Bingo in Texas: Lots of cash, little regulation

Critics say bingo - a $700 million gambling industry - is subject to lax laws and inadequate state enforcement

AMERICAN-STATESMAN STAFF

Updated: 9:49 a.m. Monday, Feb. 7, 2011

Published: 12:05 a.m. Monday, Feb. 7, 2011

In June 2006, police responded to a call from Daytime Bingo Hall in Midland reporting that $100,000 in cash was missing from a floor safe. As investigators began digging into the apparent theft, they had questions: Since bingo operations are not allowed to have so much money on hand overnight, what was the cash doing there in the first place? And how had it escaped notations on the hall's books?

According to police reports and descriptions of the case in Texas Lottery Commission transcripts, workers at the hall revealed several possible sources for the money. Bingo prizes were often overstated, they claimed; the hall would report a $100 prize as $200 and keep the difference. They said the operator also was selling tickets without reporting the sales to the state and placing proceeds in the safe — another violation of Texas bingo rules.

The police contacted the agency that regulates bingo, the Lottery Commission, and requested an audit of the hall and the three nonprofit organizations that sponsored bingo games there — the B'nai B'rith Youth Club, B'nai B'rith Men's Club and Lou Rosenberg Scholarship Fund.

The commission's Bingo Operations Division had recently audited two of the charities, finding only minor bookkeeping errors. This time, auditors found that about $250,000 could not be accounted for.

The incident highlights the serious regulatory challenges facing the agency reponsible for keeping an eye on a business that generates about $700 million every year in Texas, the vast majority in cash. A small — and shrinking — state enforcement staff, laws ripe for manipulation and the fragmented nature of the game have resulted in a legal gambling enterprise that critics contend in some ways is free of meaningful scrutiny from government regulators.

Experts and participants say the vast majority of games are conducted fairly, with proceeds accounted for and ending up in their proper places; most nonprofits use the $35 million they earn annually from bingo for charitable purposes. Yet without adequate oversight, they add, money can simply disappear, with few repercussions.

"In this business, that's more the case than not," said Kenneth Messer, who runs an American Legion bingo hall in Longview.

How well the state keeps track of bingo money could have costly implications. As legislators grapple with a projected $27 billion budget shortfall, several have said they would consider expanding legalized gambling to bring in more revenue. If that happens, the bingo industry wants a share of the action.

Last year, an association representing Texas bingo interests won a federal court case permitting charities to use bingo proceeds for lobbying. Since then, according to the Texas Ethics Commission, the Coalition for the Survival of Charitable Bingo has spent between $250,000 and $550,000 to convince lawmakers that gambling expansion in Texas should include bingo halls, among other issues.

Referring to bingo money spent on lobbying, an attorney general's appeal of the decision filed in late January claimed "certain charities are draining their bingo escrow accounts of millions of dollars that should have been directed toward a charitable purpose, but instead is being spent at the Austin Club" — a private club near the Capitol frequented by lobbyists and politicians.

If expanded gambling makes headway, "we're going to have amendments ready to authorize VLTs (video lottery terminals) and slots at licensed bingo halls," said Stephen Fenoglio, an Austin attorney who represents bingo interests. A coalition report predicted that putting video gambling machines in bingo halls would generate hundreds of millions of dollars.

The agency, he added, did a very good job enforcing bingo rules. Others agree.

But some contend the Lottery Commission's track record with bingo shows it is unprepared to monitor slot machines or newer, more sophisticated games. "They have not even been effective in regulating what they're supposed to do," said Steve Hieronymus, a longtime critic of the agency who owns a bingo supply distribution company.

Tracking the cash

Texas legislators and lawmakers approved state-regulated bingo in 1981 to raise money for charities, and by law only certified nonprofits can host games. Those that do are supposed to be closely involved with the games' day-to-day operation.

But running bingo games is complicated and time-consuming, and many charities are small and staffed by volunteers. So nonprofits often rely on for-profit bingo halls to run the operations on their behalf.

"The charities are not as active as you might hope in connection with actually running the bingo," David Schenck, a then-lottery commissioner, said in a May 2009 agency meeting.

Some commercial halls do everything from hiring a staff to work at the sessions to having their accountants handle the charities' bingo finances. "I get a quarterly check from the (hall) owner," said Elia Mendoza, executive director of a San Antonio League of United Latin American Citizens chapter that conducts bingo. "I usually don't question them on anything."

