By Paul J. Nyden
If West Virginia lawmakers make "gray market" poker machines legal, what will happen to the vendors, or "operators," who own thousands of machines scattered across the state?
In this series:
Sunday: The evolution of "gray market" poker and slot machines; how the games work and how they can be used for illegal gambling.
Monday: The state may already be hooked on gambling - legal gambling.
Tuesday: Why isn't anybody enforcing the law against gambling on gray machines?
Wednesday: The state could make millions of dollars if it follows in the footsteps of Oregon, which legalized and regulated its gray machines.
Thursday: Who is making money from barroom video poker machines?
Friday: Local members of Gamblers Anonymous say video gambling is among the most addictive forms; gambling is offered in many varieties, including floating casinos and Internet sites.
Saturday: What are lawmakers going to do about gray machines: legalize, ban or nothing?
Some of the largest operators, such as Jerry Derrick in Charleston and Joe C. Ferrell in Logan, back a bill proposal that would guarantee them millions of dollars every year. And it would all be legal.
When Oregon made barroom video poker machines legal in 1991, state lawmakers eliminated any role for gray machine operators or distributors. Today, that state gets the lion's share (65 percent) of the profits from the machines, and local business owners, or retailers, get the rest.
Derrick and Ferrell, leaders of the West Virginia Music and Vending Association, back a proposal that would give the state 20 percent of the profit, or "drop," from legal video poker and slot machines.
The proposal, which has never been formally introduced in the Legislature, gives a maximum of 32 percent to local business owners, a minimum of 48 percent to operators like Derrick and Ferrell, and 20 percent to the state.
In West Virginia, gray machines are cash cows, and unlike illegal drug deals made in back alleys, illegal gambling winnings are paid out in the open. Gamblers are paid in hundreds of bars, restaurants and convenience stores.
Today, West Virginia's gray machines could generate $450 million in profits a year. They could generate $1.3 billion, perhaps more. No one really knows.
In Oregon, 9,000 legal video poker and slot machines made $407 million during the fiscal year ending June 30. That means each machine made $870 a week, or $124 a day.
The state of Oregon kept $265 million of those proceeds. About 1,800 Oregon retailers received the other $142 million, said Lou Torres, a representative of the Oregon Lottery Commission.
If Oregon accepted a plan similar to the one backed by Ferrell and Derrick, the state would have received only $81.5 million from its video lottery machines last year.
If West Virginia's gray machines made $1.3 billion in profit last year, the Oregon plan would give the state $845 million. The bill backed by Derrick and Ferrell would give the state $260 million - $585 million less.
The rate of return from West Virginia's 3,049 legal video lottery machines, located at the state's four racetracks, is similar to the rate in Oregon.
During the fiscal year that ended June 30, West Virginia's legal machines made $131 million in profit.
Because video machines at the Charles Town Racetrack operated for only 10 months, West Virginia's 3,049 legal machines made an average of $124 a day. That's the same daily profit made by Oregon's video machines.
If West Virginia has 30,000 gray machines, and each made $124 a day, they would generate more than $1.3 billion a year. If there are only 15,000 gray machines, they might generate $650 million in profit.
Oregon pays 90 percent of all money wagered back to the players. The four West Virginia tracks pay 92 percent. Gray machine operators generally pay back about 70 percent of all money bet.
'Illegal ... to pay off'
Wendel Turner, a lawyer and lobbyist for the West Virginia Music and Vending Association, said he tried to get all the gray machines under the control of the West Virginia Lottery in 1990 and 1991.
"There is a high likelihood that the association will support making these machines a Lottery product" during the 1999 legislative session," he said.
Turner said he knows nothing about cash payoffs. "It is illegal of them to pay off. I don't have any personal experience. Some people say they do. Obviously, that is not something the Music and Vending Association can advocate."
In 1991, gray-machine owners tried to get the Lottery Commission to adopt a set of administrative rules and regulations to make gray machines legal.
Ferrell provided a copy of the 36-page set of proposed rules to the Gazette. Ferrell said he, Derrick and other people in his industry support them.
If the West Virginia Lottery had adopted those rules in 1991, it would have bypassed the Legislature.
But gray-machine industry efforts were stopped in their tracks by then Gov. Gaston Caperton, after word leaked about a federal grand jury investigation.
Subsequent trials for fixing state contracts and insider deals eventually sent Lottery Director Butch Bryan and Lottery lawyer Ed ReBrook to federal prison.
Under the 1991 proposal, all video poker terminals in bars and stores across the state would be online, hooked up to a central computer system, similar to the one now used for the racetrack terminals.
State Lottery Director John Musgrave said his agency could easily track video machine activity around the state.
Computer hookups would also require local retailers to replace old machines with more sophisticated machines.
Lizabeth C. White, deputy marketing director for the West Virginia Lottery, said the racetrack machines cost between $4,000 and $7,000. The Lottery currently approves machines made by Autotote, IGT (International Gaming Technology), GTech, VLC (Powerhouse), Williams Co. and Bally.
Machine replacement costs would help guarantee a role for vendors like Derrick and Ferrell.
Under the proposed regulations, licensed operators would buy the video machines, making it easier for bar owners short on cash. Operators would then install, operate and pay for computer hookups.
