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Regulator clobbers MegaNanza

The National Indian Gaming Commission flexed its regulatory muscles with a recent ruling that seeks to better define the boundary between gaming Classes II and III. The regulator's willingness to exert its enforcement role caught one gaming device manufacturer off guard. In the long run, however, the regulator's action may open the door to more tribes wishing to offer Class II gaming.

The continued injection of technology into gaming has blurred the line between the gaming classes. Bingo, a Class II game as defined under both the provisions of the Indian Gaming Regulatory Act and NIGC's regulations, has crept closer to and apparently crossed that border with the aid of sophisticated software that generates random numbers and produces player cards.

In effort to better distinguish between Classes II and III, NIGC on June 17 published in the Federal Register new rules governing technology's role in bingo games conducted at Indian casinos.

A leading supplier of interactive gaming machines to tribes saw its stock tumble in the wake of the new NIGC rules. Shares of Austin, Texas-based Multimedia Games Inc. took a nosedive in the days immediately following the announcement. The June 17 final rule confirmed an earlier regulatory determination that Multimedia's MegaNanza product, an electronic form of bingo that can be played on-site or by players at multiple sites, was in fact a Class III game, and thus could not be offered by tribes without a Class III compact. The regulator then ordered tribes without Class III compacts to remove the game from play.

The crux of the issue is NIGC's interpretation of the distinctions between the characteristics of a Class II game versus those of Class III, which boils down to whether the device in question is an aid in playing the game, or a facsimile of the game itself. In a May 10 letter to Multimedia, Penny J. Coleman, NIGC's deputy general counsel, stated that the game fell under the definition of the latter.

"MegaNanza does not merely assist a player or the playing of a Class II game, but rather, when MegaNanza is played, the player engages one machine in a system of linked machines that wholly incorporates the functions of a game of chance." Coleman wrote. "MegaNanza is not an attempt to play bingo, or a game similar to bingo using an electronic aid. The system plays the entire game and notifies the player in an 'entertaining display' of reels, bars and 7's of the results ... The game is intended to replicate the play of an electronic slot machine, an entirely different form of gaming. These games are, therefore, Class III games and may be played only under a tribal-state compact."

On June 17, Multimedia's shares fell 7.2 percent to $28.50, with twice the average volume of shares changing hands. The following day, the stock slid another 30 percent to $19.88 on well over 12 times average trading volume. This in turn caused Multimedia to lower its net earnings guidance for the fiscal year. During a June 18 conference call, the company projected earnings in the range of $1.60 to $1.70 per share, down from $1.75 per share. Multimedia's fiscal year ends Sept. 30; its stock is traded on the NASDAQ under the stock symbol MGAM.

The conference call may have reassured investors as the company's stock recovered slightly. By mid-afternoon, it was up almost eight percent on four times average volume.

Multimedia also announced an expedited roll-out of its Reel Time Bingo game as a replacement for MegaNanza.

"There is absolutely no question that the clarification of the rules will make it easier for additional tribes in additional jurisdictions to feel good about entering the Class II market," said Clifton Lind, Multimedia's president and chief operating officer, during the conference call. He added that he would be "shocked" if Reel Time, which he described as a "linked, interactive standard-sequence bingo game," was found in violation of the latest NIGC rules.

Company officials, who seemed largely unconcerned on the day of the ruling, switched gears the following day after watching NIGC flash its teeth.

"In light of the new rules that have been published regarding the use of electronic aids, [we thought it] unlikely the NIGC would actually expend the resources to initiate enforcement actions ? but we were wrong," said Chairman and CEO Gordon T. Graves, in a June 18 press release. "We will be addressing this in our pending litigation against the NIGC."

In April, NIGC ruled that MegaNanza qualified as a Class III game, after which Multimedia filed suit in a federal court in Tulsa challenging the decision. Three tribes, all Multimedia customers, joined the lawsuit on June 18, at which time the parties also filed for a temporary restraining order and an injunction preventing further action by the regulator.

NIGC said that the final rule "more properly captures the intent of Congress as to the distinction between permissible Class II aids and prohibited Class III facsimiles, without compromising Congress' intent to prohibit the play of facsimiles absent an approved tribal state compact."