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Star-Telegram.com

Critics call video sweepstakes a bad bet

Posted Sunday, Dec. 18, 2011

By Darren Barbee

dbarbee@star-telegram.com

First of two parts

At the VFW post in Mineral Wells, Edna Pierce, 80, swipes a card for another try at a video sweepstakes machine. She can spin the wheels on Blazin' 7s or Dragon Emperor, check out Carousel Cash or try her hand at Deuces Wild poker or Keno Colada and relax as workers pass out free sodas and popcorn.

Pierce's favorite game is bingo, but she says she once won $100 on the machines and has a simple philosophy for the time she spends at them: "All I do is punch the button and hope I land on something good."

With no luck hitting the prize at one machine, she moves to another and swipes another dollar from her account card.

She could just skip the gimmicks and hit the reveal-prize button. After all, no matter how well she plays, winners and losers have already been determined.

Across the U.S., casino-style sweepstakes video games are popping up in convenience stores, VFW halls and game rooms, touting prizes that can total thousands of dollars.

The company behind many of those games is Haltom City-based Hest Technologies, which describes itself as the industry leader in sweepstakes hardware and software.

Hest aims to create a gambling experience -- while threading through loopholes in state gambling laws. The premise is that the games are an entertaining way to reveal sweepstakes prizes, no different from winning $5,000 when you share with Procter & Gamble how you get ready for the holidays or playing Monopoly at McDonald's for a chance at $100,000.

As with other sweepstakes, Hest players don't have to pay anything to enter; they can ask for a free entry.

"BIG LEGAL cash prizes," the company touts on its website. "Our system is the only completely LEGAL and certified system in the market."

The company extols its games as entertainment and also trumpets its ties to a Cedar Hill-based charity, saying that players are helping Skyeward Bound Ranch serve families with autistic and terminally ill children.

But a Star-Telegram examination shows that legal challenges to video sweepstakes games are mounting amid criticism that they are addictive and that some players are losing their shirts.

The examination also raises questions about the marquee charity with which the company is intertwined.

Already, some states have outlawed video sweepstakes games outright. And authorities in other states are trying to stop them, as the sweepstakes parlors have spread and some of the players who jam in have reported losing their paycheck, their rent payment or grocery money.

In North Carolina, where Hest has games, nearly 9 in 10 calls to the state's Council on Problem Gambling are related to sweepstakes machines, said Gary Gray, the council's executive director. "For the most part, these sweepstakes places, they're kind of like crack cocaine," Gray said. "It's just horrible."

Much about Hest is murky.

Hest has video sweepstakes in several states, supplying the graphical guts for at least 7,000 machines. But company officials won't say which states it has ventured into, citing competition from other companies offering such games.

Hest President Chris Canard also won't talk publicly about company finances, but the money seems to roll in, judging by the take at the Mineral Wells VFW and by the money that Skyeward Bound reports hauling in.

At the post in one year alone, the dozen-some machines have brought in as much as $180,000, a VFW official said. The VFW's current deal with Hest works out to the post getting 40 percent of net profits, with the other 60 percent going to Canard companies or other vendors.

In depositions, Canard has testified that Hest Technologies takes 15 to 20 percent of gaming profits, but a copy of an operating lease and security agreement with one of his related companies shows that his combined operations can get as much as 60 percent of adjusted profits.

The website for one Canard company advises retailers that the "charitable sweepstakes kiosk ... can earn thousands of dollars a month, or even a week, for your business."

Another indication of profitability: In late October, Canard and the director of the Skyeward Bound charity said that since they joined forces in 2010, they had raised close to $500,000 to help children. It isn't clear what share of sweepstakes revenue goes to the charity.

Canard has said that people may enter the sweepstakes by donating to Skyeward Bound, and company literature refers to "donation stations." But Canard wouldn't spell out what his company's financial contract is with the nonprofit group, and the charity director said he doesn't know what its share is.

The names of those who have won prizes and how much money has been awarded are also on the list of information that Hest officials won't give out.

Legally, they don't have to, Canard said. While Procter & Gamble or McDonald's discloses such information, Texas doesn't require disclosure of winners if a sweepstakes' only use of the mail is for a consumer to return an entry form to the contest's sponsor. The odds of winning are displayed on each machine's screen: Your chance of winning $1,000 is 2 in 250,000. The odds of winning $500 is 3 in 250,000.

But the VFW workers say the list of odds never changes. It never lets on whether the cash has been claimed or is still in play.

And there's no government oversight, no way for the public to ascertain the odds or verify winnings, according to the Texas attorney general. The Texas Lottery Commission considers such devices "gray machines," and a spokesman says its authority over them is unclear.

Legal disputes

Hest should be well-acquainted with gambling controversies. Canard's father-in-law, Robert E. Houchin, was a vendor of eight-liner machines in the Metroplex in the early part of the last decade. But a 2003 Texas Supreme Court ruling that many of the casino-style eight-liners were illegal gambling devices put an end to that line of work.

Canard says Houchin is now a salesman for Hest, though Houchin is also listed as manager of two other companies that Canard said he has ownership stakes in. Canard's companies -- Hest, Trip Wire Entertainment, Donate Zone and Prepaid Planet -- perform various functions related to his sweepstakes operations, though Canard wouldn't give specifics.

