Dozens of Internet sweepstakes caf√©s are owned and operated by people who are in so much financial hot water that they couldn‚??t land a job at an Ohio casino.
Some have flouted a decades-old state law that requires businesses to register with the secretary of state.
And most caf√© owners snubbed an affidavit requested by the Ohio attorney general‚??s office last year to obtain more information about owners and their businesses; most provided little more than a street address.
The Columbus Dispatch investigated the backgrounds of both the businesses and the names of owners supplied to the attorney general‚??s office last summer on ‚??affidavits of existence‚?Ě and found a trail of red flags.
Ohioans are required to provide more information to register their dogs than to operate a sweepstakes gambling operation.
‚??It‚??s like the Wild, Wild West with these places, and what your investigation shows is consistent with what we have found and have been saying for two years,‚?Ě said Ohio Attorney General Mike DeWine. ‚??The legislature needs to take control of the situation because status quo is unacceptable.‚?Ě
State legislators have wrangled for two years over the issue of Internet caf√©s. Yet, until now, no one has dug this deeply into their backgrounds:
‚?ĘMore than half of the 780 businesses that registered with the attorney general provided no information other than a street address. They did not give the owner‚??s name or the business name or answer any other questions on the affidavit.
‚?ĘNearly 100 of the businesses are not registered with the Ohio secretary of state.
‚?ĘThe incorporation records for an additional 444 could not be found because there wasn‚??t enough information on their affidavits to find their state business records.
The Dispatch was able to locate state business records for 235 of the caf√©s.
The owners themselves are equally mysterious.
Of 221 people who provided names to the attorney general‚??s office, The Dispatch was able to identify only 122 of them through public-records searches, largely because of the lack of information provided to the state.
In a handful of cases, a national public-records search through the aggregator LexisNexis could not find anyone in the U.S. with the names provided.
Of the 122 who were found, 58 percent had financial histories that probably would bar them from working at a casino, according to the state‚??s gambling laws. Those red flags include state, federal or local tax liens and bankruptcies.
Collectively, those owners have 10 federal tax liens, 28 state tax liens and 50 civil judgments for unpaid debts. Their public-records trails also include 25 bankruptcy cases and eight foreclosures.
One owner has had 13 federal, state and local tax liens filed against him since 2000 for collectively owing more than $135,000 in unpaid taxes. He also had 14 civil judgments entered against him, including one for $1.8 million, according to public records.
In addition, a dozen of the owners have criminal backgrounds that could bar them from casino employment. Charges include theft, gambling, drug trafficking and assault.
The industry has gained political footing in Ohio as legislators have spent the past two years debating caf√© regulations.
Two groups have lobbied on the industry‚??s behalf. The Internet Sweepstakes Association of Ohio didn‚??t return several messages left by The Dispatch. And the Internet caf√© Coalition of Ohio has been replaced as a lobbying group by the Ohio Free Enterprise Alliance, which represents business owners, local-government officials and political activists supporting the caf√©s‚?? positions.
When presented with The Dispatch‚??s findings, one of the alliance‚??s board members, North Ridgeville Mayor G. David Gillock, said simply that ‚??those are good reasons as to why we need regulation of these businesses.‚?Ě
Six Internet caf√©s operate in Gillock‚??s city of 30,000 residents about 25 miles southwest of Cleveland. When the state was dragging its feet two years ago on whether to regulate the businesses, North Ridgeville decided to do so on its own.
The city imposes 28 licensing requirements on the businesses, including complete criminal and financial background checks of all owners, a plan of operation and a health-and-safety plan. The businesses pay the city an annual $5,000 registration fee, plus $30 per month for each computer used for gaming. Not counting income taxes, North Ridgeville has collected about $110,000 from the caf√©s in each of the past two years.
The city also has had only two minor incidents in which police investigated a violation of its regulations.
‚??We just don‚??t have a problem with them,‚?Ě Gillock said. ‚??They are providing jobs and filling buildings that were empty. And for our businesses, it‚??s mainly senior citizens who are there for the social experience and don‚??t want to drive 25 miles to Cleveland to play with $20‚?Ě at the casino there.
Gillock acknowledged that the one thing the city can‚??t regulate is the games.
‚??That wouldn‚??t be hard for the state to do, and inspect these places every six months like they do gas pumps,‚?Ě he said.
The lack of information on the people running the caf√©s and the sketchy financial past of some of the owners prompt some legislators to question whether the caf√©s should be considered legitimate businesses.
‚??These caf√©s have been on the peripheral edges of legitimacy, and I think these findings by the [Dispatch] show more proof it‚??s hard to consider this a legitimate industry,‚?Ě said state Rep. Jay Hottinger, a Newark Republican who has long opposed legalized gambling in Ohio.
‚??How can they not all be registered properly and disclose full information relating to how they operate? I don‚??t think it‚??s in the best interests of Ohioans‚?? financial health to have these places operating like this,‚?Ě he said.
Some people connected to the registration are almost begging state legislators for regulation to legitimize the industry.
‚??These reports underscore what we‚??ve been saying for two years ‚?? there needs to be strong and reasonable regulation in Ohio,‚?Ě said Samuel J. Ferruccio Jr., an attorney for Pong Marketing and Promotions Inc., one of the largest software providers to the caf√© industry.
‚??Businesses that are running legal and legitimate sweepstakes must be allowed to continue to create jobs and pay taxes,‚?Ě he said. ‚??But rogue operators who are already breaking the law or have criminal backgrounds should be banned.‚?Ě
Some legislators said it was clear from testimony last year that others in the industry want to be regulated.
