A proliferation of vending machines that dispense "sweepstakes" game cards that also can be used to make long-distance telephone calls has prompted investigations into whether they are illegal gambling devices.

Aspects of the growing and lucrative vending machine business have caught the attention of the Honolulu Police Department and the city Liquor Commission, according to interviews and business and court records.

A nationally recognized expert on electronic gambling, William L. Holmes of Annandale, Va., said in an opinion sent to the Liquor Commission last week that the vending machines are a form of illegal gambling. Distributors of the machines say they don't cross the line because customers can write to the sweepstakes operators and obtain free game cards. They argue there is no "consideration" paid for participating, removing a key element in the legal definition of gambling.

Holmes, a former FBI agent who worked for 14 years in the gambling unit of the FBI crime laboratory, is scheduled to appear before the Liquor Commission today to discuss his analysis of the phone card machines.

More than 80 Honolulu bars and hundreds of other restaurants and retail establishments have installed the machines that, for a dollar, dispense cards allowing the purchaser to make brief long-distance telephone calls as well as participate in "sweepstakes" games with cash payouts of up to $1,000.

Honolulu Liquor Commission Administrator Dewey Kim Jr., who took the reins of the agency in May, said he expressed misgivings about the phone card machines shortly after taking office.

"My investigators have seen people literally buying hundreds of dollars worth of these cards in one night," Kim said.

He said he doubted that the customers wanted the cards to make telephone calls. "We see people just drop them in the trash if they're not a (sweepstakes) winner. They're not using them to make calls," he said.

In the meantime, Kim has placed on hold all applications for installation of new machines.

Maj. Kevin Lima, head of Honolulu Police Department's narcotics/vice division, said in a recent interview that the department is also investigating the legality of the machines.

One of the department's officers, narcotics/vice division detective Timothy Mariani, is a distributor of the machines through a company he owns called KP Amusements Inc.

Mariani declined to discuss the business, but his attorney, Keith Kiuchi, said the machines are legal and Mariani received permission from the department to operate the business, and approval from the Liquor Commission to install the machines in liquor-dispensing establishments. The Liquor Commission approval was granted before Kim took office and raised questions about their legality.

According to HPD "outside employment" forms, Mariani's request to operate KP Amusements in his off-duty hours was approved by the department in January 2005. The form said the company's business was to "provide amusement game and vending machines."

One of the major distributors of the phone card machines in Hawai'i, Larbil Inc., said in a letter last year to the city prosecutor's office that the "sweepstakes" game is no different from other legal promotional contests offered around the country by national firms like Coca Cola and McDonald's, companies that he labeled "the big boys."

The letter, written by Larbil attorney William Milks, included The Honolulu Advertiser's "Pigskins Picks" football contest in a listing of such promotions.

"The big boys run international, nationwide and regional sweepstakes programs, promoting well-known products such as 'Whoppers' ... 'Double-Gulps' ... 'Pigskin Picks,' etc.," Milks wrote.

LEGAL SWEEPSTAKES

"A common characteristic of legal sweepstakes promotions is the fact that potential purchasers can play the sweepstakes game without the necessity of making a purchase," Milks said.

The "no purchase necessary" option to the games "eliminates one of the three essential elements in Hawai'i necessary for a sweepstakes game to constitute gambling," Milks said.

He argued that the machines have been approved for use in other states that have reviewed them and found that they do not violate gambling laws.

Some states, however, have outlawed the devices. In 1998, the Illinois attorney general issued an opinion on the legality of a machine called the "Lucky Shamrock Prepaid Emergency Phone Card Dispenser," which closely resembled the devices found in bars and other retail establishments here.

"The purchaser of a phone card receives something for his or her money which is arguably worth the amount deposited into the Lucky Shamrock Dispenser (although the utility of a two-minute phone card is questionable)," the opinion said. It also noted that customers could write to obtain free sweepstakes entry cards.

But the Illinois opinion found that "It is 'the lure of an uncertain prize,' however, that appears to motivate a purchaser to patronize the Lucky Shamrock Dispenser."

"Although the scheme has been carefully designed to appear to meet the criteria generally prescribed by the courts in approving giveaway schemes, a review of the underlying purpose of the scheme leads inexorably to the conclusion that the Lucky Shamrock sweepstakes is but a thinly veiled lottery," the Illinois attorney general wrote.

