Marco Valerio conducted a phone interview with Gatto only hours after the bill was filed.
Their conversation revealed that Gatto had a bill ready to introduce last year, covers the Assemblyman’s assessment of poker’s chances in 2015 and why Gatto thinks his approach to the so-called bad actor issue is less aggressive than some might think.
Marco Valerio: When did you begin to study online poker? What work had you done on it ahead of introducing this bill?
Mike Gatto: I’ve been interested in it since approximately 2001. That was the second year of law school for me – I took a class that had some of these topics in it. I read some papers by some of the authorities in Internet gaming law – I. Nelson Rose, people like that. It’s something I’ve followed for about 14 years now.
In terms of my career as a legislator, I actually wrote an online poker bill during the last legislative session.
I had it ready to go – and I was asked by the chairman of the GO committee to defer to the gentleman who authored last year’s version.
So I deferred. I willfully did not move forward with my bill last session, but I spent this year researching a framework that would make sense, and I came up with some ideas that we thought made really good sense, so I decided to go ahead and introduce a bill this year.
Valerio: Interesting, I didn’t know that about your previous efforts. You are referring to Assemblyman Jones-Sawyer whom you deferred to?
Valerio: Understood. So what did you make of previous years’ efforts to legislate and regulate online poker in California?
Gatto: I know there have been proposals, and I think the first bill was introduced in 2008. There have been anywhere from two to six proposals every year since 2008. Obviously, the fact that none of them have been signed into law – not one of them has even passed one house of the legislature – that weighed into my decision to get involved.
I think any successful proposal – whether it’s mine or anyone else’s – has to address two things.
Number one, it has to address the external challenges. These are challenges from groups that are not involved in gaming: law enforcement, parents groups, church groups, people who traditionally point out certain concerns with online gambling – that it might allow minors to gamble, that it could serve as a front for money laundering. Religious groups usually have a problem with gambling in general. So a good proposal addresses the external concerns.
It will also have to address the internal concerns, and there are many different players who wish to participate in online poker. They are not in a state of agreement right now, and I think you have to address both of those sets of concerns to be successful. I think addressing the external concerns will create momentum, which in turn will make things feel more real for the internal players, and that ought to make them come to the table with more seriousness about arriving at some sort of agreement.
Valerio: I hope that happens. Having followed this issue very closely, I remember that during the last legislative session, one kept hearing that despite all the momentum, it just didn’t seem to be a good year for passage.
A lot of people said, eh, it’s a tough year. It’s an election year and all that. Bottom line, it seemed like the stars weren’t aligned last year. What can you tell us about the dynamics of this year’s session heading into it? Do you think the environment is in any way more promising or accommodating?
Gatto: I do. I think the passage of time has made some things a little clearer. We’ve seen what other states have done, we’ve seen what other states have tried, we’ve seen what online poker has shown to be in those states, so we can hopefully learn from what they’ve done right and also their mistakes.
And also, I think people feel this moving pressure – the possibility that the federal government could step in and change the dynamic for states. This would be a lost opportunity to do something unique for California. And you’re right. It’s not an election year, so we’ll see what happens.
Valerio: What about the legislative ensemble, the cast of characters? Some key supporters of online poker from previous legislatures are no longer serving, right? Lou Correa, for example?
Gatto: Yes. The most obvious change is that the chairmen of key committees are out of their respective houses. So last year, Isadore Hall was Chair of Governmental Organization in the Assembly. Now he is the Senate. Hall replaces another online poker proponent, Senator Rod Wright, who left the Senate due to a conviction.
Lou Correa is termed out of office. We do have a legislature that is very new. Something like eighty percent of the California State Assembly has been in office for less than two years. That is fascinating. It’s a very, very new group of people, who now have the opportunity now to put their stamp on things.
We have a new Chairman of GO in the Assembly and that’s Adam Gray. He’s a terrific guy, very smart, very motivated. I think he’s going to do a terrific job.
So yeah, in many ways this is a new legislature. I am the old fogie in the Assembly, but I do think that with a new cast of characters there’s a new opportunity, and there might be a new will to get this done. If that’s the case, then 2015 might end up being the year.
Valerio: How do you plan to move forward with this? I understand the bill has been pre-filed – what next? What would you like to see happen as this bill continues to be reviewed?
