Nevada Gaming Control Board member Terry Johnson, chair Becky Harris and member Shawn Reid at a board meeting in Carson City on Wednesday, Feb. 7, 2016. (David Calvert/The Nevada Independent)

It was the old Vegas — the one Frank Sinatra and the rest of the Rat Pack knew, where mobsters paraded around with showgirls on their arms under humming neon lights — that the Nevada Gaming Control Board was designed to rein in.

It wasn’t clear when the Legislature created the board, and later the Gaming Commission, in the 1950s that gaming regulators would be able to successfully drive the unsavory mob elements, known for skimming profits from their casinos, out of Nevada. But the gaming industry was already a vital portion of the state’s economy, employing thousands of Nevadans, and if the state didn’t step in to bring what was then a county-regulated industry under its thumb, the federal government would. It was up to the state to try.

It was under those auspices that Nevada gaming regulators were given the broad authority to make ethical judgments about the character of the individuals to whom they chose to grant gaming licenses. To this day, state law requires regulators to find each applicant for a gaming license “of good character, honesty and integrity” and bars licensees from engaging in activity that “reflects or tends to reflect discredit or disrepute upon this state or gaming in this state.”

The law gave gaming regulators broad discretion to deny licenses to those with criminal convictions or known to keep company with mob types. But, since the 1950s, the general principle has been also used to, for instance, discipline a casino operator who held birthday parties for Adolf Hitler.

The question in front of the board now is how it, as a gaming regulatory body, ought to investigate and address a set of allegations of sexual misconduct against Las Vegas casino mogul Steve Wynn and detailed in a Wall Street Journal article last month. It’s a question of what the board and the commission believe “good character” means today — in the 21st century and in the midst of the #MeToo movement — and to what extent regulators should entangle themselves in non-gaming related matters.

The wheels are already in motion — and continue to turn despite Wynn’s resignation as chairman and CEO of Wynn Resorts Tuesday night. The board’s new and first-ever female chair, Becky Harris, confirmed Wednesday morning that the board will continue its investigation into the allegations. Wynn remains in a mandatory licensing position with control of about 21 percent of Wynn Resorts and could face action by the board, as could the company as a whole or any other licensed employees.

At stake is Nevada’s reputation as the “gold standard” in gaming, and what that means in the modern era. Will regulators in Massachusetts, who said Wednesday their investigation “aggressively continues,” or Macau act first? Or will Nevada’s regulators take the lead and mete out any punishment they deem appropriate to the man whose casinos — the Mirage, Treasure Island, the Bellagio, Wynn, Encore — dot the skyline of the Strip and who essentially created the new Vegas as it exists today?

The gaming regulatory apparatus

Before there was the “gold standard” of gaming, there was the Wild West.

The broadest contours of gaming regulation came in 1931, when Gov. Fred Balzar signed a law allowing wide-open gaming. Casino owners had to obtain a local license from the county sheriff and any incorporated city or county where required; the only requirement for a casino applicant was that he or she had to be a U.S. citizen.

Gaming was a bustling industry in Nevada by the 1940s, so the Legislature gave the Tax Commission the authority to license casinos for the purposes of taxation in 1945. It wasn’t until a few years later, though, that the commission was allowed to begin regulating the industry and denying applications for licenses.

The biggest change came in 1955, when Gov. Charles Russell signed the law creating the three-member Nevada Gaming Control Board as a division of the Tax Commission, giving the board and the commission broad power to investigate suitability for a gaming license. Four years later, a newly elected Gov. Grant Sawyer removed the responsibility of gaming regulation from the Tax Commission and moved it over to the Nevada Gaming Commission, a five-member, governor-appointed board, as it is today.

It was Sawyer’s famous “hang tough” policy that guided the state over the next few decades in removing and then keeping out mobsters from Nevada’s casinos. Under the bifurcated gaming regulatory system, the Gaming Control Board acts essentially as the prosecutor — investigating and putting together the best case they can — and the Gaming Commission acts as judge and jury.

“I think it has been really a very sound model and I think we can be proud of it,” said former U.S. Sen. and Gov. Richard Bryan. “Not that we’ll agree with every decision the board and the commission makes, but the gaming regulatory apparatus has been scandal free. It’s a remarkable testament to the people who served on the board.”

