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From The Las Vegas Advisor question of the day:
Q:
In light of the recent IRS investigations of PURE-managed nightclubs and the huge amounts of income they generate, doormen making hundreds of thousands of dollars is probably just the tip of the money iceberg.
Why would the money-hungry casinos let outside entities such as PURE have access to any of the huge profits these clubs generate? I’m sure the hotels are more than capable of running nightclubs. Do you think they didn’t know how much money was involved, and now that they do, they’ll take back control? Or is a few hundred million dollars not enough to interest the casinos?
A:
These are questions we’ve been thinking, talking, and wondering about since the IRS raided the offices of PURE Management Group (PMG) in mid-February. It’s a big story, an important, complex, and disturbing story, one that’s influencing our view of the evolving entertainment scene in Las Vegas.
Here are the facts as we know them.
In what some local observers are calling a surprise move, while others are saying they could see it coming from 100 miles away, the Internal Revenue Service raided the offices of Pure Management Group on February 20, 2008. Federal agents showed up at company headquarters, located at 2121 Industrial Blvd., along with the LAX (Luxor/MGM Mirage) and PURE (Caesars Palace/Harrah’s) nightclubs, and even the private residence of one of the managing partners of PURE. PMG operates more than 10 restaurants and clubs at casinos on the Strip; PURE itself can accommodate up to 1,500 people and claims to be the number-one revenue-producing nightclub in the U.S. PMG’s revenues have skyrocketed in the past five years, from $25 million in 2003 to more than $120 million in 2007.
The raid on PURE is believed to be the first IRS invasion of a casino since the 1980s, when the feds were investigating mob involvement in Las Vegas.
According to the seven-page search warrant presented at PURE HQ and obtained by the Las Vegas Sun, IRS Criminal Investigation Department (CID) agents "were seeking evidence of a currency distribution scheme, a coat check scheme, and a fraudulent deduction scheme -- all of which may have stretched up the company’s management chain." The warrant cited "three possible criminal violations -- tax evasion, filing false individual tax returns, and conspiracy to defraud the government of taxes."
At PURE, PMG headquarters, and the PMG principal’s home, CID investigators seized upwards of 20 boxes of bookkeeping, financial, and personnel records, daily planners and personal organizers, tip envelopes, and other evidence, including computers.
Investigators also interviewed employees in tip positions at PURE and LAX; the Sun’s sources said that "as many as a dozen PURE employees were read their criminal rights before being interviewed by agents."
One Sun source explained that CID investigators pursue cases that have "a pattern of criminal behavior at the top of a company, rather than for the purpose of auditing individual taxpayers." For a business to be raided, the IRS has to suspect that certain documentation might disappear if agents don’t seize it in a surprise raid.
The IRS carted away so many records that agents will probably spend months deciphering the business practices at PMG before they decide whether or not to file criminal charges.
Which brings us to the business practices in question. And here’s where the story gets interesting for our purposes, and potentially ugly.
According to published pieces, online trip reports, forum posts, and personal experiences, it seems that the nightclub scene is where the Las Vegas cash culture reaches its unrestrained extreme.
One example. On a busy Saturday night, the lines outside the most popular clubs can stretch for a quarter-mile. In a move called "line fishing" or "line sliding," one of the doormen trolls the back of the line for a sucker who’s willing to pay extra -- $100, $200, $500 -- to move to the front of the line. What the doorman doesn’t say is that his $500 covers only a line pass. The customer still has to slip another $50-$100 to the other doorman just to get inside the club.
In a Sun story about an older couple who took their 21-year-old daughter and a group of friends to LAX, the couple had made reservations, which got the group to the front of the line, but the doorman there told them that $100 would "get his attention." Once paid, the doorman pointed to a podium inside the door, where a hostess took another $50 to confirm the reservation, then handed the group off to the maitre d’, who took another $100 to "lead the group a few feet farther into the club, where they were told to wait." Then an usher took another $100 to escort them to their two tables in a corner of LAX -- a mere $350 to get seated.
The couple was told by the reservationist that the cover charge would be a two-bottle minimum for $375 per, but when the bill for the bottles of vodka and gin arrived, they cost $500 apiece. Then there was a $50 tip to the waitress. Then there was a $100 tip to the group’s "burly security guy," who took the money and never returned. Then the manager showed up, claiming that because the demand for tables was so fierce, they’d have to pay another $1,000 for two more bottles of booze. When they refused, the manager sat another group at one of the couple’s tables.
