Gaming company stands poised to make millions on 8-liners in Texas
Aces Wired, backed by an Austin entrepreneur, is placing its bets on games that operate in gray area of state law.
Sunday, February 10, 2008
In November 2006, Aces Wired, a young company controlled by an Austin businessman with long ties to the gambling industry, opened an eight-liner gambling parlor on Interstate 40 outside of Amarillo and began advertising on billboards. Three months ago, Potter County declared the site an illegal gambling operation and ordered it closed.
At first glance, the case, which has not yet come to trial, is of small consequence. But not to Aces Wired, which is counting on a favorable ruling to spread its gambling machines across the state.
Eight-liners, which look and play like slot machines, are legal only when played for amusement. Many small-time operators frequently offer cash prizes, however, provoking a game of cat-and-mouse with local law enforcement. Often a parlor is raided and closed, only to reopen days later in the same location.
"They're like cockroaches," Travis County attorney David Escamilla said.
But Aces Wired represents a new and far more sophisticated version of eight-liner operations in Texas. Politically connected and generously financed, the Dallas-based company has paid hundreds of thousands of dollars to lobbyists and lawyers to deflect opposition to its plans.
Campaign contributions from its principals include a combined $300,000 to Gov. Rick Perry, Lt. Gov. David Dewhurst and Attorney General Greg Abbott.
Its Austin patron, Gordon Graves, is well-steeped in gambling. An inductee of the Lottery Industry Hall of Fame, until 2003 he was chief executive of Multimedia Games Inc., an Austin-based gambling-products company that last year reported revenues of $122 million.
"I think Aces Wired could be even bigger," he said.
Aces Wired claims its games, which exploit a gray area in state law, are legal because they use a debit card-like system to charge and reward customers with merchandise instead of cash. Yet they still function enough like slot machines to attract some of the more than 3 million Texans who leave the state to gamble each year.
The company calculates Texas could support 63,000 of its eight-liners, according to Securities and Exchange Commission filings.
With parlors in a half-dozen locations, it hopes to expand its operations fivefold this year by moving into new cities, including Austin.
It has agreed to acquire a majority interest in a Corpus Christi dog track, where it eventually hopes to place 500 game machines, and it intends to install as many as 2,500 eight-liners in bingo halls.
Its ambitious plans represent the latest push to expand the limits of legal gambling in a state that boasts a popular lottery, lawful cash bingo games and sanctioned betting on horses and dogs — despite a constitutional mandate directing legislators to ban gambling.
"Any time you open the door to any form of legal gambling, entrepreneurs are going to ram it open and run through," said Nelson Rose, a law professor at California's Whittier Law School who has testified before Texas lawmakers. "What you have is a constant fight."
Increasingly, such clashes erupt when authorities try to apply old laws to new gambling technology. Today, bingo is played on video displays that act similar to slot machines, and gambling entrepreneurs are on the cusp of offering gambling via cell phones. Yet Texas gambling statutes don't even clearly define "cash" or "games."
Anti-gambling activists fear that Aces Wired is nudging the state into expanded legal gambling. In its public filings, the company notes that its eight-liner machines can easily be converted to slot machines. There's already so little difference between the two, however, that if Aces Wired wins in court, slots in Texas will be effectively legalized without legislative action, said Rob Kohler, who conducts research for the Christian Life Commission, which opposes the spread of gambling.
For their part, state officials worry that the spread of eight-liners will siphon business from the lottery, which helps pay for public schools.
Texas Lottery Commission surveys show the annual percentage of Texans who buy lottery tickets today is roughly half what it was in 1995; for the past several years, lottery sales have remained flat, at about $3.7 billion.
A 2004 commission study, meanwhile, estimated Texans spent $2 billion a year on eight-liners. "There is a proliferation of other games, legal and illegal, that is drawing on the lottery dollar," said Commission Chairman James Cox.