Mobster turned casino mogul Moe Dalitz, third from the left, in front of the Stardust Hotel. (Callanmerrick /Courtesy under Creative Commons from WikiMedia commons)

Some old timers, such as bootlegger and racketeer turned businessman Moe Dalitz who bailed out the Desert Inn after the original builder ran out of money and finished the Stardust when its owner died mid-construction, managed to stay in the industry despite the new regulation. But regulators were much tougher on the up-and-comers, including, most notably, Frank ”Lefty” Rosenthal.

The Gaming Commission famously denied Rosenthal, a mob-backed bookmaker from Chicago who was convicted of fixing a college basketball game and was childhood friends with mobster Anthony Spilotro, a licensee in 1976. The commission had identified Rosenthal was running the Stardust without a license and forced him to comply with the licensing process.

But Rosenthal and his lawyer, Oscar Goodman, took the license denial to court, arguing that the state’s gaming laws were unconstitutional both as written and as applied. Although a District Court judge initially sided with Rosenthal, the Nevada Supreme Court eventually upheld the law.

“It really was the seminal case in gaming regulation. It verified the whole procedure that the state had been following for 15 years,” said Bud Hicks, the former chief deputy attorney general who represented both the board and the commission in the lawsuit. “It set it in stone that the state can do this, and they based that on the fact — and this is important — that a gaming license is a privilege. The state doesn’t have to grant anyone a gaming license. They can have their own standards and requirements for getting a gaming license and keeping a gaming license.”

By the mid-1980s, the board and the commission had essentially achieved their goal of rooting out the mob out from the industry.

Enter the Engelstad case in 1989.

With the mob, regulators had serious concerns about the way casinos were run, including but not limited to skimming profits off the top of casinos, a clear conflict with the state’s overall goals in protecting a stable, trustworthy gaming industry. But what did the board think about one of the state’s licensees throwing birthday parties for Adolf Hitler?

The Imperial Palace as seen on Jan. 6, 2006. (Asten/Courtesy under Creative Commons https://flic.kr/p/8xHJ5)

Turns out, they didn’t like it. Ralph Engelstad, the multi-millionaire owner of the Imperial Palace (now the Linq), agreed to pay $1.5 million in fines and damages, after the Gaming Control Board determined that Engelstad had “damaged Nevada’s image by glorifying Hitler and the Third Reich at his Imperial Palace Hotel and Casino on the glittery Las Vegas Strip,” in the words of the New York Times at the time.

The statutes charging regulators with determining that applicants for a gaming license are “of good character, honesty and integrity” were created with the mob in mind. But in the intervening years, the board and commission have denied licenses to people who have filed fraudulent tax returns and lied under oath. The commission has even taken a hard-line on the marijuana industry which, while legal in Nevada, is illegal under federal law.

“The ramifications or the meaning of ‘good character’ evolves over time and presents itself in different ways to the Gaming Commission, and that gets us to where we are today and how they’re going to interpret current events, and not only that but on a go-forward basis,” Hicks said. “What is their charge going to be?”

A few months after the Engelstad case, Wynn opened the Strip’s first-ever “megaresort,” the Mirage. It was a harbinger of the new era — a glitzy and clean Vegas.

The Wynn allegations

So what is the Gaming Control Board to do with the newly deposed casino mogul accused of sexual misconduct and directly responsible for the new Vegas?

The Wall Street Journal story, published in late January, recounts the story of a Wynn Resorts manicurist who told her colleagues that Wynn forced her to have sex and who was later paid a $7.5 million settlement by Wynn. Dozens more described behavior to the Journal that, the article says, “would amount to a decades-long pattern of sexual misconduct by Mr. Wynn,” including pressuring employees to perform sex acts.

Wynn has said in a statement that the idea that he ever assaulted any woman is “preposterous.”

“We find ourselves in a world where people can make allegations, regardless of the truth, and a person is left with the choice of weathering insulting publicity or engaging in multi-year lawsuits. It is deplorable for anyone to find themselves in this situation,” he continued in the statement.

Wynn didn’t admit any misconduct in the statement announcing his resignation, only saying that he cannot continue to be effective in his current roles with what he described as an “avalanche of negative publicity.”

