Nevada gaming regulators will look into the lawsuit filed by Scientific Games against Hong Kong-based Sylebra Holdings, the company’s third largest shareholder, but stopped short of opening their own investigation because the firm’s ownership stake is below the state’s 10 percent threshold required for licensing.
Gaming Control Board Chairwoman Sandra Douglass Morgan said Monday that the agency’s investigations division will review the lawsuit filed Friday in Clark County District Court in Las Vegas by Scientific Games.
Las Vegas-based Scientific Games said suitability concerns with Sylebra have been raised after investigators found that Sylebra owned a significant stake in a Russian company with alleged ties to illegal gaming, money-laundering and financial support of terrorist organizations.
Morgan said Sylebra, which has a significant presence in the Cayman Islands, has not attempted to exert influence over Scientific Games. However, she said she still has concerns, since the lawsuit alleges that Sylebra has refused to comply with requests for information and disclosure submissions for suitability from more than two dozen gaming regulatory bodies both in the U.S. and internationally.
Wall Street’s reaction to the lawsuit was somewhat muted. Shares of Scientific Games were down 92 cents or 4.45 percent, closing at $19.76 on the Nasdaq.
Sylebra owns more than 8.6 million shares of Scientific Games, a 9.34 percent stake. Billionaire Ron Perelman’s investment arm, MacAndrews & Forbes, is Scientific Games’ largest shareholder, with a 39.2 percent stake in the company, which provides gaming equipment to both the casino industry and lotteries worldwide.
Fine Capital Partners owns 8.7 million shares of Scientific Games and is the company’s largest institutional investor with 9.7 percent.
Sylebra has been an investor in Scientific Game for roughly four years. According to the lawsuit, Sylebra had refused numerous requests from the company for information needed to conduct a suitability analysis under Scientific Games’ corporate bylaws. Under those bylaws, Scientific Games can declare Sylebra a “disqualified holder” and force a redemption or sale of the shares.
SunTrust Bank gaming analyst Barry Jonas told investors the worst-case scenario for Scientific Games is Sylebra selling its entire state on the open market.
“We see this as the most unlikely (scenario) given Sylebra would likely suffer significant reputational damages with potential ramifications for all of its holdings,” Jonas wrote in research note released Sunday evening.
He suggested that Sylebra could avoid suitability licensing by selling their ownership below a 5 percent threshold set by Scientific Games bylaws and several regulatory agencies. However, Jonas said some regulatory bodies could still pursue the compliance information, which would still raise questions for Sylebra beneficial owners.
If Sylebra is found to be a “disqualified holder,” Jonas said its shares could be redeemed at the lowest price in 30-day average trading, or at Sylebra’s cost basis – roughly $13.70 a share per Factset.
“We believe the most likely scenario entails Sylebra coming to agreeable terms with Scientific Games given the potential forced redemption at cost and reputational damages,” Jonas said.
However, Jonas said, the issue could take several years to resolve.
Scientific Games wants Sylebra to provide documentation for suitability, including a list of beneficial owners and proof of compliance with anti-money laundering laws.
In a statement, Scientific Games spokeswoman Susan Cartwright said Sylebra “has refused to supply” basic information about the hedge fund’s own investors for more than two years.
According to Nasdaq, Scientific Games is Sylebra’s third largest investment and its only gaming ownership. The firm lists holdings in 28 public companies and has nearly $2 billion in total managed assets.
Howard Stutz is the executive editor of CDC Gaming. He can be reached at hstutz@cdcgamingreports.com. Follow @howardstutz on Twitter.
