Special Report - Japan's casino tycoon bet big on Philippines fixer
TOKYO/MANILA (Reuters) - Japanese billionaire Kazuo Okada was facing a crisis: work on his dream casino by the bay in Manila was going nowhere.
Instead of a world-class resort packed with Chinese high-rollers, Okada, 70, was sitting on a $300-million patchwork of reclaimed and undeveloped land next to the Manila airport that by the middle of 2009 was threatening to become a money pit, according to company records and people involved.
Crucial regulatory approvals were tied up in red tape. The provisional gaming license was flawed. No one could tell the architect how high he could build the gold-toned towers without endangering incoming aircraft.
To realize Okada's goal of making the Manila casino more profitable than rival operations in Macau or Las Vegas, the project needed to win an exemption from corporate taxes in the Philippines. It also needed a presidential order giving Okada's company, Universal Entertainment, the ability to own the resort outright as a foreign investor.
Universal executives believed Philippine officials had promised those concessions by the end of 2008 for a project expected to create more than 6,000 jobs. The Philippine gaming authority had given Okada a side letter to Universal's provisional license in August 2008 saying it would make its "best effort" to get those approvals from then-Philippines President Gloria Arroyo.
It would mean hundreds of millions of dollars in additional profit each year if the approvals came through, according to an analysis of Universal's presentations to regulators and investors.
By June 2009, however, the project was more than six months behind schedule and Okada's patience was wearing thin. When Arroyo came to visit Tokyo, Okada saw her in a meeting arranged by the head of Philippine gaming regulator, Efraim Genuino.
"Get clarity on how long it will take to solve these problems on the spot and extract a promise," a note prepared for Okada in Japanese by Universal executives said. It was not clear what was discussed in the private meeting.
Reuters examined hundreds of pages of documents from Universal and Philippine regulators and interviewed nearly two dozen people involved in the project in Japan and the Philippines in reconstructing how Universal tried to push through its casino deal in the Philippines in the final months of the Arroyo administration. That deal is now the subject of investigations there and in the United States.
The record shows Universal won concessions on three critical issues that had threatened the $2-billion project in late 2009 and early 2010.
First, the Philippine Amusement and Gaming Corporation (PAGCOR), the gaming regulator under Genuino, brokered a land swap in November 2009 that Universal needed to move ahead with construction.
Then in February 2010, Arroyo signed a presidential order making it possible for foreign investors such as Okada to have 100-percent ownership of casinos. Around the same time, Arroyo's office approved an application for corporate tax relief from Universal's land-holding company. Both measures were expected but the delays had frustrated Universal executives, records show.
Universal pushed hard to get its final gaming license from Genuino - right up until June 29, 2010, a day before he left his post - but failed to get it.
As it raced to win final approval for its casino, Universal also funnelled a total of $40 million in payments to Rodolfo Soriano, an aide to Genuino and a former consultant to PAGCOR who had become central to Universal's operations in the Philippines by late 2009.
Of the total $40 million in transfers to Soriano, $10 million was immediately returned to the Japanese company in May 2010 to avoid writing off a bad loan extended to another company not involved in the casino project, as Universal closed the books on its fiscal year, records show.
The payments to Soriano, now under investigation as potential bribery, were first reported by Reuters.
It is unclear what happened with the $30 million paid to Soriano that remained with him. Soriano, who came to be known to Universal executives by his nickname "Boysie", has not commented on the payments and could not be reached. There is no evidence the money was transferred to officials in the Arroyo administration or to others.
Universal booked $7 million of the payments to Soriano as a "consulting fee", citing his help in winning the order signed by Arroyo allowing foreign casino ownership as partial justification for the payment, according to company documents seen by Reuters.
Okada broke ground on construction of the casino in January 2012, but PAGCOR under its new chairman has threatened to strip Universal of its license if evidence of bribery is found.
Universal said it conducted its business in the Philippines lawfully. Its lawyer, Yuki Arai, declined to comment further.
