Not a Penny in the Slots

Not a Penny in the Slots

All at sea...'the guy under the whip', Michael Snyder, displays pictures of boxes of slot machines damaged en route to South America. Photo: Robert Pearce

The late summer winds, blowing straight off the Nevada desert, pushed the outside temperatures beyond a scorching 30 degrees. Inside the Aristocrat Technologies offices, looking over a restaurant complex in downtown Las Vegas, the tension was palpable. Vast fortunes have been won and lost there by the rich and famous since Chicago mobster Benjamin "Bugsy" Siegel established a gambling oasis back in the 1940s. And almost exactly a year ago, Aristocrat - an Australian company which had become the world's second biggest poker machine manufacturer - was set to become another victim.

Senior executives from Australia and North America were bunkered down for a marathon three-day meeting to avert a looming earnings crisis. Everyone wore suits. Unusually, there wasn't even time for a round of golf. As concerns about revenue surfaced, Des Randall, the Australian chief executive of the group, stared straight across the table at Mark Newburg, the company's US president of operations and delivered an ultimatum.

"You have to get the numbers," he said, his tone matter-of-fact. It was September 2002. Five months later, in February this year, the company plunged into crisis, as its share price spiralled out of control, ostensibly after a series of botched deals in South America that saw the company's earnings plunge into the red. As the corporate bloodletting gathered pace, the finger for this catastrophe was pointed firmly at the North American executives, who variously were portrayed as a group deliberately misleading head office about the true nature of the company's affairs.

But interviews conducted by the Herald with North American executives paint a very different picture. It is a picture of a poorly run company desperately attempting to inflate the numbers by grasping for any possible deal. And the deal in mind, centred on Latin America. In fact, there were two deals, one in Brazil, and the other, in Colombia, better known for its cocaine and heroin exports than legitimate business dealings. But back to that fateful meeting.

Along with Randall and Newburg were chief financial officer Lionel Jeyaraj, US chief financial officer Ron Rowan, vice-president of sales David Lucchese, general manager of the Caribbean and Latin America, Mike Snyder, head of the compliance committee, Mike Mauser, and the general manager of manufacturing in Australia, Neil Hogg. Financial documents spread out across the two-toned wooden table painted a grim picture. Slot machine sales in North America were weak and Aristocrat faced the real prospect of missing its full-year profit target of $109 million.

"We were being told in no uncertain terms [by Des] that we had to get the numbers and...that South America was the key," said one of the executives who was at the meeting. Shortly after the meeting, Randall told Australian analysts in Las Vegas the company was confident of meeting full year forecasts. The US executives, however, say Randall knew full well that Aristocrat wouldn't meet targets. Not by a long shot.

On February 7, five months after the meeting, Aristocrat announced a $28.8 million profit downgrade - the first of several - and all hell broke loose. Since then, more than $1 billion has been wiped from the company's market value and six senior executives including Randall have been sacked and the chairman, ALP stalwart John "Bruvver" Ducker has been forced to fall on his sword and the corporate regulator, the Australian Securities and Investments Commission (ASIC), has launched an investigation.

Randall, the former managing director of information technology company NCR Australia, was fighting to save his high-flying career. And who could blame him. He and his wife Vivienne were living in a house next to a golf course in the Anthem Country Club development, in an exclusive suburb of Las Vegas, home to Hollywood actors and music stars. When he was in Sydney, Randall and his family hung out at the company's $4.1 million pad near Balmoral Beach, which boasted a sauna, pool, theatre system and 7-metre high entrance hall. In desperation, Randall sent a succession of confusing announcements to the Australian Stock Exchange in a bungled attempt to explain the debacle.

Later, at two emotion-charged earnings briefings with incredulous media and analysts, Randall said senior executives in the US had never warned him that they would miss the company's targets for slot machine sales. Randall also said that he found out only on February 4 that a contract involving the sale of 3000 slot machines to a customer in Colombia, which Aristocrat had been relying on to make its numbers, had fallen through.