Then there was the total of $120 in tips to the restroom attendants so the girls didn’t have to wait in the long lines.
In another story, when a guy attending a wedding party at rumjungle at Mandalay Bay left the club to go to the bathroom, thereby avoiding the long lines inside, the doormen demanded money for reentry. When he refused, they broke his leg.
According to the Sun, much of the cash collected at the door, in amounts of "tens of thousands of dollars," is split with other club employees and managers. Norm Clarke, the gossip columnist for the Las Vegas Review-Journal, reported that doormen at the most popular clubs can earn $400,000-$500,000 a year. How far up the chain of command the cash split (known in the trade as "breaking the bank") climbs, is one of the things CID investigators will attempt to determine in the kickback part of their investigation. We’ve heard rumors that the club managers have been seen handing over slugs of cash to casino managers.
Which brings us to the part of your question about why the casinos simply don’t run the clubs themselves, without four-walling them to the club companies.
Some casinos do run their own clubs. Steve Wynn, for example, typically gets these things right; Wynn Las Vegas owns its two clubs, Blush and Tryst, and maintains strict control over their operations.
Station Casinos, as well, bought out its two most popular nightclubs, Lobby at Green Valley Ranch and Cherry at Red Rock. Again, the casino company’s food and beverage department sets policy and accounts for as much incoming money as possible.
At LAX, and the four other clubs and one restaurant Pure operates at MGM Mirage, the two companies have revenue-sharing agreements, which would put the casino corporation in a position to know what needs to be known about the entertainment company’s business.
However, in the casinos where the clubs are four-walled (they rent the space and run their own operations from top to bottom), and even in those with revenue-sharing agreements, insiders observe that in the urgency to create and open these nightclubs, the casinos seem not to have taken into account the huge potential for and probability of abuse, such as the shakedown of customers by any number of club employees, the vast amounts of cash that change hands, and the kickbacks to managers in and out of the clubs.
It’s perhaps safe to assume that the IRS invasion will rectify the way deals are structured and cash is accounted for in the future.
Also, presumably, now that the proverbial you-know-what has hit the fan, with one "well-placed insider" claiming that "people are going to prison over this," other clubs that blatantly conduct these practices might be eager to at least try to clean themselves up.
LasVegasMagazine.com reported, for example, that when "one major nightclub operator" installed video cameras outside its front doors to keep an eye on the doormen and bouncers, some workers immediately quit.
We’ll have to wait and see how far-reaching and long-lasting this latest crackdown on the nightclubs extends. The last time the clubs made negative headlines was in February 2006, when the state Gaming Control Board warned the casinos they’d be held responsible for any and all trouble at the nightclubs arising from the volatile mix of loud music, alcohol and drugs, underdressed and inebriated partiers, dim lighting, prostitution, the admittance of minors, and especially the violence among customers, perpetuated by bouncers and security guards.
It’s a typical balancing act for the casinos, of course. On the one hand, they have to maintain at least an illusion that the whole nightlife scene is safe and friendly for the club goers and that trouble won’t spill over and affect the legions of non-clubbing tourists and visitors who frequent Las Vegas. This isn’t dissimilar from the casinos’ traditional tightrope walk when gambling itself was a pariah practice, or when prostitution was more of a factor inside the casinos.
On the other hand, of course, they certainly don’t want to kill the goose that lays the golden eggs. These nightclubs are huge cash cows (to mix a metaphor) for the joints. They not only pay exorbitant amounts of rent; some also share revenues with the host casinos. In addition, they attract the kind of customer casinos covet: young, pretty, trendy spendthrifts who party like there's no tomorrow and money grows on trees.
From the consumer's point of view, the basic strategy for getting into these clubs is an answer for another question, although we do have one solution we can recommend here, namely the use of a nightclub "facilitator," -- a middle-man agency that will arrange a nightclub package for you and actually escort you in. We've looked at a few of these and chose Red Carpet VIP as our preferred vendor of these services. Anthony Curtis spent a night out on the town with them to see how it all worked and recommends the service they provide (as covered in our recent "Spotlight on" profile) both for novices and seasoned clubbers.
Meanwhile, we certainly don't have to remind anyone that Las Vegas offers plenty of nighttime entertainment options and pleasures for people whose money doesn't grow on trees.
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