Genuino has been charged with misuse of public funds during his time at PAGCOR for allegations unrelated to the Universal payments to Soriano. He could not be reached for comment.
Arroyo has been under hospital arrest for charges related to alleged electoral fraud and misuse of public funds during her presidency. Her spokeswoman, Elena Bautista-Horn, did not return calls seeking comment.
Universal has sued three former employees claiming that $15 million transferred to Soriano - including the $10 million that was immediately returned - was unauthorised.
In early December, Okada and Universal announced they had filed a libel action against Reuters in Tokyo for reporting on the payments to Soriano in November.
UP FROM HARDSHIP
Okada, one of Japan's most successful entrepreneurs, had risen through hardship and trusted his gut when it came to the biggest decisions.
His father died when he was in elementary school, a loss he said helped make him self-reliant. He made his first fortune fixing and selling American jukeboxes in the 1960s. He became a billionaire selling pachinko machines, a Japanese form of legal gambling.
By the late 1990s, the pachinko market had peaked and Universal began to look for ways to diversify.
Okada met casino impresario Steve Wynn in 2000. The two had to rely on a translator - Okada speaks little English - but both said they began a strong friendship. On a handshake, Okada became Wynn's major investor.
"I got lucky," Wynn, 70, told Nevada gaming regulators in 2004. "At first I could hardly believe it, but then $250 million came ‘zwinging' in." Wynn also said then he believed Okada to be a man of deep integrity. "Take the high road. Do the right thing," he recalled Okada telling him.
Okada staked Wynn for a total of $380 million. That jump-started construction of the Wynn Las Vegas resort that opened on the site of the old Desert Inn in 2005, and the even more profitable Wynn Macau in 2006. By 2010, Okada's investment had increased in value almost eight times and returned just over $600 million in dividends.
Macau in particular has produced stunning results. By 2011, the Macau market was bringing in almost $34 billion a year, making it more than five times larger than Las Vegas.
When Genuino visited Tokyo in 2007 to drum up interest in a $15-billion resort and casino complex PAGCOR wanted to develop, Okada jumped at the chance to invest, people involved said.
A year later, on the cusp of global recession, Universal paid just over $300 million for 30 hectares (74 acres) on Manila Bay. In August 2008, PAGCOR granted a provisional license to its casino operating company, Tiger Resorts, Leisure and Entertainment.
But Okada later realized the initial license fell short of what the company had sought, records show. Universal did not want to have to hire employees, including dealers, through PAGCOR and pay fees to the regulator as a placement service, according to letters sent from Universal to PAGCOR.
Universal also pressed PAGCOR to allow high-rollers coming on trips organised by junket operators to come into the casino without reporting their names to the regulator. Junket operators combine concierge and credit services for rich Chinese and have been central to the growth of gambling in Macau.
To promote Manila as an alternative to Macau, Universal wanted to make it a market where the winnings of Chinese gamblers would be "free of supervision," according to a company presentation.
There was also some uncertainty about whether Wynn would join the Okada project. Okada said he wanted to bring Wynn in as a partner through late 2010. "At that time I trusted him. I showed him everything," Okada told Reuters in October.
Wynn, however, was always sceptical about doing business in the Philippines, a person familiar with his thinking said. When Okada asked him to visit Manila in June 2010, he agreed to a briefing from Genuino. But he turned up in a polo shirt when everyone else wore business attire, a sign he saw himself as a spectator, the person said.
By early 2012, Wynn and Okada had split and begun a legal fight over Okada's continued investment in Wynn's company that is playing out in courthouses in the United States, Japan and the Philippines.
A Wynn investigation found Universal had paid $110,000 to entertain gaming regulators from Korea and the Philippines. The Wynn camp alleges that showed Okada was an unfit partner. Okada has said Universal entertains officials in line with its internal policy and denies any wrongdoing. The guest list that drew the attention of Wynn included Soriano, Genuino and Mike Arroyo, the husband of then-President Gloria Arroyo.