Gatto: I’ll tell you a little bit about the legislative process. All bills have to be introduced between December and February. It’s really just a three month window to introduce a bill. Every single bill that goes through the process – certainly ones as complex as this – is usually referred to two or three committees in the first house and then two or three committees in the second house.
They’re amended every step of the way. We had a very complex bill last year that had to do with the entertainment industry, a lot of money at stake, lots of different players. It was amended 79 times before it finally got past both houses and was signed into law. I mean, 79 times. You think about that.
I am under no delusions, nor should anybody else who doesn’t follow the legislative process be under any delusions, that my bill is a final product. This is an opening statement, it’s a discussion point, it’s putting some language across the desk – but procedurally, this will go through a very, very thorough public hearing process.
Anybody at all can participate in that public hearing process. They can show up in person. They can submit testimony. They can write to members of the various committees. And they can propose ways to make the bill better. That is what the legislative process is about.
So this bill will change quite a bit. What I can tell you that makes this bill different and, I think, special, is that we have borrowed from the best practices from the worlds of banking, gaming, even the California Lottery, to make this bill something that I think takes care of all external concerns but then really expands the pie so that hopefully some of the more internal concerns can be taken care of as well. For example, we require that the initial sign-up would have to be in person.
You would have to show up to a licensed validator – that’s what we’re calling it – and you would have to make your initial deposit in person, prove that you are who you say you are.
Now this achieves a couple of things.
First of all, if you’re showing up to a casino floor, you’re going to be on camera. If you’re showing up with suitcases full of 500 Euro notes and a foreign passport, maybe you’re a money launderer. But the point here is, everybody would have to show up with two forms of identification, in person. Security teams would be trained to recognize signs of money laundering and very carefully screen minors from getting in the system.
But once you are validated, you could then make any other deposits online and you’d be in the system.
This also guarantees foot traffic to existing California establishments. Brick-and-mortar establishments would be guaranteed a visit from somebody who is there to play poker. If you think about it, that is so valuable.
This would be somebody who we know wants to play poker, and that local establishment could do lots of things. They could sign them up for their rewards programs, they might even get to play a game that day, and they would take a percentage of the transaction. They would be, for all intents and purposes, a branch, just like a bank branch.
On the backend, if you made a withdrawal above a certain amount – we haven’t decided the amount yet – or if you wanted to make a series of withdrawals in a very short period, you would also have to show up in person to one of these licensed establishments.
When you can do that, you can diminish cheating. If somebody deposits $50,000 one day, wins $500,000 in the next 10 or 20 minutes and then tries to show up and withdraw, that would probably trigger something within our algorithms to indicate that person had done something strange.
That helps weed out cheating. People can trust the game more if they know that cheaters would be weeded out, and I think cheaters are less likely to show up in person and claim their winnings.
This is designed to be a good hybrid system that borrows from existing business practices. If you want to open a bank account, you have to show up in person. You could then do all your banking online, but you do have to show up in person for that initial visit, and we think this is a sensible way to do this for online gaming.
If you look at the hoops players have had to jump through in recent years, wiring money to Costa Rica, Ireland… If players want to play, they’re going to show up in person, they’ll open their account and fund it. This should also be a marketing bonanza for existing establishments. You have reward clubs and they have an existing customer base.
Finally you’re going to have a situation where the licensees, the main operators, would pay existing operators for their customer bases and pay their voucher to sign up their customers through the system.
There might be small establishments that cannot participate, and before they thought that the only way that they could participate in online poker was to form some sort of coalition and scrap together all their money and try to invest in a license.
But that’s proven to be probably not the way that things are going to go down. So I think this would allow those establishments to participate.
The way I put to another reporter is, during the Gold Rush in California a lot of people got wealthy selling shovels. They weren’t finding gold, they were selling shovels to the people who were finding gold. I think that’s an apt analogy. I think there’s a lot of different people who could participate in many ways and carve out a niche and make a nice living.
Valerio: How much can you tell us about the dialog you’ve had with the stakeholders, how many different kinds of stakeholders have you heard from? What kind of feedback have you received, both leading up to the introduction, and perhaps even since the introduction of this bill?
Gatto: At the start of last year’s session, I embarked on a tour of all the various gaming establishments in California, the local communities, the people who process the online transactions, everyone whom I thought should be consulted for my bill. I went up and down the state. I’ve had hours and hours of meetings.
