Nevada is considered the gold standard when it comes to gaming regulation, but you wouldn’t know it from its humble beginnings that allowed the mob two own casinos.
Gregory Gemignani, a gaming law attorney with Dickinson Wright and a professor at the International Center for Gaming Regulation at UNLV, outlined that history to gaming law attorneys at a State Bar of Nevada conference.
The state was founded by miners in rough and lawless camps and an era that Mark Twain described as gamblers being held in high esteem. Gaming wasn’t legalized in Nevada until 1869, five years after statehood, despite a veto from Gov. Henry Goode Blasdel.
“It was legalized without much if any regulation,” Gemignani said. “Essentially, sheriffs regulated the activity, until the temperance movement came along. That wasn’t just about alcohol, but also gambling. The Nevada Legislature was influenced by that movement and in 1909, gambling became illegal again until 1931 during the Great Depression.
The Nevada Legislature in 1931 legalized gambling to fund local governments; the counties were the regulatory authorities, led by sheriffs. The only qualification to be licensed was to be an American citizen and pay a gambling license to the county.
The first move was in Clark County; Las Vegas decided it needed only six casino operators and rejected applications for others. It was litigated to the Nevada Supreme Court, which agreed that counties could regulate the number of casinos and that cities could do the same.
From 1935 to 1945, everything was local, Gemignani said. The problem was many sheriffs weren’t collecting gambling-license taxes from casinos, so it didn’t help fund local government as it was designed.
In 1945, the state regulated gambling when it imposed a 1% tax on gross gambling revenue and put the Tax Commission in charge of regulating gambling.
“It didn’t have a lot of authority to regulate,” Gemignani said. “It was all about collecting taxes.”
Nevada at the time attracted unsavory characters and mob connections; Bugsy Siegel, for example, completed the Flamingo. Gambling was still considered a “pariah activity” and banks wouldn’t loan money for casino construction. That meant developers sought alternative sources of funds, which led to the Mob.
“Things came to a head after the Flamingo, when and Siegel found dead in L.A.,” Gemignani said. “Nobody knows exactly why (he was murdered), but there was a lot of speculation it was because the people backing the Flamingo weren’t happy with the extensive cost overruns of the project.”
While gambling was emerging in Nevada, other states were cracking down on it, Gemignani said. When California did, those operators moved to Nevada to do so legally.
“A lot of the people who came here were of questionable character. The Tahoe Village Casino had one of the owners killed on the casino floor, making national news. It wasn’t good for the image of Nevada and gambling. The Tax Commission decided it was time to start reining some of this in. Tax Commissioner William Moore ordered 60 operators to show up at a meeting in northern Nevada to talk about some of the issues, such as operators not paying their proper taxes and maybe not having an honest game.”
Only 25 operators showed up and it showed the weakness of the Tax Commission as a regulating authority, Gemignani said.
In 1947, Nevada Attorney General Alan Bible issued an opinion that Tax Commission had more authority than it believed, including the authority to look into the character of applicants and deny licenses.
“This was a big surprise to the governor and the chairman of the Tax Commission,” Gemignani said. “The Tax Commission used that power in 1947 to deny licenses to five people (out of hundreds of applications) and part of the reason (for so few was) the Commission only had one inspector and one auditor for auditing and collecting of taxes.”
That brought national attention to the state, ultimately highlighted in the Kefauver Committee Hearings, a Senate investigation into organized crime that brought the Mafia into public view on television in 1950 and 1951. Some of the hearings were held in Las Vegas and going after gambling was part of the focus.
“It really brought Nevada gambling and organized crime to mainstream America,” Gemignani said. “It was must-see TV in the 1950s.”
In that environment, Congress proposed a 10% tax on all money wagered; the idea was the federal government wasn’t comfortable outlawing gambling, which fell under state’s rights. Instead, they thought they could tax it out of existence.
“We were fortunate. We had Sen. Pat McCarran, who was maybe not powerful enough to kill the bill, but was powerful enough to get exceptions for table games, slots, and pari-mutuel racing,” Gemignani said. “Back then, gambling was only in Nevada and horse racing in certain states. There were no state lotteries, casinos, or tribal casinos. The only thing that didn’t get exempted was sports wagering and it still applies today, but not at that rate.”
In 1955, the Tax Commission created the Gaming Control Board to act as its arm for regulating gambling. That same year, a number of bankruptcies in the casino industry prompted the Commission to look into finances of applicants. Also at the time, more federal hearings in the 1950s continued to paint Nevada in a bad light, Gemignani said.
When Grant Sawyer ran for Nevada governor in 1958, he promised to clean up gambling. After he won, he championed the Gaming Control Act, which created a new agency, the Nevada Gaming Commission. It also took the Gaming Control Board out from under the Tax Commission and made it an independent agency with full funding and staffing, including former FBI agents and others from law enforcement.
“It started to work, but you still had the perception that Nevada was a problem back,” Gemignani said. “In 1960, John F. Kennedy is elected president and the day after his inauguration his brother Robert F. Kennedy becomes attorney general; he had his thing about organized crime and gambling. He hired 50 agents to raid and shut down most if not all the gambling establishments in Nevada.”
Sawyer heard about that plan and went to Washington, D.C., to talk to the attorney general, who wasn’t receptive. Sawyer supported President Kennedy in his nomination and Kennedy gave him the time to get things right under the new regulatory system.
“After that, the rest is kind of history,” Gemignani said. “This model has been tested and used by other jurisdictions in whole or in part.”
When Nevada passed the Corporate Gaming Act in 1967, it fundamentally changed the gaming industry by opening the door to corporate investment. Previously, every stockholder had to undergo a background check, making it infeasible for corporate ownership. Corporate ownership ultimately led to the marginalization of Mob casino ownership.