Wynn told Okada and other directors in 2011 that he did not think it would be possible to operate in the Philippines, consistently ranked as one of the most corrupt economies in Asia, according to a legal claim filed by Universal in Nevada.
"All of us are of one mind," Wynn told Reuters. "We cannot be related to activities in the Philippines."
LAS VEGAS IN MANILA
When Okada and the Universal board approved the Manila project in August 2008, they projected it would be a cornerstone of a string of resorts around the rapidly growing Asian market. They expected Universal would become a $9 billion company by 2014 with a listing on the Hong Kong stock exchange, according to notes from the board meeting.
Casino gambling revenues in the Asia-Pacific region have more than tripled since 2007, according to PricewaterhouseCoopers. The region is set to overtake the U.S. market as largest in the world next year when gambling revenues reach $67 billion from $58 billion in 2012.
Universal's first designs were based on the Wynn casinos, featuring two wings in reflective gold glass. Plans included $150 million to build one of Asia's largest aquariums and a "Kidzania" playland, with another $70 million for the "Manila Eye," a massive Ferris Wheel.
But Okada's plans for a "six-star" resort were immediately tested by a litany of problems on the ground in Manila. Engineers discovered 10 hectares (24 acres) of its site was reserved for road use and held by another developer, making building impossible.
It had been overlooked in the original purchase. "We didn't realize at the time that we had the road problem," a memo from June 2009 said. "Our land was crisscrossed by these roads like wormholes."
Universal's Manila staff worried there was no easy fix. After months of delays, Universal called in Genuino to negotiate a land swap between Universal, the local city of Paranaque and developer Asiaworld Properties Philippine Corporation.
"The right answer is to ask PAGCOR Chairman (Genuino) to be our public face in this matter," the memo said.
Over the summer, Universal pushed for more frequent contact with Genuino. It set up a video conferencing facility so the two sides could talk more regularly. Universal also sought to make Genuino the conduit for passing on key documents to Arroyo's presidential office, company documents show.
Around that time, Universal was also looking to break with Philippine law firm SyCip Salazar Hernandez and Gatmaitan, which it felt was charging too much and moving too slowly, according to company memos. As it prepared to ditch SyCip, Universal rebuilt its strategy around Soriano in what was described in an internal memo as a "shift to Boysie".
In a statement, SyCip partner Imelda Manguiat, who handled the Universal account, said all transactions the law firm worked on were legitimate and lawful. She declined to comment further.
Shifting to Soriano meant reworking a structure that allowed it to circumvent the requirement that the landholding company behind the casino be at least 60 percent owned by Filipinos.
Records reviewed by Reuters show Universal had bankrolled the original investment meant to satisfy that foreign ownership requirement. This was done by depositing $4.4 million in a Banco De Oro account in 2008. That money secured a loan to a firm called Lex Development Corp, a shell company established by SyCip. Lex used the money to make its investment in the project. Universal covered interest on the loan, records show.
The holding was transferred in 2009 to Platinum Gaming and Entertainment, a Soriano-affiliated firm, records show.
OKADA IN CHARGE
Okada remained in charge of key decisions involving Universal and the Manila project, current and former employees said. On some mornings, employees would wait more than an hour to speak to him. Any expense over $36,000 had to be approved by the strategy board for the Manila project, records show.
Sometimes Okada's hands-on style grated on his people. In one December 2009 meeting, Okada and Toshihiko Nishigaki, a hotel industry veteran brought in to oversee the Manila project, got into a heated discussion about responsibility for the project, according to three people in the room. Nishigaki asked Okada to step into the corridor and a shouting match ensued.
Within weeks, Nishigaki was gone. His departure was the start of a transition that put greater focus on a quicker return from a downsized project. Plans for the Ferris Wheel and other attractions that had promised to turn the casino into a tourist magnet were dropped or scaled back, people involved said.
Nishigaki did not respond to a letter seeking comment.