For Mendoza's organization, as well as several other LULAC chapters in San Antonio, the bingo hall staff even fills out the charities' federal tax returns — a practice accountants say raises red flags about whether the charities' bingo operations are driving the organization rather than the other way around.

(It also raises other questions: A review of several LULAC charities' federal tax returns by the American-Statesman showed them losing hundreds of thousands of dollars a year on bingo while their reports to the Texas Lottery Commission indicated the charities were earning a modest return on the game. Peter Garcia, who owns the three San Antonio bingo halls that host LULAC chapters, said the federal returns were inaccurate and would have to be resubmitted to the IRS.)

To insure internal oversight, state law requires a sponsoring charity to have at least one representative on-site for every bingo game conducted under its name. But organizations can meet the requirement simply by making the bingo hall owner or manager a member of the charity.

Without checks and balances, such arrangements can make it easier for cash to vanish. Austin's Jeff Minch, whose publicly traded Littlefield Corp. owns a dozen bingo halls in Texas and more in other states, said when his company recently bought new bingo halls in South Carolina he realized an immediate 10 to 15 percent increase in proceeds just by keeping a closer eye on hall employees handling money.

The missing sums can be vast. In the year before the police were called to Daytime Bingo, the Midland-area charities earned about $35,000 a year, according to Lottery Commission transcripts.

After beefing up their internal controls of bingo operations, the charities' annual profits jumped to between $175,000 and $200,000, according to the records.

"In any cash business, it can be very difficult to keep a close eye on it," said David Rosen, a spokesman for the Midland charities. "Apparently, there's lots of ways to steal."

Infrequent enforcement

Mischief is easier because the state commits few resources to enforcing bingo laws.

The Lottery Commission's bingo division has 13 field auditors — half the number the agency employed in 2006. Last year, according to state bingo reports, the team performed 11 audits out of the approximately 1,200 organizations that hosted bingo games — less than 1 percent. Phil Sanderson, director of the Lottery Commission's Bingo Operations Division, said the number of audits the agency can perform is limited because of staff size and the hundreds of hours each requires.

State bingo executives say they strive to observe one bingo session a year in every hall in Texas in an effort to catch violations. In 2009, the division's enforcement agents completed 337 game inspections out of more than 100,000 bingo occasions.

But rather than tracking where the game money went, a state auditor's report last year found that agents focused on minor violations such as whether a hall's license was up-to-date and making sure bingo workers did not play the game during their shifts.

A 2006 internal audit of the bingo division reported similar gaps: Bingo auditors relied on "self-reported documentation prepared by licensees as factual evidence" and performed "minimal assessment of licensees as to the fair conduct of the games and as to determining the proceeds derived from the games."

Sanderson said that as a result of the 2010 audit the agency has adopted a new approach that identifies certain bingo halls and charities as high-risk, triggering more intensive audits. He declined to say what factors the agency would consider high-risk.

In the past, bingo authorities have struggled to keep tabs on offenders.

A February 2006 Lottery Commission examination of the B'nai B'rith Men's Club concluded the nonprofit wasn't using enough of its bingo proceeds for charitable purposes. Yet state records show that as of the end of 2009, the charity had continued to stockpile money, amassing nearly $600,000 in its undistributed bingo accounts fund — more than any other single bingo-playing charity, and more than 10 times the reserves legally permitted under new state laws.

B'nai B'rith's Rosen said he was aware the Lottery Commission was displeased with the amount of the club's reserves; however, there was no rule forcing it to spend the money, so it didn't. Since a new law was passed in 2009, he added, the charity has been spending down the fund by donating the cash to charitable causes.

A 2006 agency audit determined that a related Midland charity, the Lou Rosenberg Scholarship Fund, was not using enough of its bingo proceeds to fund scholarships. Still, by the end of 2009, the charity had nearly $250,000 in its bingo checking account.

In 2008, according to the organization's last available federal tax returns, the charity awarded 10 scholarships — including $54,000 to children of the nonprofit's board members.

Trustee Miles Nelson said the fund was set up to benefit Jewish students from the Permian Basin, and because there were only about 60 Jewish families in the area, the scholarship applicant pool was limited. Board members recused themselves when their children's applications were considered, he said.