Because they are unregulated, enforcement against eight-liners in Texas varies from county to county, and prosecutors are split over whether Aces Wired is a legitimate amusement business or gambling dressed in finer clothing.
Although Tarrant County has allowed it to operate three gambling centers, Potter County Attorney Scott Brumley said Aces Wired is "trying to exploit a loophole in the law to open up a gambling operation."
Last spring, Abbott concluded that the company's machines were illegal. His opinions are only advisory, however, and the Amarillo case is the first time a court will directly tackle the question.
Technology transforming games
Texas is surrounded by states with legalized gambling, and the pressure to broaden gambling markets here is relentless. Racetrack owners regularly lobby state legislators to allow video lottery terminals — electronic slot machines — at tracks.
The Texas Lottery Commission's avowed goal "is to generate money for schoolchildren of Texas without unduly influencing people to play," Cox said.
Yet Gtech, the company that contracts with the state to manage the lottery, spends $50 million a year on research, studying how to persuade people to bet more money on lotteries. The lottery commission spends $32 million on advertising and marketing its games, according to its 2007 financial report.
In 2002, Texas greatly expanded the use of pull tabs at charity bingo games. Research shows a quick payoff makes players bet more and faster, and pull tabs allow a player to see immediately if he has won simply by opening a paper window.
Since then, sales of traditional bingo cards, which players fill in as numbers are called, have dropped steadily. Sales of the pull tabs have nearly tripled, from $89 million in 2002 to $253 million in 2006, when for the first time pull tab sales surpassed card sales.
Increasing use of sophisticated electronics further muddies the regulatory waters. Last summer, the Texas Lottery Commission approved a new device that reads pull tabs electronically. Critics say it's similar to a small slot machine — a development unanticipated in 1981, when the state permitted bingo as a social hall pastime to raise money for churches and rural fire departments.
"A very social, traditional game of bingo is being turned into something that voters never contemplated," Kohler said. "The days of 'B-1' and 'F-9' are over."
Eight-liners — the term now encompasses a broad range of electronic slot machine-type games, including poker — owe their existence to a 1993 exemption to state anti-gambling laws known as the "fuzzy animal" exception, named for the stuffed toys in coin-operated machines at supermarkets. It allows games of chance if the awards are limited to noncash or token cash prizes. But "the Legislature did not write a model statute," said Williamson County District Attorney John Bradley, and Aces Wired is the only the latest to test its limits.
A decade ago, then-Gov. George W. Bush declared war on eight-liners, and lawmakers have regularly proposed bills to outlaw or restrict the games. Two weeks ago, Dewhurst again directed senators to study eight-liners in preparation for the 2009 legislative session.
Opposed by amusement game interests, most of the reform efforts have died.
"I've watched the legislature tackle eight-liners for the last 10 years," Brumley said, "and nothing gets done."
The inaction has given an opening to entrepreneurs eager to cash in on the hunger for gambling.
"The issue is how to make the prizes you win playing amusement games more valuable without crossing over the line set by the (state) Supreme Court," said Graves, who, with 30 percent of Aces Wired's stock, is the company's biggest single shareholder.
Now 73, Graves has placed many successful bets on gambling businesses. Before working at Multimedia, he founded a company that became Gtech, the multibillion-dollar company that operates lotteries in Texas and 25 other states and in Europe.
After consulting with numerous experts — including the author of a report on illegal eight-liners for Bush — Graves and others merged several electronic data and bingo-related companies to form Aces Wired in 2004.
The company's machines look and sound like slot machines. But instead of paying out cash jackpots, they use stored-value cards.
Players load the card by paying cash to the operator. The game machine reads the card and deducts the cost of each play. Winnings accumulate on the card in the form of credits, which can be redeemed for merchandise at dozens of stores, from Abercrombie & Fitch and Target to convenience stores.
Aces Wired opened its first gambling center in El Paso in late 2005 and four more the following year in Fort Worth, Killeen, Corpus Christi and Copperas Cove. The company seemed on a roll until Abbott's ruling last March that concluded, legally, there was essentially no difference between winning $50 in cash and $50 in DVDs at Best Buy.
