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Can regulators keep video gambling crime-free?
By Joseph Ryan | Politics and Projects Editor
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Published: 5/17/2010 12:17 AM

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Take a look behind the scenes of Illinois' video gambling gold rush:

• Gambling interests moving in after facing pay-to-play allegations in two other states.

• A man who worked to push legalization arrested by the FBI and charged with running a multimillion dollar illegal gambling operation.

• A West suburban mayor with ties to a company hoping to finance some of the 45,000 gambling machines set to be placed in bars, restaurants and other local spots across Illinois.

With the lucrative slotlike machines set to be operating by year's end, a Daily Herald investigation shines light on the problem regulators face to keep political insiders and, separately, organized crime out of a new legal industry that could be worth up to $1.5 billion annually.

Illinois Gaming Board Chairman Aaron Jaffe said his office is investigating any possible issues with the ties that the Daily Herald probe uncovered, though he declined further comment.

"I'm not to comment on investigations as they proceed," Jaffe said.

Government watchdog groups, however, contend the findings are just what they warned lawmakers about when they tried to stop the video gambling law -- at least until more safeguards were put into place to make sure the machines would be above-board.

Chicago Crime Commission Executive Director Art Bilek said the revelations illustrate why it is so critical for regulators to double-up efforts on vetting all the players in the new legal market.

"This is all the more reason for giving the powers to the gaming board to do the best possible job to keep organized crime out of the business," he said.

"This hits at the core issue of whether or not we took our time in figuring out how to do this," added Mark LaMet, head investigator for the Better Government Association.

The Funding Stop

One of the issues raised has to do with the Funding Stop LLC, created a week after Gov. Pat Quinn signed the law, and now offering to loan millions of dollars to those wanting to run video gambling machines.

Just who started the Funding Stop remains unclear - and that goes to the heart of the issue, watchdog groups say. And it's not clear if regulators have the authority to ask, as they do others who stand to profit from video gambling.

On state records, the company is owned, in part, by a blind trust and Joseph Canfora, a former Empress Casino executive who now runs a company that provides financing for casinos across the country.

But Funding Stop spokesman Dakota Shultz says the company now is owned only by Canfora and Louisiana video gambling businessman Edgar Colomb. He says the blind trust no longer exists, but declined to say who had owned it.

The company says it has $90 million in applications for loans so far and four referral contracts, three with big distributors who will recommend them to buyers and one with a construction company to work on projects they finance.

Gaming board spokesman Gene O'Shea said the agency is looking at whether it can regulate or ask questions of companies like the Funding Stop, including who owns it. Illinois law doesn't require finance companies to be licensed like it does game makers, distributors, owners, operators and handlers.

One of those connected to the Funding Stop is Burr Ridge Mayor Gary Grasso, who says he has done at least $5,000 in legal work for the company.

Grasso is listed as a vice president with Merit Management, which is owned by Canfora. Canfora, Merit, the Funding Stop and Grasso share the same Burr Ridge office.

Grasso says he has no financial stake in the Funding Stop. "If they would ask me to do any more work for them I certainly would," Grasso said. "It is a legal business."

However, Grasso's connection is an example of potential conflicts of interests that critics of the new law warned officials about.

Grasso's village board has delayed voting on a local video gambling ban for months at his urging, according to village records. Grasso says he supports the ban and only wanted to delay a vote to learn more about industry regulations.

Grasso said he informed the village board that he has worked for video-gambling-related companies. There is no mention of it in records of meetings when the ban was discussed. Several trustees didn't return phone calls from the Daily Herald.

The one who did, Trustee Bob Sodikoff, said Grasso never told him of his involvement with the Funding Stop. But, Sodikoff says he trusts Grasso to not cross any ethical boundaries.

"I think he is an honorable guy," Sodikoff said.

LaMet of the BGA says Grasso needs to recuse himself completely, adding "I don't think that is a lot to ask."

In any case, Bilek, of the crime commission, said it will be difficult to know in the end who is in charge of the Funding Stop without proper vetting by the gaming board.

"This has to be open to public view," he said.

Shultz said he wasn't sure if the company he represents will face direct gaming board scrutiny.

Legalization is projected to generate $340 million annually in state taxes that will pay for part of Quinn's $31 billion, 10-year program to build new schools, transit and roads. Every liquor-serving bar, restaurant, club and truck stop is allowed five machines, which can earn more than $100 a day.

