 billion MGM Grand Macau resort.
The issue has come about because of the well-established regulatory principle that a casino licensing authority has the right to scrutinise any external deal done by one of its concession holders.
MGM MIRAGE said in a filing to the US Securities and Exchange Commission that New Jersey's Division of Gaming Enforcement (NJDGE) had described its joint venture partner in Macau as "unsuitable" in the New Jersey context, though the company did not mention Ms Ho by name.
MGM MIRAGE added in its SEC filing: "The Company does not believe that the report will have a material adverse effect on it. However, since the report was issued on May 18, 2009, it is still being reviewed by the Company and may be the subject of a hearing by the New Jersey [Gaming Control] Commission; therefore, no assurance can be given as to the ultimate impact of the report.
The company added: "While we disagree with the recommendation of the DGE, we look forward to presenting our position at the hearing."
Pansy Ho said in a statement: "I and my advisers will need time to read and consider the contents of the report and decide how best to respond to it in due course."
On the State of New Jersey official website, the NJDGE describes its role as: "to protect the public interest by maintaining a legitimate and viable casino gaming industry, free from the influences of organized crime, and assuring the honesty, good character and integrity of casino owners, operators, employees and vendors."
Its 75-page report will be sent for adjudication to the New Jersey Gaming Control Commission (NJGCC), which could ask the company to dissolve its partnership with Ms Ho on pain of having its gaming licence for Atlantic City (where it jointly owns The Borgata Hotel Casino & Spa with Boyd Gaming) suspended.
At the time Inside Asian Gaming went to press, the NJGCC hadn't scheduled a meeting to discuss the case. The news could hardly come at a worse time for MGM MIRAGE, which continues to face debt default risk on its US$8.6 billion CityCenter project in Las Vegas. As of December last year, the remaining project debt on MGM Grand Macau stood at US$818 million.
Sources familiar with the New Jersey process say that in its assessment of the Pansy Ho-MGM MIRAGE deal it appears to be relying not just on historical (though unproven) allegations made by US law enforcement agencies against Ms Ho's father, Dr Stanley Ho, regarding the operation of his Macau business. The Garden State's attorneys are also basing their view on due diligence statements made by Dr Ho's own company SJM Holdings Ltd. The latter, through its subsidiary Sociedade de Jogos de Macau SA (SJM), runs Dr Ho's casino interests in Macau. The due diligence statements were issued when SJM Holdings Ltd listed on the Hong Kong Stock Exchange in July 2008.
This is potentially very significant because when the Nevada Gaming Control Board held its own hearings into MGM MIRAGE's deal with Pansy Ho in 2007, the due diligence documents for the SJM IPO were not available to it. The Nevada Gaming Control Board called Ms Ho in person, and after hearing her testimony recommended to the Nevada Gaming Commission that Ms Ho was a suitable partner for MGM MIRAGE and that she was acting independently from her father's operation. It appears that after scrutiny of the SJM IPO document and other material that New Jersey is not prepared to accept Ms Ho's assurances at face value.
"If there was evidence [available to New Jersey] not provided to us, then there would be a concern," Dennis Neilander, chairman of the Nevada GCB said in remarks to the Macau media.
Neither the New Jersey DGE nor the New Jersey GCC has been prepared to comment in detail on the former's report ahead of any potential adjudication by the New Jersey Commission. However, NJDGE Director Josh Lichtblau was quoted in the US media as saying he thought his unit's report "speaks for itself".
Commission chairwoman Linda Kassekert told The Associated Press that the state report cites suspicion among international law enforcement authorities that Stanley Ho is tied to organised crime as the reason MGM MIRAGE should not do business with his daughter.
A key passage from the SJM IPO document filed with Hong Kong Exchanges and Clearing Ltd that may be causing difficulties for Ms Ho and MGM MIRAGE reads as follows:
"….there have been and we may continue to face allegations and complaints made by various third parties and in media reports in relation to our and certain of our shareholders' compliance with applicable anti-money laundering laws or association with other illegal activities. Whether or not justified, any incidents, regulatory investigations or reports through the media or other third parties of possible money laundering or other illegal activities involving SJM, or, with respect to gaming activities prior to 2002, STDM, or their casinos, employees, patrons, Gaming Promoters [sic], or shareholders, could harm our reputation and our corporate image, or otherwise affect our ability to conduct and expand our business, cash flow, financial condition, results of operations, prospects and Share [sic] price.
Another passage in the same document states: "despite SJM's efforts we cannot assure you that the activities of SJM's Gaming Promoters [sic] or the activities of their business associates and gaming patrons comply with applicable laws and regulations, such as usury or anti-money laundering laws or regulations, foreign exchange controls or sanctions imposed by the Office of Foreign Assets Controls of the US Department of the Treasury."