Mike Snyder, a dapper 42- year-old, headed Aristocrat's Caribbean and Latin American operations. An electronics whiz, he'd left the US Air Force in the 1990s to join the gaming industry, and ended up with Aristocrat after it took over US group Casino Data Systems. Snyder says Randall knew as early as June 2002 - a full eight months before the profit warning - that slot machine sales in North America were falling short of Randall's targets and the company would miss its numbers unless it sold several thousand machines in South America. "There was absolutely no way that anybody on the operational side [of Aristocrat] Mark or Ron, you name them all, would ever believe that Des didn't know," Snyder said last week.

After boasting to the media and analysts that Aristocrat - the world's second biggest slot machine maker - would achieve 20 per cent market share in the highly competitive North American market by the end of 2002, Randall didn't want to have egg on his face. It wasn't just the company's reputation. Ego was at stake. The napoleonic Randall told Newburg and other senior executives that they had to get the numbers. No excuses.

Snyder, who was sacked in March, has launched legal action against Aristocrat in the District Court of Clark County, Nevada, seeking more more than $US990,000 ($1.5 million) in damages and costs. Snyder has alleged the company breached his contract by failing to pay him sales commissions he earned during his employment and expenses incurred in relocating his family from Minneapolis, in Minnesota, to Miami, Florida. Aristocrat said in a statement to the Herald that it would "vigorously" defend the action. According to Snyder, Randall wanted to "grow the business at any cost" and didn't like to be told otherwise. "If you didn't make the numbers you would lose your job," Snyder said. Snyder said he had felt like the headlight on a freight train "moving at a million miles an hour" last year as he darted between Brazil, Peru, Colombia and Florida trying to drum up orders for slot machines. His wife and two young children at home in Miami rarely saw him. "I was the guy under the whip," Snyder said.

The potential saviour was a Colombian deal with a casino operator named Carlos Quintero. If it came off, it would be Aristocrat's biggest ever. It was worth $US40 million ($61 million) over five years and was more than big enough to fill the gaping hole in the company's bottom line. Colombia, a lawless Latin American enclave better known for its cocaine production and kidnappings of foreigners than legitimate business, had as many as 30,000 slot machines on the ground. Quintero, in his early 40s, was one of Colombia's biggest casino owners and Aristocrat was keen to forge a relationship.

In the landlocked city of Bogota, sometimes described as the "kidnapping capital of the world", Quintero had many friends. And he knew how to live the high life. A connoisseur of fine wine and food, he kept showjumping horses, was a member of a couple of country clubs and had connections at the highest levels of government and police. But anyone with money in a country caught up with guerrilla warfare for the past 40 years has to protect themselves. Quintero rarely ventures out alone. He is driven around in an armoured Toyota Landcruiser under the watchful eye of a gaggle of gun-toting bodyguards. Like many Colombian businessmen, Quintero had multiple bank accounts scattered about the globe, supposedly to protect his assets from being plundered by local gangsters.

Snyder was "working" a deal in Brazil when he met Quintero in the middle of last year. Over coffee and salmon on toast at the Marriott Hotel in Lima, the bustling capital of Peru, Quintero told Snyder he wanted to buy 12,0000 slot machines over five years with the first shipment of 3000 machines to arrive by the end of the year. It was just what Snyder needed. He was having trouble with a Brazilian casino operator, NuevaStar, that had cancelled an order for 2300 slot machines worth $US20 million. But just as Brazil had fallen apart, the deal with Quintero also began to unravel in December. He told Snyder that a South African businessman, who had casino operations in Peru, would lend him the cash for the deal. But the South African ran into trouble and skipped out on the deal.

In his place, Spain's biggest bank, Banco Santander, stepped in and agreed to recommend Quintero to its lending committee. On the strength of that, Quintero gave Aristocrat two cheques for $US1 million as a security. But he asked the company to wait several weeks before depositing them. Apparently, he had to transfer money between his multiple accounts. As unorthodox as all this sounds, Snyder says that Aristocrat head office in Sydney was kept fully informed of all developments. The deal went ahead. Quintero signed the contract for the machines on December 12 and the shipment left Australia on December 17.

The machines were stored in Quintero's warehouse in Bogota's free trade zone where they were to be assembled by Aristocrat's technicians. But Quintero's cheques bounced in mid-January. And Aristocrat knew then it would be difficult to convince the company's auditors, PricewaterhouseCoopers, to include the revenue in the 2002 net profit without a deposit to secure the deal. The final straw came about a week later when the Spanish bank decided that it no longer wanted to be involved in lending to the gaming sector.