In Oregon, the state Lottery Commission operates 9,000 video machines. Each machine cost about $6,000, Torres said. The total cost of machines was about $54 million.
That bill was easy to pay, because the state now gets $265 million in video gambling profits a year.
West Virginia gray machine owners point out they service broken machines and dispatch repair workers to fix them.
In Oregon, the Lottery Commission maintains telephone hot lines for retailers who need repairs.
"Sometimes we can help out over the phone. A lot of times, we send out technicians. We have them all around the state. Or we can trade them a good machine for a bad one," Torres said.
Cash in the bucket
The Ferrell-Derrick proposal would make it difficult for just anyone to get into the business. An applicant for a license must be "a person of good character and integrity" and a West Virginia resident "for not less than two years."
Each operator-distributor would pay the state Lottery Commission an initial license fee of $8,500 and annual renewal fees of $1,500.
That proposal would also prevent proliferation of mini-casinos by limiting each business owner to a maximum of 10 machines.
Oregon allows a maximum of five machines in each establishment. Only bars and restaurants with liquor licenses are allowed to have them. None are allowed in convenience or retail stores.
In West Virginia, a central computer system would also make it possible to introduce a statewide "progressive jackpot" system.
Daily jackpot payouts could be as much as $200,000, an industry insider said. Every time a player puts money into a video gambling machine, she could hope to win the big prize.
Regulations backed by Ferrell and Derrick would allow advertising to promote video gambling machines in local bars. In Oregon, the law prohibits anyone from advertising the gambling machines.
With gray machines, all transactions are cash. Vendors make regular visits to bars and stores to open the machines, scoop mounds of bills into plastic buckets, then pile the money on nearby tables to count.
Local retailers get repaid for payoffs to players. The vendor and owner then divide the profit on a 50-50 basis.
The West Virginia Lottery uses profits from video machines to finance new schools, educational programs and the state Commission on Aging.
In Oregon, after taking out operating costs from its $265 million share of the profits last year, the Lottery Commission gave $194 million to public schools and $34 million to economic development programs.
Cash profits from gray machines go into private pockets.
Making video gambling machines legal in West Virginia might increase their use. Some chains of convenience stores and gas stations, such as 7-Eleven Food Stores, Go-Mart Inc. and Ashland Food Marts, refuse to install gray machines.
If these chains installed the machines, bar and store owners who already have them might see their profits drop.
It is impossible to determine exactly what West Virginia's gray machines make. Machine owners are reluctant to say anything about their business.
No one knows exactly how many machines there are, how much is bet on each, and what percentage of bets goes back to players.
Estimates on the number of machines vary from a few thousand to 30,000 machines, with as many as 15,000 owned by local retailers. The proposed law would prohibit local retailers from owning machines.
Millions or billions?
In July, the West Virginia Lottery released figures on bets and income from the 3,049 legal machines at the four tracks. Some of those machines were installed recently and did not operate the entire fiscal year.
Last year's profit was $131,153,601. That means the average machine made $43,718.
If gray machines made the same amount and paid back 92 percent of all bets placed, the annual profit from 30,000 gray machines would be more than $1.3 billion.
If gray machines kept 30 percent of all money wagered, the annual profit would be more than $5.6 billion.
Track machines, however, might get played more hours each day than machines in bars or convenience stores. But since payouts to gray machine players are smaller, fewer players can generate more profits.
To make $43,718 in profits, a typical track machine (paying back 92 percent) would have taken in $546,475 last year, or $1,497 a day.
To make $43,718 in profits, a gray machine (paying 70 percent) would needed only $145,727 in bets, or $399 a day.
If gray machines averaged more than $399 in bets a day, profits would be higher. One Southern West Virginia machine owner said each of his machines makes about $100,000 annually.
An industry insider made lower estimates, saying gray machines make between $250 and $300 a week in profit.
If 30,000 machines each made $300 a week, they would take in $468 million a year in profit. If that estimate is correct, each gray video machine would make $15,600 a year in profit.
That estimate, however, is likely to be low.
A business source said a Kanawha County bowling alley made $265,000 last year from nine video poker machines. If the owner split profits 50-50 with the vendor, each machine would have generated $58,889 in profits that year.
The Dobkin case
William Kolibash, former U.S. attorney for the Northern District of West Virginia, is the only person who ever prosecuted owners of gray gambling machines in West Virginia.
In June 1991, federal agents confiscated cash and 172 video poker machines owned by brothers Jack and Ben Dobkin of Wheeling, Art Sauvageot of Weirton and Robert Logan of Chester.
In the Dobkin case, the government confiscated more than $150,000 in cash and destroyed dozens of machines, then worth about $4,000 each.
"There was one woman who was a teller at a local bank. She embezzled $250,000 in one year. Half went into poker machines," Kolibash said.
"Another guy, who worked for a local radio station, lost $50,000 to $60,000. The only people who benefit are the operators."
After his investigation, Kolibash estimated a high-pay location could generate up to $2,000 a week in profits. Using that estimate, the state's gray machines could generate $3.12 billion in profits.
"Certain locations have that kind of volume, but those are the high end," Kolibash said in 1995. "A mom and pop place might take in $200 or $300 a week."
To contact staff writer Paul Nyden, call 348-5164.
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