It would be easy to make too much of these paragraphs given that lawyers preparing IPO documents are usually required by stock market regulations to present the worst case scenario facing a company. And by the standards of due diligence, any casino operator in Macau using the services of third party gaming agents (i.e., all of them) would need to make a similar statement regarding the probity of those agents and their gambling patrons.
According to sources spoken to by IAG, the real difficulty for Pansy Ho and MGM MIRAGE in New Jersey is the specific historical allegations made by US federal law enforcement against Sociedade de Turismo e Diversões de Macau (STDM), the company that ran Dr Ho's casino interests in the days of his Macau monopoly up to 2002 and which still acts as an umbrella company for many of his investments.
In 1988, the US Justice Department listed Dr Ho as an associate of an unknown Chinese triad organisation that allegedly operated in Macau's casino VIP rooms. Pansy Ho is a director of STDM, which still owns an interest in SJM. She is also the managing director of Hong Kong-listed Shun Tak Holdings Ltd, the shipping and property conglomerate with most of its business interests in Macau, and which Dr Ho chairs. According to IAG's sources, Ms Ho's continuing directorship of STDM and the role of that company in relation to the historical organised crime allegations is an important reason why New Jersey doesn't believe Pansy Ho is truly acting independently from her father.
New Jersey state Assemblyman Richard Merkt, a former senior lawyer for the NJDGE, has also gone on record as expressing concern that STDM owns a stake in a North Korean casino—another fact confirmed in the SJM IPO document that would not necessarily have been available to the Nevada hearings.
It's possible that some judicious reshuffling of Pansy Ho's directorial jobs might be enough to satisfy New Jersey regulators. Ms Ho's brother Lawrence Ho faced suitability hearings in the Australian state of Victoria regarding his casino joint venture with the Australian company Publishing and Broadcasting Ltd (as it then was). Dr Ho had to resign as chairman of Lawrence Ho's company Melco International Development before the Australian regulators would sign off on the joint venture.
New Jersey's position on Pansy Ho has been criticised in some quarters as being tainted by politics. New Jersey is, however, atypical of most US states in that its chief law officer, the state attorney general Anne Milgram, was appointed by the governor, not elected by popular ballot. This arguably makes her and her officials less likely to engage in political grandstanding than those in other state jurisdictions.
Lobby groups for and against gaming certainly seek to play an active role when gaming licensing is discussed in the US. It's on public record that a group calling itself Family Focus and stating its opposition to all casino gaming, distributed a 300-page packet of information including negative press cutting on Dr Ho to both the Nevada gaming authorities and those in New Jersey prior to their consideration of the MGM MIRAGE-Pansy Ho deal.
Interestingly, New Jersey's governor Jon Corzine, a former US Senator, is a largely self-financing candidate as a multi-millionaire in his own right. He doesn't therefore depend on money from lobbying interests to get elected. He spent US$38 million alone on his 2005 gubernatorial campaign, according to The New York Times—exactly twice the amount of his opponent. How he made his money is an even more interesting issue, and may be relevant to the level of fiduciary scrutiny in New Jersey regarding Pansy Ho. Governor Corzine is a former chairman and co-chief executive of the investment bank Goldman Sachs, and was one of the senior executives who oversaw its expansion into Asia in the 1990s. If anyone knows how to read and interpret the due diligence passages of an IPO document, it's Mr Corzine.
He left Goldman Sachs in 1998 but remained a stockholder. Time magazine reported he made US$400 million when Goldman Sachs was floated as a public company in 1999. Just as interestingly Mr Corzine's co-CEO at Goldman Sachs was Henry Paulson, who served as US Treasury Secretary from 2006 until January this year. This is the same US government department that made the original allegations about Dr Ho's links to Chinese organised crime back in 1988.
New Jersey's report comes at an embarrassing moment for the gaming industry, given that Dr Ho is a guest of honour at this year's G2E Asia conference and exhibition in Macau. He will be presented with a G2E Asia Visionary Award at the event—only the second time the accolade has been given. The award recognises outstanding leaders who have contributed to the success and expansion of the Asian gaming entertainment market.
Dr Ho will no doubt receive the award from the American Gaming Association and the event organisers Reed Exhibitions with thanks and good grace, but as he accepts the applause of the conference audience, he will be aware that a section of the US law enforcement community still regards him with suspicion. Whether the alleged and unproven sins of a father should be visited upon the father's daughters and sons will be revealed in New Jersey in due course.