Then, all of a sudden, I was asked that I do not move forward with my bill, and I was willing to defer it for one year. I put off the meetings.
This year, we basically started the same process where I’m talking to people, everybody from investors to members of the community and everyone in between: operators, tribes, card rooms – getting their opinions on this.
We have not finished that process. We have probably talked with forty percent of the interested parties. There’s a whole lot more to go and we’re going to be taking care of that in the days and months ahead. The feedback so far has been good.
But I will say, to manage expectations because I think they should be managed, there are vast chasms between a lot of different stakeholders that need to be bridged to make this a truly consensus bill. There’s still a lot of work to do and a lot of meetings to have.
Valerio: I understand. I feel like I should ask you about the controversial issue of the bad actor clause. I’ve noticed that the bad actor language, or the covered assets language, in your bill is rather comprehensive. I would use the word aggressive, or tough. It’s pretty severe. How do you feel about that. Is this a part of the bill that you paid particular attention to when it came to the wording?
Gatto: Well, the irony is that I actually got a call just over an hour ago from an attorney who has handled these issues for 30 years, and he said he thought this was not that aggressive, that it was a step towards liberalizing the language compared to bill proposals in the past.
So I don’t really know if you guys are interpreting different things. I guess it remains to be seen how people react to that.
Valerio: I suppose.
Gatto: It is something we paid attention to because there is a very strongly held opinion that we want to have a level playing field. We want to make sure that groups who are authorized to participate in online poker all have the same chance, particularly those who were very careful to do everything right and who were very careful to adhere to every policy that existed before.
I would never want to create a situation where we were playing favorites for one group or one entity. This is an issue where we really want to look carefully at all the data. I think this is a key issue in the bill that will require, and generate, the most discussion.
Valerio: Understood. You’ve said you’ve been looking at this issue since 2001?
Valerio: Wow. That’s even longer than I’ve been monitoring the industry, so I applaud you and I feel like deferring to your own knowledge. So take a company like PokerStars, which is clearly at the center of many of the bad actor controversies. PokerStars, I believe, has been in operation since 2001. They were operating in the US market during the time you were monitoring this industry.
So I’m curious to ask you, prior to California’s efforts to regulate online poker, can you recall what your opinion of companies like PokerStars and Full Tilt Poker was? Could you foresee yourself legislating about them one day?
Gatto: That’s an interesting question. In 2001, I would have never pictured myself legislating this type of thing because I didn’t have the hubris to foresee I’d be in public office. I was working for a United States Congressman and he sat on some of the key committees, but it’s not something I saw in my future at that time.
Do I have an opinion about them? You know, I’ve read a lot about them. I know that some of their assets got acquired by Amaya, and there are different people who describe the acquisition in different ways – but I come at this legislation with an open mind. It’s not like I cannot uphold any particular agenda, other than doing what’s best for the state of California.
Every state will do what is best for its bottom line. It’s up to the legislature to do what is best for the taxpayers. That means making sure we have a healthy industry with a lot of different participants so that we’re not dependent on any one participant. That’s really my only motivation for this bill.
Valerio: I’m very pleased by the way you’ve described your commitment to seeing this effort through. It sounds you invite and encourage debate, opinion, informed and educated feedback. Could you tell the readers, the players, and the people who work in this industry what they can do to participate in this effort?
Gatto: Sure. First of all, anybody from the biggest players to members of the public are more than welcome to contact me. In many cases they’d be surprised that I will contact them back personally. If I don’t, then my staff will. We are more than happy to take suggestions from anybody.
Today we have scheduled meetings with the Amaya coalition. I expect before the end of December to discuss their vision for a bill. We definitely will be meeting with anybody who wants a meeting on this. People can also submit their thoughts to us in writing.
I’m under no delusions here. I think this is a very difficult bill. It’s going to be a very, very difficult negotiation and it’s going to be a long year, but this is something that I think would be a lost opportunity if we didn’t come to the table and try to work it out. So that’s what we’re going to try to do, and there is a 50-50 shot we fail spectacularly once again.
Valerio: Oh, heaven forbid!
Gatto: There’s a reason why this has not happened in six years, but all you can do in life is try, and I’m going to try.