Holmes, the national expert hired by the Honolulu Liquor Commission, said in his opinion letter that the phone card machines differ from national sweepstakes contests offered by such companies as McDonald's in an important way: Anyone who plays one of the national games — whether by buying a product or by writing for a free entry — has the same chance of winning because everyone is playing from a single "game pool," Holmes wrote.

But each sweepstakes game card machine contains its own limited "game pool" that is independent from other machines and from the set of free entries used to fill written requests for free sweepstakes cards, Holmes said in the opinion and in a brief telephone interview yesterday.

"When the free chance is offered from a different game set, it takes the device out of the category of a vending device," Holmes wrote.

"It is my opinion that the pull-tab devices (calling cards) in question are gambling devices that were designed and manufactured for the purpose of gambling," Holmes wrote.

Larbil attorney Milks had not seen the opinion and could not comment on it directly. "I know these cards and similar kinds of items are promoted around the country, in states with and without legalized gambling. The courts have been almost unanimous in their opinions that when free play is available, it's not gambling," he said.

Earlier this year, Larbil and other phone card distributors tried to hire HPD Assistant Chief Stephen Watarai as a paid consultant, but the city Ethics Commission questioned the propriety of the arrangement, according to a copy of an Ethics Commission memo supplied by Watarai.

"I told the chief that I'm not going to be involved," Watarai said in a recent interview.

Watarai said he has discussed going to work for the vendors as a consultant after he retires.

15 MACHINES SEIZED

Last year, Honolulu police seized 15 video game machines from Larbil at a Kalihi location called the Internet Sweepstakes Arcade, according to court records.

The machines were different from the vending devices installed in bars, said Larbil lawyer Milks. The police and Honolulu prosecutor's office said the Sweepstakes Arcade machines were illegal gambling devices and initially charged an arcade employee with promotion of gambling, then later dropped the charge.

Some of the equipment was later returned to Larbil and some was forfeited to authorities, Milks said.

In May, acting on a tip from Watarai, HPD officers from the narcotics/vice division investigated another type of video entertainment machine that's distributed by a company in competition with Larbil called Korex Inc.

Police did not seize the machine, which was installed in a hostess lounge called Club Flamingo, but Korex president Kyung Sul "Tom" Kim said he shipped it back to the Mainland after police questioned its legality. Other machines that Kim's company distributes locally are not gambling devices and do not pay out cash prizes, said Kim and his lawyer, Mark Kawata.

Watarai said he reported the Korex machine to narcotics/vice officers after it was called to his attention. "Somebody brought that to me, that some machines out there are paying off and it's a gambling machine," he said. He declined to identify the source of the information, other than to say it did not come from the Larbil group of distributors.

In fact, he said, he later learned that Larbil also had a machine in operation at Club Flamingo, "so I could have been calling the artillery down on them also."

Watarai did not disclose his ties to the Larbil group when he contacted the narcotics/vice division about the allegedly illegal machines, Lima said.

"He did what police officers do when they see a possible crime," Lima said of Watarai. "He reported it."

According to Tom Kim and attorney Kawata of Korex Inc., there's a dark side to the electronic machine business: They filed a lawsuit in March against a former Korex employee, alleging that he stole 50 of the company's machines as well as $17,000 in machine revenue earlier this year.

In police reports, they also alleged that the former employee and another man falsely identified themselves as police officers on three different occasions during visits to bars where Korex machines were installed.

Twice the bar owners were warned that the Korex machines must be removed or they would be confiscated by police, according to the lawsuit and allegations in police reports. The third time the men visited a club, the owner refused to let them into the premises and they returned with "five large males," one of whom shattered the glass front door of the club with a rock before leaving the area, according to allegations in complaints to police.

INCOME UNKNOWN

Just how much money the machines generate or how many are in circulation are unknown.

The Korex lawsuit said that the company's 50 machines — which feature a video game called "GoStop" and do not dispense telephone cards or other products — were bringing in $45,000 a month in revenue —less than $1,000 a month per machine.

The suit said machine distributors typically split revenue on a 50-50 or 60-40 basis with the businesses where the machines are installed.

Dewey Kim of the Liquor Commission said the machine distributors and bar owners don't have to report revenue figures, but he wonders if appropriate taxes are being paid on money generated by the devices.

Larbil attorney Milks said his client pays its taxes and has been doing everything it can for years to make sure that its machines are operating within the law.

Reach Jim Dooley at jdooley@honoluluadvertiser.com.