"We are doing things the right way," Nelson said.

An island retreat

With so few investigators in the field, state regulators rarely uncover significant bingo violations. Most identified violations are minor paperwork errors, with fines typically ranging from a warning to a few hundred dollars.

Even when regulators crack down, penalties can land softly. In 2001, state bingo auditors determined that eight South Texas chapters of a fraternal organization, the Improved Order of Red Men, had donated tens of thousands of dollars to build a retreat on a Cameron County island owned by Charles Isbell. Isbell, a longtime Red Men member, owned the halls in which the Red Men played bingo.

An administrative law judge agreed that while the island lodge may have hosted occasional charity functions, it mainly benefited Isbell. Bingo staffers recommended that the Red Men's licenses be revoked for "deliberate and ongoing violations" of bingo laws.

The Red Men chapters maintained the expense was permitted. The Lottery Commission decided the fraternities should put an equivalent amount of money back into their bingo accounts, pay a fine and keep their bingo licenses, which remain active today.

The case of the missing money at Daytime Bingo in Midland wrapped up with no criminal charges filed. In 2008, the Lottery Commission fined the three charities under whose names the suspect games were being held a total of $163,000. Among the largest penalties ever levied by the state agency against charity conductors, the fines were paid out of the organizations' bingo proceeds.

While maintaining his innocence, Daytime's then-owner, a Midland lawyer named Gary Garrison, agreed to give up his license, stay out of bingo for seven years and sell the Daytime Bingo Hall. According to state records, he sold it in August 2009 to a company called Or Shemesh LLC — a corporation controlled by some members of the same charities the Lottery Commission had fined only months earlier, state corporation records show.

Rosen, who has been an officer of the B'nai B'rith Men's Club and is on the board of the new company, stressed that the two were separate and distinct. The bingo hall "is not owned by the charities," he said. "There is a bright line between the owners of the hall and the charities."

Weak rules

At times, state rules governing bingo also have proved inadequate to keeping up with the game as halls and charities aggressively seek new ways to bring in money.

Last year, a Longview bingo hall skirted a restriction that limits individual halls to hosting only two bingo sessions per day by pouring a new foundation slab less than one inch from the existing hall and building a "second" hall on it. "It's separated by a fire wall," explained hall manager Larry DeHoff, who added, however, that the new hall has no bathrooms of its own.

Yet under current state bingo rules, the building, which opened in mid-December, can now legally conduct two more bingo sessions per day, meaning the owners can collect more rent from sponsoring charities.

Bingo has struggled with the spread of eight-liners, devices like slot machines that are considered illegal if winners are paid in cash or prizes of more than nominal value. Free-standing illegal eight-liner casinos siphon as much as $2 billion from bingo and the lottery every year, according to one state study.

In recent years, the Lottery Commission has fielded reports of eight-liners being placed inside bingo halls, but state law doesn't allow the agency to regulate eight-liners — or any other gambling — unless they are operated during active bingo games and are in the same room.

"So if somebody wants to run a game of Russian roulette five minutes after a bingo occasion occurs, within the same premises of bingo, and to bet on it, or a cock fight or anything else, we have no jurisdiction over that?" an incredulous Schenck asked at a Lottery Commission meeting last year.

Agency officials affirmed that it was true. In the past decade, the agency has taken only a single action against a bingo hall for running an eight-liner.

In October, Texas Attorney General Greg Abbott issued an opinion that eight-liners awarding bingo tickets as prizes violated state gambling laws. Nevertheless, said Littlefield's Minch, several bingo halls continued to keep the machines running.

Frustrated by the Lottery Commission's inaction, he began his own investigation late last year, hiring four state-licensed private investigators to enter several Austin-area bingo halls suspected of running illegal eight-liners, play them and document the results.

"I've been down (at the Texas Lottery Commission) for five years beating my gums about this," he said. "The guys who follow the rules are at a disadvantage."

In January, Minch presented to the state attorney general and Travis County attorney's office signed affidavits from his private police officers detailing how they exchanged their eight-liner winnings for bingo tickets at three Austin bingo halls. Travis County Attorney David Escamilla said an investigation is ongoing.

edexheimer@statesman.com; 445-1774