‚??This is an industry that is ready for regulation,‚?Ě said state Rep. Michael Stinziano, D-Columbus. ‚??Those that are following the rules will be fine, and those that are not will need to leave Ohio, and I am comfortable with that.‚?Ě
Other legislators said they aren‚??t surprised by the lack of information and sketchy financial past of some caf√© owners, but they believe that Ohio would be best served by strict regulations.
‚??Some of them are honest businessmen, and there are others who aren‚??t,‚?Ě said Sen. Joe Schiavoni, D-Youngtown. ‚??They can call it sweepstakes or whatever they want, but it‚??s gambling. People go there to win money, not to buy phone cards or use the Internet. I would still prefer strict regulation, and that would probably eliminate all the bad actors. If we were going to just ban them, we should have done that a long time ago.‚?Ě
DeWine said he supports the pending bill sponsored by state Rep. Matt Huffman, R-Lima, that would limit prize payouts at the sweepstakes parlors to $10 a day, essentially driving them out of business.
DeWine‚??s office has done what it can to call attention to the problems with the caf√©s over the past two years, but his office lacks the statutory authority to force the businesses to reveal more information. Nor could DeWine‚??s investigators conduct the kind of investigation they normally would because they lack the regulatory authority.
DeWine asked the legislature to require more information from caf√©s when it decided to have them register last summer. But the law required them only to notify DeWine‚??s office about their locations.
‚??It comes down to, how much gambling do we want in our state?‚?Ě DeWine said. ‚??If we want these things on almost every street corner by [regulating] them, that‚??s up to the legislature. But personally, as a citizen, I don‚??t think that is a very good idea.‚?Ě
Internet caf√©s sprang from legislators‚?? 2007 crackdown on slot-machine-like games of skill that limited payouts to $10.
But the departure of the most-popular game, Tic Tac Fruit, made way for new slot-machine-like games that caf√© owners call sweepstakes. There are now dozens of game variations, including some that are nearly identical to video-poker machines found in casinos.
At caf√©s, customers buy Internet time or phone cards that include codes that can lead to winning cash prizes. They play slotlike games on computers to reveal their winnings.
Most caf√©s are in strip-mall storefronts. Some require customers to ring a doorbell to gain entrance. A few are dark, and people are smoking. Others are bright and freshly painted. Many offer playing customers free food, such as chips and hot dogs and soft drinks.
In many cases, a sole employee serves as both the host and cashier.
Most caf√©s generally are one-room establishments filled with cubicles, each with a desktop computer. To get started, customers go to a cashier‚??s window and convert cash into credits, or points, for the games. The computer then records the total credits as the customer plays the slot-machine-like games. Once the customer is finished playing, he or she cashes out remaining credits or leaves the credits in an account for the next visit.
The Dispatch visited five caf√©s in Franklin County; at one location, the computers had no mouse or keyboard, making it nearly impossible to connect to the Internet.
At other locations where the Internet was available, customers had nearly unfettered access, including to pornography sites.
Caf√© owners say that what they‚??re offering is not gambling, but some of their customers have sought help for a gambling addiction.
Since Maryhaven began treating compulsive gamblers 2.5 years ago, nearly two-thirds of the 350 people who have sought help said their game of choice was Internet sweepstakes, said Paul Coleman, president and CEO of the central Ohio substance-abuse program.
‚??When they started out gambling, they found that Internet caf√©s were easy and quick action,‚?Ě Coleman said.
The typical patient, Coleman said, is a middle-aged woman who begins to worry as more of her money is spent at caf√©s.
‚??We hope the legislature acts quickly and decisively so we know what these things are,‚?Ě Coleman said. ‚??They should be regulated.‚?Ě
Although Internet caf√©s are fixtures in many parts of the East, Midwest and South, no state regulates them.
Last year, the American Gaming Association released a white paper that sounded alarms because of the lack of governmental oversight of the estimated $10 billion industry. That size compares with about $62 billion generated by the casino industry, which is heavily regulated.
Caf√© owners and employees are not subject to background checks, games aren‚??t checked for integrity and fairness, and there are no gaming taxes.
State law requires someone to be 21 to gamble, but nothing in the law prevents minors from playing the sweepstakes games. Some of the caf√©s scan a customer‚??s license for record-keeping purposes and, in part, to keep minors from playing the games, but the system is far from foolproof. Nothing forces owners to provide customers information about where to find help for compulsive gambling.
‚??Every state gives careful thought to the mix of gaming it wants. It‚??s a proactive decision. This doesn‚??t follow that model. It grows up like a weed,‚?Ě said Judy Patterson, senior vice president and executive director of the American Gaming Association in Washington, D.C. ‚??It‚??s contrary to public policy. It‚??s gambling.‚?Ě
Ohio probably trails only Florida in the number of Internet caf√©s in the country. Florida recently required owners to seek a state operating permit.
Massachusetts, Maryland, North Carolina and Pennsylvania have banned caf√©s, but some states are finding it difficult to eliminate them because owners change the game just enough to fall outside the law, Patterson said.
The gaming association wants them banned. The group has a vested interest because the caf√©s compete with casinos, racetracks and lotteries. But more important, Patterson said, caf√©s lack all consumer protections that regulated gambling offers.
‚??These people are shady at best,‚?Ě she said. ‚??Worse, we don‚??t even know who they are.‚?Ě