Although such opinions do not have the force of law, several prosecutors ordered Aces' parlors closed.
"It was very painful," Graves said. "Like a wrecking ball." The company estimates Abbott's decision has cost it more than $300,000 in legal fees so far.
Striving for legal 'insurance'
The company's luck changed in September when Craig Enoch, a former state Supreme Court judge, arbitrated a contract dispute between the company and a supplier. Declaring the state's gambling laws unclear, he concluded that "Aces Wired amusement machines ... comply with Texas gambling laws."
Prosecutors are not bound by that ruling, either. But in recent months Aces Wired's representatives have conducted a road tour, distributing copies of the opinion and meeting with county officials. Stephen Fenoglio, Aces Wired's lead attorney, recalls 10 to 12 such meetings.
One was with Brumley of Potter County, who told the company it could open a game parlor pending his review of the laws but then shut it down a year later, partly in an effort to get a definitive court decision on Aces Wired's games.
"We'll never know unless we try," he said.
Still, Enoch's opinion has emboldened the company to resume its expansion plans. It hopes to have 1,300 machines in place by the end of the year, increasing its inventory nearly 700 percent in two years. It has raised $8 million from investors. According to its financial statements, the company's take averages about $82 per machine daily — a potential $40 million a year.
With so much at stake, Aces Wired is covering its bets with lawmakers, too. Graves, who has other business interests, has distributed $420,000 in campaign contributions in the past two years, according to state filings. That included $41,000 to Abbott; $100,000 to Dewhurst, who sets the Senate agenda; and $111,000 to Perry.
Sen. Juan "Chuy" Hinojosa, D-McAllen, also received $7,000 from Graves last fall, after he introduced a bill that would have permitted the use of stored-value cards in certain bingo games; Rep. Kino Flores, D-Palmview, got $8,000 after introducing several unsuccessful gambling bills.
Graves has given to just one judicial candidate: state Supreme Court Chief Justice Wallace Jefferson. He received $2,500 from Graves in October, a month after Enoch cited Jefferson's 2003 opinion on eight-liners as evidence that Aces Wired's debit card system was legal.
In October 2006, Aces Wired added Michael Gallagher, a politically active Houston trial lawyer, to its board of directors. Two months later, he donated $50,000 to Dewhurst, according to state records. Gallagher also has an ownership interest in the dog track the company is buying.
Fenoglio said the company actively lobbied for or against more than a half-dozen bills during the last legislative session. Public records show Aces Wired retained six lobbyists, paying each up to $99,000, and hired a San Antonio lobbyist to represent the company as it opened up a parlor in that city last December.
The company is also positioning itself should the state's gambling laws loosen.
"We can easily and at minimal cost convert our games to electronic bingo games and/or video lottery terminals," the company wrote in a filing.
Graves said Aces is bidding to run a state lottery, too, although he declined to name it.
Meanwhile, the eight-liner debit card system provides the company unprecedented data on its players, Graves said.
Because each card belongs to a specific individual, the company can track precisely where, when and what game that person plays and how much money he or she has spent.
Rick Swett, a statistician who left the company last year, said Aces Wired sent birthday cards and advertisements to its most active gamers, some of whom spent $30,000 a year on the machines. Most of the heavy gamers, he said, were older empty-nesters and women.
On a recent morning, the Ace Gaming Amusement Center in San Antonio was bustling. Tucked in a strip mall next to a pool hall, most of the parlor's machines were beeping and whirring. Manager Donna Raser said the center already has a solid group of regulars.
Shirley Haracz of San Antonio said she's won enough credits to go shopping at Best Buy,
H-E-B and some convenience stores. Her mother, Marjie Ferguson, stops by every morning.
"We tried coming once in the evening," she said, "but it's too busy. There are lines of people waiting to get on the machines."