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Playboy-Elsinore Associates, In the Matter of the Application for a Casino License

Cite As 10 N.J.A.R. 465

Page 1 of 81 View in DJVU

In re Playboy~Elsinore Casino Application
Cite as l0 N.J.A.R. 465
Decided: April 7, 1982
Approved for Publication by the Casino Control Commission:
April 8, 1988
Playboy-Elsinore Associates ("PEA") applied to the Casino Con-
trol Commission for at casino license. PEA consists of two general
partners, Playboy of Atlantic City and Elsub Corporation (the
Elsinore entities). The Commission considered the qualifications of
the two corporate entities separately, as well as those of certain indi-
viduals required to be qualified.
As a result of a hearing held by the Commission, all five Com-
missioners determined that the Elsinore entities and the Pritzker fam-
ily had established their qualifications. Three Commissioners de-
termined that Hugh Hefner and the Playboy entities qualified. One
Commissioner found that both Hugh Hefner and the Playboy entities
failed to establish their qualifications for licensure. One Commissioner
determined Hugh Hefner did not qualify.
N.J.S.A. 5:12-73(d) provides that no casino license may be issued
without the approval of four members of the Casino Control Com-
mission. Accordingly, a casino license was issued to the Elsinore
Edward N. Fitzpatrick, Esq.: David M. Satz, Esq.: Frank P. DiPrima,
Esq.: Marilu Marshall, Esq.: Freda Wolfson, Esq., and Steven
Goldenberg, Esq., for Playboy-Elsinor Associates
James F. Flanagan, !!!, Deputy Attorney General: Mitchell A.
Schwefel, Deputy Attorney General: John Sheehy, Deputy At-
torney General, and Gary A. Ehrlich, Deputy Attorney General,
for the Division of Gaming Enforcement
Robert J. Genatt, General Counsel: David Arrajj, Special Counsel &
Director of Licensing: Thomas N. Auriemma, Deputy Direc-
tor/Legal Division, and Ted M. Rosenberg, Assistant Counsel,
for the Casino Control Commission

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This matter has been brought before the Commission pursuant
to the application of Playboy-Elsinore Associates ("PEA") for a
casino license. The history of PEA's application, its acquisition of a
Temporary Casino Permit in April 1981, and the qualification criteria
pertinent to this plenary casino license proceeding are set forth in the
Chairman's Instruction to the Commission, which is made a part of
the record of this casino license hearing, and which is incorporated
by reference in this Opinion.
This Opinion concerns itself only with those areas which were
the subject of significant attention at the hearing in this case. Detailed
findings with regard to other licensing criteria are contained in a
separate Resolution.
The Division of Gaming Enforcement ("Division") issued to
investigative reports which, as modified, have been stipulated and
admitted into evidence. Both the Division's investigative report with
respect to the Elsinore entities and its investigative report with respect
to the Playboy entities outlined several areas of concern. All of the
issues raised by the Division were fully explored during the course
of this lengthy hearing. Obviously, as the Division has recognized,
it is the Commission's responsibility to evaluate independently the
entire record and determine the qualifications of the business entities
and natural persons who must qualify. This has been done by each
Since the two general partners in PEA, Playboy of Atlantic City
and Elsub Corporation, are subsidiaries that are owned by other
business entities and persons, this Commission will separately evaluate
the qualifications of the Playboy entities and the Elsinore entities.
Despite being one of the more affluent families in the United
States, the Pritzker family of Chicago, Illinois, has been able to
insulate itself from much of the attention that frequently attaches to
such financially prominent families. The Pritzker holdings include a

