Over the past several years, in shopping malls and behind storefronts across the United States, in Internet cafes and adult arcades, computerized sweepstakes games have grown into a massive business, big enough to draw the ire of the commercial casino industry, which says they’re nothing but illegal gambling. As more cases involving them make their way into the courts, judges are tending to agree. Yet few states actually regulate the cafes or have laws pertaining to them and they’ve largely been ignored by law enforcement. That is until an epic scandal erupted in Florida earlier this year that now finds them squarely in the crosshairs of lawmakers, prosecutors and police.
The cafes, which can be found as standalones or tucked within amusement arcades and other businesses, follow roughly the same model. They sell time, not gambling per se. Usually it is Internet or phone minutes which come with “promotions” or “bonuses” in the form of sweepstakes entries or chances at lottery-like draws. Purchasers participate through the medium of electronic terminals or PCs that mimic poker or keno or casino-style slot games. No betting takes place. Not in a conventional sense. The prizes are the entries, which the customer may win or (of course) lose. Or players may be awarded retail products or “gifts” exchangeable for cash.
There are legal defenses for them, and operators have not been entirely unsuccessful in pressing these. The argument most frequently heard is they’re no different than the contests offered by McDonald’s or Coca-Cola and other big consumer brands. Opponents say this is ludicrous and cite as proof the industry’s own estimates that revenue per terminal can range as high as $5,000 a month. Before things got ugly in Florida in March, they were legal in the Sunshine State as charities, and operators there have won jury verdicts in at least two cases.
The cafes have also fought back with the more subtle argument that shutting them down violates their First Amendment right to free speech, a pitch that’s been rejected by federal judges in Pennsylvania and Florida but prevailed for a time in North Carolina, where a state appellate panel last year allowed that operators were constitutionally protected against North Carolina’s gambling laws, a ruling the state Supreme Court reversed in December in the course of upholding a 2010 law banning sweepstakes games. The constitutional defense has been tried in Ohio, South Carolina and Arkansas, too, and additional cases are pending in Florida and Pennsylvania.
Some of the industry’s more enterprising minds have come up with the highly marketable idea of linking the games up with charities and non-profits as a fund-raising tool. One of the pioneers of this model, HEST Technologies out of Texas, was a leading software supplier of these “sweepstakes promotional systems” before it was indicted and ordered to close last year by the Texas Attorney General’s Office.
But the mash-up that occurred in Florida in March 2013 was in a class by itself. Forty-nine people were arrested, more than 60 were charged and more than $64 million was seized in 23 counties and five other states in raids by state and federal agents on a charity called Allied Veterans of the World, which prosecutors say was a front for a massive illegal gambling ring run out of some 50 sweepstakes parlors across Florida. Between 2007 and 2012, these venues generated a reported $300 million for charitable work on behalf of military veterans—except only about $6 million of it went to veterans, the charges state; Allied’s executives paid the other $294 million to themselves and their confederates. An Oklahoma software provider netted $63 million from its involvement, according to federal investigators. The husband-and-wife owners have been charged with racketeering and conspiracy.
Alarms were being raised for years over the proliferation in Florida of sweepstakes “charities,” but as they are lawful, and as the parlors are popular among the state’s large population of senior citizens, whose votes help maintain the Republican Party in power, these were not addressed.
The most publicly prominent of Allied’s friends in Tallahassee was Lt. Gov. Jennifer Carroll. A retired naval officer and former head of the Florida Department of Veterans’ Affairs, she had a PR firm when she served in the state House of Representatives whose biggest client was Allied. As lieutenant governor she appeared in a glowing television ad promoting the company and its charitable work.
By the time the news of the arrests broke, she had already resigned. She has not been charged.
The investigation isn’t over either, according to reports, which may explain how the Legislature managed with stunning alacrity last month to get a bill to Gov. Rick Scott, who promptly signed it, outlawing various types of electronic machine games popular in Internet cafes. Which has confused nearly everyone about what is now lawful and what is not, and opponents, who include the Florida Arcade Association, representing businesses employing some 14,000 people, have hired lawyers to prepare a challenge in the courts.
In North Carolina, sheriff’s deputies in March arrested the owners of three locations and seized computers and other equipment.
In Ohio, Cuyahoga’s prosecutor has petitioned the state Supreme Court to stop the judge who quashed last year’s indictments from enforcing her orders, and state Attorney General Mike DeWine, an avowed enemy of the sweepstakes parlors, has joined the suit.
The problem for opponents, who include police and prosecutors, a majority of the state House of Representatives and Ohio’s four casinos and seven racetracks, is that no law specifically prohibits the cafes. There is nothing permitting them either, which could pose a unique problem for law enforcement since to classify them as gambling might require, under the state Constitution, that their status be submitted to a voter referendum. In the meantime, there is nothing on the books requiring them to be licensed and no licensing mechanism even if they were. Their suppliers aren’t licensed or regulated either. There are no technical standards for machines and no laboratory approval processes. The locations cannot even be formally inspected because they don’t serve alcohol. Not surprisingly, they’ve sprouted like mushrooms. Currently, there are more than 800 of them.
What is known is that the sweepstakes lobbying machine is well-financed and effective. A bill passed in the House last year to regulate them out of existence died in the Senate. A similar House measure passed in March is expected to meet a similar fate. However, the Senate is expected to join with the House to extend a one-year moratorium on new cafes that is scheduled to expire in June, and the president of the upper chamber, Republican Keith Faber, has urged his members to return campaign contributions from the cafes.
The casinos, certainly no slouches in the lobbying department, have mobilized a response aimed at voters called Ohioans Against Illegal Gambling. The racetracks, which are looking to add video lottery terminals, support the campaign.
“This is not the easy way to do it. This frankly is the hard way,” he said.
On April 19, a grand jury in Cleveland handed up indictments against 11 people and eight companies on charges of illegal gambling involving Internet cafes. The day before, six Cuyahoga cafes were raided by a team of local and state agents. Earlier this month, state investigators searched a café in Richland County and seized evidence, including bank records. Search warrants also were executed at a company and a private home in New Jersey.