“As I have reflected upon the environment this has created — one in which a rush to judgment takes precedence over everything else, including the facts — I have reached the conclusion I cannot continue to be effective in my current roles,” Wynn said in the statement.

Despite Wynn’s resignation, questions remain about whether anyone in the company knew of the settlement and alleged sexual misconduct and, if they did, whether it was handled through the appropriate internal channels. Wynn could also individually face penalties from the board as a gaming license holder.

Nevada Gaming Control Board Chairwoman Becky Harris presides over the board’s meeting in Carson City on Feb. 7, 2016. (David Calvert/The Nevada Independent)

Gaming Control Board Chair Becky Harris confirmed Wednesday that the investigation will continue, though the board has remained mum on the details of what that probe will entail. However, multiple sources familiar with the gaming regulatory process mapped out several possible courses of inquiry the board could follow when pursuing its investigation, which they estimated could last anywhere from three to six months.

Although Nevada gaming regulators are not ordinarily in the business of investigating allegations of sexual misconduct, state gaming regulations give the board and the commission broad authority to discipline any licenses for engaging in any activity that harms “the public health, safety, morals, good order and general welfare of the people of the State of Nevada, or that would reflect or tend to reflect discredit upon the State of Nevada or the gaming industry.”

Regulations lay out 14 specific “unsuitable methods of operation” including failing “to conduct gaming operations in accordance with proper standards of custom, decorum and decency, or permit any type of conduct in the gaming establishment which reflects or tends to reflect on the repute of the State of Nevada and act as a detriment to the gaming industry.”

First, and perhaps most broadly, the board could make a case that the mere publication of the Journal article and subsequent news stories in other outlets have already brought disrepute on the state and the industry. For example: Wynn was removed as the Republican National Committee’s finance chair, the University of Pennsylvania removed Wynn’s name from a campus plaza and a scholarship, rescinded his honorary degree and the University of Iowa plans to remove Wynn’s name from its vision institute and, to top it off, he resigned from the company that bears his name.

To not act in some way risks tarnishing the state’s reputation as the “gold standard” of gaming, the sources said, and could raise serious questions about Wynn’s influence in the industry. To wait to act until Wynn Resorts’ Board of Directors finishes taking whatever action it deems necessary or the Massachusetts or Macau gaming regulators complete their reviews could also hurt Nevada’s reputation.

However, the Massachusetts Gaming Commission will be able to explore the issue of the $7.5 million settlement in a different way than Nevada regulators, who granted Wynn his license decades ago, can. Massachusetts regulators have said that the existence of the 2005 settlement was not disclosed to the state’s investigators when they conducted a background check on Wynn Resorts and its top officers in 2013 before building began on the Wynn Boston Harbor project, according to the Boston Globe.

Still, the sources said board investigators will likely take a close look at the $7.5 million settlement agreement — which Bloomberg reported on Friday involves a paternity claim — as part of their investigation. Investigators could look at whether the company’s board of directors was made aware of the settlement agreement, if the company’s compliance committee acted as it should have and whether any company policies, state law or federal law were violated.

It would be worse, for instance, if investigators find out that information was quarantined within the upper echelons of the company than if people up and down the chain in the company were made aware of the problems and handled them internally, one source said. For instance, was the settlement brought up during one of Wynn’s compliance committee meetings? If the investigators’ review of the company’s internal records show it wasn’t, then the question becomes why not? Did someone decide not to put it on the agenda, or does the company’s compliance committee not require a disclosure of ongoing litigation and other legal matters?

Investigators will also likely attempt to locate the individuals the Journal spoke to — both named and unnamed in the article — as well as contact all the people in positions of authority at Wynn who might have had knowledge about the settlement and any other allegations. The board already has fairly significant confidentiality protections that would protect those who come forward to the board with information about a licensee, including any victims with allegations about Wynn.

Investigators could also contact Wynn’s ex-wife, Elaine Wynn, and her lawyers, who referenced the $7.5 million settlement broadly in a lawsuit seeking to lift restrictions on the sale of her stock in Wynn Resorts. Elaine Wynn declined to comment through a spokesman on the news of her ex-husband’s resignation Tuesday evening.