Hest is mindful of the various land mines in state gambling laws. Texas, like many states, prohibits games of chance that pay winners prizes of value. But sweepstakes games are often governed by separate laws -- in the Lone Star State, the Texas Sweepstakes Act. That law classifies a game as a sweepstakes if a player can request an entry for free. The prizes also must be on a finite list, with predetermined odds, among other requirements.

Yet video sweepstakes can cough up a pretty good chunk of money, unlike eight-liners, where even the $5 cap on prizes didn't stop the machines from being declared illegal.

Hest's games have been precisely designed to create a gambling environment while staying inside the law, Canard said.

"We've crafted our system ... to not only meet those requirements but also put in place business rules encoded in the software that prevent ... fraud from happening," he said, referring to such things as operators changing the odds.

Players can ask for a single free entry once every 24 hours. They can also enter by making a "donation" to Skyeward Bound Ranch or by buying a product. Winning on the video representations of slot machines, poker, keno, craps or other games won't increase the chance of winning sweepstakes prizes, the company says. No skill or dexterity is involved.

Canard also says the company has never lost a court battle over the legality of its machines.

Hest was buoyed in October, for example, after a Travis County state district judge ruled that sweepstakes machines do not constitute gambling devices. As with eight-liners, though, where there were years of conflicting court rulings, battles are still being fought over the legality of video sweepstakes.

A spokesman for the Texas attorney general said the office has active "prosecutions of cases in Victoria and Bandera in which those [Hest] machines were used. Also, those machines were used at a location raided last summer in Nacogdoches by their sheriff's office in a case in which we provided legal assistance at the request of the DA."

Spokesman Tom Kelley said he could not comment further since the cases are ongoing.

Canard said Kelley's "information is not entirely accurate," but he did not elaborate.

North Carolina is contesting the legality of sweepstakes software, awaiting an appeals court ruling. Hest continues to operate there.

The appeals court is considering two cases with conflicting lower-court rulings. In one case involving Hest, a judge ruled that eight specific sweepstakes games that mimic gambling are illegal, but he also said the state's ban on casino-style sweepstakes video games violates the First Amendment.

In the other case, involving another sweepstakes company, a different judge upheld the state's ban.

Machines with Hest's vibrant, graphically intense software were seized in late October in South Carolina, where officials said they appear to be gambling devices. But on Dec. 6, in a separate case involving a September seizure, a South Carolina magistrate found the Hest system legal, noting that no consideration is required to participate in the sweepstakes.

"Representatives from the [South Carolina] AG were present, and we believe that the decision reached by the court will be respected around the state," Canard said.

It's unclear whether equipment seized or outlawed in other states is connected to Hest. Company officials say unscrupulous competitors have co-opted its name because of its success in legal challenges, leading to criminal cases in other locations to which Hest has no connection.

Virginia and Massachusetts are among states that have banned the video sweepstakes devices.

Canard likes to describe Hest casino-style games as a way to add fun to the sweepstakes. "We're trying to provide a maximized level of entertainment," he said.

The company also makes sweepstakes software that looks like video games, but he said that for some reason, gambling themes are more enjoyable for customers. "You know, it's marketing. You look at your target audience," he said. "You target them with a message and imagery and entertainment that they enjoy."

The company has used different terms to describe its products to customers.

On its website earlier this year, Internet archives show that Hest told potential clients that its games offer "Phenomenal play results, significant hold and play games casino players love!"

In previous years, according to the archives, the website had said that the "casino" can allow players to determine the denomination and number of coins played. It also advised its "casino customers" that it could provide cash flow recording and analysis, demographic information on players, and details on the games they like and how much they play, so that they could "identify and understand performing customers."

That information is no longer on the website.

"The web content you are referring to was years out of date and does not reflect our product and service offering," Canard said.

Just like McDonald's?

Canard has a favorite analogy to answer critics of Hest games.

Calling Hest sweepstakes gambling would be like saying the McDonald's Monopoly sweepstakes is gambling, he said.

"We provide software that does exactly what McDonald's does," he says.

"McDonald's sweepstakes is a game of chance, so why is that not gambling?

"How come it's OK for McDonald's to use these sophisticated marketing tools to sell soft drinks to children in the middle of an obesity epidemic. Why is that OK? And Skyeward Bound Ranch can't leverage those same sophisticated marketing tools to solicit donations from adults to help children?"

Legal or not, a growing group of critics says the sweepstakes video games are no good.

State Sen. Rodney Ellis, D-Houston, said video sweepstakes need to be reined in if they're taking advantage of gaps in state law.

"I do not support the exploitation of legal loopholes," Ellis said. "If there is gaming going on in this state, it needs to be legal, it needs to be regulated, and the state should receive the revenue it needs to properly fund education, healthcare and public safety."

Gray, of the North Carolina gambling assistance group, said a video sweepstakes isn't like McDonald's.

"I don't know of too many people that go in on Friday and spend their whole paycheck at McDonald's buying hamburgers, trying to win free french fries."

Gray said that this month, he helped a 52-year-old woman with two teenagers who was getting evicted because she was losing her paychecks every week to sweepstakes machines.

"Anybody would have to be an idiot not to think that they're gambling when they're sitting at these machines," he said.

Darren Barbee, 817-390-7126

Twitter: @DarrenBarbee

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