In November 2009, Okada hosted a PAGCOR delegation, including Soriano, in Las Vegas to watch Philippine national hero Manny Pacquiao win a welterweight championship fight. Universal picked up the tab for Soriano and the PAGCOR delegation at Wynn Las Vegas at a cost of $14,412, records show.
Then in January 2010, Okada led a delegation of Universal executives from Tokyo to the wedding of Genuino's son, Anthony, at the Sofitel hotel in Manila. Okada sat at the same table as former Philippines First Lady Imelda Marcos. Executives who accompanied Okada said the intent was to show his support for Genuino and his politically ambitious family.
PAGCOR filed corruption complaints against Efraim Genuino and other former PAGCOR officials in 2011 alleging they diverted funds to help favoured candidates for public office, including Genuino's children.
In part, Genuino is accused of diverting rice Okada had donated to help typhoon victims in 2008 to support the candidacy of his sons, two years later. The rice was delivered to potential voters in bags with pictures of Anthony and Erwin, according to the charges.
Anthony was elected mayor of the city of Los Banos, while Erwin ran unsuccessfully in the May 2010 elections.
The Department of Justice recently said it would not pursue charges against Anthony and Erwin due to a lack of evidence. Neither of the sons could be reached for comment.
The $40 million in payments from Universal began moving to Soriano on January 14, 2010 with an initial instalment of $10 million transferred to the bank account of Subic Leisure and Management, a Soriano-controlled company registered in the British Virgin Islands. Another $15 million was transferred to Subic Leisure on March 3, 2010, internal records show.
Then in late April and early May 2010 Universal recycled another $10 million payment through the same Subic Leisure route. Records show Universal brought the money back to its own accounts in a move aimed at covering a loan to a company called AZ Games International Corp that had gone sour, according to company records and people involved in the transaction. AZ Games was registered in the British Virgin Islands and operated with little oversight as a result. It had been dissolved months before, records show.
The final $5 million was paid to a Hong Kong shell company named People's Technology Holding Ltd, of which Soriano was the sole shareholder. It was paid four days after Soriano met Okada and other Universal executives at a Chinese restaurant in central Tokyo to press for the transfer, people with knowledge of the meeting said.
Universal has filed two lawsuits against three former employees claiming the final $5 million and the $10 million that came back to Universal were not authorized. In rebuttals to the Universal lawsuits, two former executives - Mitsuo Hida and Takafumi Nakano - said they had been following orders in making the payments. Nakano said he was considering becoming a whistleblower under Japan's anti-bribery law.
IN COMES AQUINO
At the end of June 2010, Genuino stepped down after a controversy erupted over his "midnight" reappointment by Arroyo. The election of President Benigno Aquino the month before posed potential complications for Universal.
Okada went to Manila to meet the new PAGCOR chief, Christino Naguiat, in August 2010. A month later, he hosted Naguiat at the Wynn Macau casino and covered $50,523 of expenses during a four-day stay. Universal does not contest it covered hotel rooms and other costs for government officials but maintains no laws were broken. Naguiat has said there was nothing inappropriate about his stay.
A memo from Okada's August 2010 visit to Manila notes he was "trying to keep a good relationship with and feel comfortable with the new government." But it also contained harsh words for his Manila-based staff.
"I think you should have made a prediction what would happen due to change of government and should have made necessary preparations," Okada was quoted as saying.
Okada's ambition to build casinos around Asia hinges in part on how the investigation of the Manila payments is resolved. The payments to Soriano are the subject of a Philippine Department of Justice investigation and two separate congressional hearings in the Philippines.
The Nevada Gaming Control Board said last month its investigation was progressing. Possible sanctions include a suspension of Universal's gaming license.
Earlier this month, Universal signed a deal giving Philippine property firm Robinsons Land Corp a minority stake in its casino operating company and a majority stake in its Manila landholding company.
The Manila project - now known as Manila Bay Resorts after initially being dubbed "Okada Resort Manila Bay" - is scheduled to open in 2014, four years behind initial projections.
(This story is corrected to make clear in paragraph 59 that Pacquiao won the welterweight title, not retained it.)
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