Wynn Resort as seen on the Las Vegas Strip on Monday, Jan. 29, 2018. Daniel Clark/The Nevada Independent

The investigation process would likely conclude with a detailed, confidential interview with Wynn, which would give him an opportunity to explain his side of the story to the board. Anyone is allowed under their constitutional rights to refuse to answer the board’s questions; however, unwillingness to cooperate with the Gaming Control Board is grounds for a discipline.

If, after its investigation, the board decides that some wrongdoing has occurred, the three members of the board can sit as a body in private to discuss what punishment they believe is reasonable, including fines, suspension of license or total revocation. The board would likely try to reach a settlement with Wynn or the company.

Wynn’s resignation likely gives the company a better bargaining position when it comes to making a settlement, sources say, because it removes a possible remedy the board could have sought. However, the board could still seek to impose a fine on Wynn Resorts, mandate certain internal changes within the company and its board of directors or take other action against any other individual licensees in the company, including its president and newly-appointed CEO Matt Maddox, who it deems to have acted inappropriately.

The board could also require Wynn as an individual licensee to give up his voting power in the company — turning it over to either someone else in the company or mandating that his shares be voted in proportion to how the other shareholders vote — but allow him to keep his economic stake in it. It could also consider revoking Wynn’s license entirely, forcing him to sell off his 12 percent stake in the company entirely. (Wynn also controls Elaine Wynn’s 9 percent stake in the company.)

The five-member Nevada Gaming Commission, which can only meet publicly, would then be responsible for giving a thumbs up or down on whatever punishment the board recommends, a politically tight spot for a politically connected board. The commission is currently chaired by Dr. Tony Alamo, former member of the Nevada State Athletic Commission; others on the board include John Moran Jr., a lawyer and the son of the late Clark County Sheriff John Moran Sr., Randolph Townsend, a former state senator, retired U.S. District Court Judge Philip Pro and Debbie Fuetsch, a senior vice president for Wells Fargo.

Asked about Wynn stepping down, Alamo said in a brief interview Wednesday morning only that the board is investigating, that they’re “methodical” but that “nothing happens overnight.”

“At the end of the day what is our responsibility? To make sure the industry, the people, the properties, the licensees follow the state statutes and regulations,” Alamo said. “That’s what we do.”

The Gaming Control Board chair could work with the Alamo and any other commission members ahead of time to see if they have any major concerns with the board’s recommendation and whether there is more information the commission would like to have before making its final decision. Settling the matter ahead of time limits any acrimonious testimony that could come up in a public hearing, though it also limits the public’s input and oversight of the process.

If the board were to recommend a fine to the commission, commissioners could have some leeway to hem and haw about whether they wish the fine were more or less and then vote to approve it. If the board recommended a license revocation, commissioners would be in the hot seat, essentially responsible for making the decision whether to take away the license of the man who made the modern Las Vegas or any other licensed individuals in the company.

If Wynn or the company doesn’t agree with the punishment recommended by the board, they can argue for a full hearing in front of the commission where Wynn’s lawyers would present their case and the Nevada attorney general’s office would present the board’s case. However, having a full hearing over such an issue would be rare, sources said.

Failing to reach a settlement can be somewhat of a risk for the state, having to battle the issue out publicly against high-powered corporate lawyers with comparatively unlimited resources. At the same time, fighting too hard can be a risk for licensees, who have to decide how much they want to draw the ire of regulators who will continue to oversee them for decades to come.

The investigation is also coming at a time of change for the board. Its longtime chairman, A.G. Burnett, stepped down in December, and Harris, the board’s first-ever female chair, took office just four days before the Journal story broke.

How narrowly or broadly the board responds to the Wynn allegations could have far-reaching implications for how both the gaming industry addresses sexual harassment and assault on a long-term basis, as well as for other industries too. Some, like UNLV employment law professor Ann McGinley, think that’s a good thing.

McGinley believes that Nevada, despite its “what happens here stays here” motto, could be a model for the rest of the country as far as what is appropriate sexual conduct and what isn’t. And she believes the Gaming Control Board could be the place to start defining what kind of behavior is and isn’t appropriate in casinos.

“The reputation of the gaming industry in the state of Nevada and in the industry as a whole will only work as long as the reputation is protected,” McGinley said.

Disclosure: Wynn Resorts and the Elaine P. Wynn and Family Foundation have donated to The Nevada Independent. You can see a full list of donors here.