Moving in

Another video gambling businessman moving into Illinois for a shot at the legalized market is Nicky Nichols, of Redman Gaming of Louisiana, who has extensive history in the business - one that raises the concern of watchdog groups and has been the subject of two pay-to-play allegations.

Last May, Redman Gaming applied to build a truck stop in Jefferson Parish near New Orleans. Around the same time, Redman set up a deal to share profits from another proposed truck stop casino with a company owned by a parish executive who held sway over that application, the New Orleans-based Times-Picayune reported in December after reviewing parish e-mails and documents obtained through public information laws.

Documents regarding the truck stop casino deal were turned over by the parish to the FBI, which has an ongoing investigation into the parish executive, the newspaper reported.

And in 2006 in Pennsylvania, when a Nichols company won a spot on a state list of exclusive video gambling machine providers, the media raised questions about the company's blind trust. A powerful lobbyist then acknowledged the trust was set up to benefit his children and then removed it as a part owner in the Nichols company.

The Pennsylvania Gaming Control Board also ordered Nichols' company not to have any business contact with his father-in-law, Robert Guidry, who admitted to paying $1.5 million in bribes to Louisiana's governor for a casino license in the 1990s. Guidry also had a video gambling license held up in the 1990s by state police because he was in business with reputed mob associate Frank Caracci, according to news reports from the time.

Nichols didn't return several phone calls from the Daily Herald seeking comment.

Nichols' move to Illinois isn't entirely unexpected.

Colomb, the president of the Burr Ridge-based Funding Stop, worked with Redman Gaming in Louisiana on at least two truck stop casinos, according to newspaper reports. Shultz said Colomb was a project consultant for Redman, but never employed by the company. A March 2009 newspaper article describes Colomb as being in charge of the company's new developments.

In Illinois, weeks after Quinn signed the legalization law, Nichols helped set up at least three Illinois companies apparently related to video gaming, state records show.

Nichols would have to apply for a license from the gaming board to work as a video gambling operator. Those license applications are not yet available, but could be in the coming weeks.

Bilek and LaMet said regulators need to take a close look at Nichols' business dealings in Louisiana and Pennsylvania before allowing him in on any video gambling in Illinois.

LaMet contends this example proves critics' warnings about the state's need to adhere to a very extensive vetting process. He added, "I'm not sure the structure exists... to create the kind of vetting process that this is going to need."

New arrests

Illinois regulators also want to make sure anyone involved in the state's illegal gambling industry not get in on the legal one - a goal made all the more urgent by some recent arrests.

Two owners of video gaming companies have been charged with illegal gambling and both companies were members of the Illinois association that lobbied for the legalization of video gambling.

Jimmy LaCost and his son, owners of Kankakee-based LaCost Amusements Inc., were indicted in January on 109 counts, including money laundering and illegal gambling.

Federal investigators accuse LaCost of running a network of illegal video gambling machines in the Kankakee area, taking in nearly $6.4 million between 2005 and 2009.

LaCost has denied any wrongdoing through his lawyer.

In 2004, LaCost was listed as a member of the Illinois Coin Machine Operators Association's video gaming committee, which was heading up the organization's years-long push for legal video gambling.

LaCost also is listed as a past president of the association, which includes dozens of companies like his, that operate distributor routes for pool tables, jukeboxes, arcade games and dart boards.

An association spokesman declined to comment on LaCost's arrest or the extent of his involvement with supporting legalization.

Meanwhile, reputed video gambling mob boss Casey Szaflarski also was a member of the association. His Berwyn-based Amusements Inc. was still listed earlier this month on the organization's online membership database as a video gaming operator, with Szaflarski listed as the contact.

Szaflarski was arrested in March as part of a federal investigation of the Chicago mob and its connection to video gambling machines. His attorney has denied the allegations.

A coin machine operating association spokesman declined to comment, other than to say the online database is out of date and Szaflarski hasn't been a paying member for at least three years.

In pushing for legalized video gambling, the association has pointed to Illinois Gaming Board regulators as assurance the legal industry won't be tied to the illegal one known to fund the Chicago mob.

The gaming board, they have said, will keep crime and questions of political influence out. Grasso agrees that is important.

"The one thing that the citizens of Illinois can be comfortable with is that it is a highly regulated industry," Grasso said. "From that perspective, I think they should take great security and solace. Only people with a good reputation, who are fully vetted will be involved in this industry."