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Best of Liz Benston

Gaming Guru

Liz Benston
 

Mom and Pop roughed up in gaming license bid

15 April 2008




LAS VEGAS, Nevada -- By all accounts, Chet and Karla Cox are successful businesspeople whose hard work earned them a chain of gas station franchises from Chevron, the nation's largest gas retailer. Do-it-yourself people, they held a contractor's license to build their own stations, operated two bar and grills, planned their own marketing campaigns and lined up their own equity partners.

Successful at every turn, they decided to take their mom-and-pop business to the next level.

They went after a full-fledged Nevada gaming license to launch their newest company — Coxman Gaming — so they could manage their own slot machines at their various businesses, rather than rely on a vendor to do it, eating into their profits.

Accustomed to doing everything else pretty much on their own, they started the process without an attorney.

They didn't foresee what they were walking into — and they got beat up.

Welcome to the big leagues, they were told.

Their story shows what can happen when small-business people seek a Nevada gaming license.

It's not an easy process, starting with an application of more than 70 pages. That's followed by a thorough background check that involves combing through court filings and other public documents as well as private papers such as company books and tax records.

The Coxes received a "restricted" license to operate slot machines in January 1995 and now have eight locations, including Chevron stations in Henderson and North Las Vegas and two bar and grills. But that involved only cursory paperwork, not an extensive background check.

There's a big difference between licenses to operate up to 15 slot machines, called restricted licenses, and nonrestricted licenses for casinos with from 16 slots to thousands of slots.

That difference allows regulators to focus their resources on casino bosses rather than operators of bars, convenience stores and other small slot locations.

When Nevada legalized slots in small businesses, it set up regulations allowing convenience store owners to receive slot revenue without having to go through the burdensome licensing process themselves. Instead, slots at small, restricted locations are owned and operated by licensed third parties who share revenue with the store owners.

As their chain of stores grew, the Coxes figured they could save money and maximize profits by getting a nonrestricted license and operating the slots themselves. But they lacked gaming experience and didn't want to risk investors' money building a "slot route" company at a time when such operations — because of a smoking ban and fierce competition — might not be as profitable as they once were.

So they came up with what they thought was a reasonable, though apparently contradictory, solution. They would have a third-party operator, Silver State Gaming, run the slots for a few years until they got a better handle on how the slots performed and learned more about the business.

Regulators weren't impressed.

"You are asking us today to approve a slot route operator ... that basically will have no employees, no buildings, no trucks and no machines. It is a unique model, at least to me," board member Mark Clayton said.

Although it makes sense in other industries to grow as experience is gained, that's not the case in the gaming industry. License applicants are expected to be experienced when they appear before the Gaming Control Board, not learn on the job.

That wasn't all that made regulators uncomfortable.

Although Silver State would handle the filling, emptying and repairing of slot machines, regulatory reporting and player disputes would fall to the Coxes' son, a college graduate with construction experience but little gaming experience.

Though C.J. Cox pledged to be on call at all hours, board member Randy Sayre said the young man still would be operating "under a learner's permit."

Clayton, noting that third-party operator Golden Gaming had been running the Coxes' slot machines for more than a decade, raised another key question about the couple's proposal.

"If the experience hasn't been learned over the past 14 years, how can we be comforted that it is going to be learned in the next couple of years under this arrangement?" Clayton asked.

The Coxes also made omissions and mistakes on their license application.

The errors seemed innocent enough. They failed, for example, to disclose lawsuits that gas station managers handled and forwarded directly to insurance carriers without involving the Coxes.

They also neglected to mention a property they owned: a home inhabited by Chet's mother that, for all intents and purposes, belonged to her even though it was in her son's name. Then there was the fact that their company hadn't notified Clark County's Business License Department when it began operating slots at gas stations. And the Coxes also erred when they transferred ownership of a location without first seeking the board's approval.

After receiving multiple notices from the board regarding the problems, the Coxes hired a gaming attorney midway through the licensing process to correct the mistakes and patch things up with regulators.

Though attorney representation isn't a requirement of the licensing process, it's recommended. Attorneys typically cross-examine their clients before helping them complete an application, then check the information and oversee the follow-up process with regulators.

But by the time the Coxes hired Las Vegas attorney Sam Basile, some damage had been done.

At the hearing, Sayre praised the Coxes' past business success but suggested it might have made them overconfident.

"There was a very cavalier approach to entering into the nonrestricted arena," Sayre said.

Of the errors Clayton said, "These are basic, black and white questions. We're not here to educate you."

Regulators didn't deny the Coxes' application, which would have killed their chances of obtaining a license in the future. Instead they reserved their vote, giving the couple a chance to resolve the problems and make their case again before the board.

If the board eventually votes for approval, the Coxes then would appear before the Nevada Gaming Commission, which would make the final decision.

Basile apologized profusely, saying the mistakes were "not meant to evade" and that the Coxes now have a compliance procedure in place to prevent further slip-ups.

"We would submit that the sins of the past don't necessarily predicate operations in the future," he added.

"I will not accept that position, but we don't need to argue it," Clayton shot back.