Quintero was left without a backer and the deal fell through. In a desperate attempt to keep the deal alive, the Colombian wired Aristocrat $US250,000 to secure the machines. Aristocrat says that Quintero contacted the company on February 4 and said he had been unable to find another backer. Three days later the company announced profit for the 12 months to December 31 would be $80.2 million, $28.8 million lower than the forecast. Snyder says the deal would have proceeded if Randall hadn't panicked. "It's not uncommon for us to execute contracts and get deposits at a different time - I don't think that any of us were concerned [that the money had not been paid]. We knew Carlos better than any other customer...he is a legitimate business person," said Snyder. He argues that Randall was trying to "cover his arse" for the problems in South America when he ordered the US team to retrieve the machines. But it wasn't just the deals that were causing headaches.

Brazilian casino operator NuevaStar, which had previously bought 2500 slot machines from Aristocrat, was fed up with Aristocrat. Shipments supposedly sent to Brazil, were arriving in Singapore and Spain or not at all. Slot machine parts had arrived damaged or destroyed after cardboard boxes "exploded" during the voyage across the Pacific Ocean to South America. Other parts had been seized by customs after the descriptions and quantities recorded on the boxes failed to match the contents. According to one confidential email seen by the Herald, in one shipment, "some of the count variances exceeded 1333 per cent".

Snyder said this was the real reason Aristocrat lost money in South America. "The single thing that screwed us was the factory [in Rosebery] didn't ship what we wanted," Snyder said. "This is what sank Aristocrat, they had no idea what they were doing. It wasn't because the deals were bad or the customers were crooks." Snyder has also accused Aristocrat of negligence after the company botched numerous shipments of slot machines to South America, which he says cost him tens of thousands of dollars in lost commission. "Aristocrat made countless shipments of slot machines and slot machine parts [to customers in South America] which contained incorrect invoices or shipment descriptions." Based upon Aristocrat's errors, various shipments were seized and confiscated by customs officials in several countries and customers were fined. "As a result, a certain portion of the sales generated by [me] were canceled or heavily discounted by Aristocrat."

Aristocrat, meanwhile, has defended its position, arguing that provisions, write-downs and other adjustments relating to the restructuring of four contracts in three countries in South America had been made. Acknowledging mistakes had been made in the past, the company says it has reduced its focus on South America and shipped "virtually nothing in the first half". Snyder estimates Aristocrat lost about $US50 million in new sales and spent between $US10 million and $US15 million fixing damaged machines, discounting prices and compensating customers. Aristocrat is desperate to move from the past seven months. But it won't be easy. The company is still without a permanent chief executive and the new chief financial officer Simon Kelly won't start until next month because he has to undergo extensive probity checks. Then there is the bitter legal stoush with Randall, who says the company owes him almost $13 million in unpaid entitlements and a bonus for meeting "financial and non financial goals". Aristocrat has fired a cross claim at Randall, accusing him of dishonesty and fraud.

Among numerous accusations, Aristocrat says Randall withheld important financial information from the board and that the company doesn't owe him a cent. Snyder is still angry with Randall for accusing the US senior executive team of being in disarray. "The US team was talented, disciplined and focused. They had some tall numbers to meet and we did everything we could to meet them," Snyder said. Snyder said Randall's claim that he was left in the dark about the state of the US operations was "bullshit". "It's all a lie - the numbers were reported to Sydney at least once a month and in detail on a quarterly basis," Snyder said. But his conscience at least is clear. "We did what we were supposed to do. Mark didn't do anything wrong, I didn't do anything wrong, Ron Rohan didn't do anything wrong. The Colombian deal worked flawlessly," Snyder said.

Last month Aristocrat announced it had reached a $US3.5 million settlement with the Bogota casino magnate, recovering 2350 machines from the warehouse in Bogota. Six senior executives have lost their job. The chairman has quit. Shareholders have lost up to 80 per cent of their investment. But not everyone's a loser. Carlos Quintero got to keep 647 slot machines.

SOURCE: SMH.