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significant interest in all of the companies that comprise the Elsinore
portion of the PEA general partnership. Accordingly, both the family
and their financial holdings have been scrutinized during this licensure
In the early 1900's, Nicholas J. Pritzker formed a law firm that
has continued in existence to the present time. All three of Nicholas
J. Pritzker's sons, Harry, Jack, and Abraham Nicholas, eventually
became associated with the family law firm. Originally engaged in the
general practice of law, the firm subsequently specialized in the fields
of commercial law and real estate acquisitions and reorganizations.
Significantly, by the end of the 1930's the Pritzkers were no longer
actively engaged in the traditional practice of law, but rather were
exclusively involved in various entrepreneurial and investment ac-
The Pritzker family has been able to accumulate va/st financial
and real estate holdings throughout the world. Significant among
these holdings are the Marmon Group and the Hyatt Corporation
("Hyatt"). All of the common stock of Marmon is owned by the G.L.
Corporation, which, in turn, is owned by the Pritzker family trusts.'
Operating as a diversified international conglomerate, the Marmon
Group is expected to have sales this year in the $2.5 billion to $3
billion range.
Hyatt currently operates, primarily through long-term leases or
management contracts, approximately 60 hotels and two motels
located throughout the United States.: Effective February 5, 1979, a
reorganization of Hyatt was consummated. The Pritzker family, for-
merly the controlling shareholders of the publicly-traded Hyatt,
purchased all of the outstanding shares of Hyatt from the public
shareholders.  In exchange for their shares, the public shareholders
received cash and a specified number of shares of the common stock
'Since the mid-1930's, the Pritzker family has extensively utilized irrevocable
trusts as asset management devices. Currently, the overwhelming majority of
the Pritzker family holdings are held in trust for the lineal descendants of
Nicholas J. Pritzker.
-'Hyatt's worldwide hotel affiliate, the Hyatt International Corporation, oper-
ates a chain of approximately 35 hotels outside the continental United States.
!n February of this year, Hyatt International became a privately-held corpor-
ation as a result of the Pritzker family's purchase of the remaining 5 percent
public share in the company.
AII of the common stock of Hyatt is now owned by HG, Inc., which, in
turn, is owned entirely by three Pritzker family trusts.

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of Elsinore Corporation ("Elsinore"). As a result of the reorganiza-
tion. Elsinore. formerly a wholly-owned subsidiary of Hyatt, was
spun-off and is currently a publicly-traded corporation. Through
HCC Corporation. a wholly-owned and controlled non-operating
subsidiary of Hyatt, the Pritzker family currently holds approximately
22 percent of the common stock of Elsinore.
Elsinore presently owns and operates the Four Queens Hotel and
Casino in Las Vegas, Nevada. Additionally, a wholly-owned
subsidiary of Elsinore owns the Hyatt Lake Tahoe Hotel and Casino
in Incline Village, Nevada. Another wholly-owned subsidiary of
Elsinore is Elsub Corporation, a New Jersey corporation. As a general
partner in PEA, Elsub owns approximately 46 percent of the partner-
ship venture in Atlantic City.
Other members of the Pritzker family who have playe.d significant
roles in the family business dealings include the three children of
Abraham Nicholas Pritzker, Jay, Robert, and Donald, who died in
In that portion of its opening statement dealing with the Elsinore
entities. the Division voiced concern over a series of financial trans-
actions between the Teamsters Central States, Southeast and South-
vest Areas Pension Fund ("Pension Fund") and the Pritzkers, Hyatt,
and Elsinore. respectively. The Division's investigative report with
respect to the Elsinore entities, more specifically identified eight such
financial relationships extending from the late 1950's through the
mid-1970's. During the course of the Elsinore portion of this hearing,
substantial testimony and documents were produced concerning the
involvement of the Pritzker family and its business entities with the
Pensiou Fund.
At the close of tne evidentiary phase of this hearing, the Division
iu its summation indicated that it would have no objection to the
lieensure of the Elsinore entities if the following two conditions were
imposed by the Commission:
?.. number one. there is no more dealing in any way, shape
or form 'ith any Division or subdivision of the Teamsters
Secondly. that the Pritzker family make efforts to insulate
or extricate themselves from existing ties that they may
have with the Teamsters fund or funds in any way, shape
or form ...

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In summarizing the Elsinore portion of this hearing, the Division
focused on certain aspects of the above financial transactions which
it found particularly troublesome. These areas of concern will now
be addressed below.
1. The 1959 Loan
On June 11, 1958, Jay Pritzker, on behalf of his family, entered
into a joint venture agreement with several other individuals for the
purchase and operation of what would later become the Hyatt House
in Burlingame, California. The initial financing for the project had
been obtained through a mortgage banker but soon proved inadequate
due to a series of construction overruns. After an unsuccessful attempt
to secure additional financing from the mortgage banker, Jay Pritzker
approached Stanford Clinton, then counsel to the Pension Fund  and
an individual who had been closely associated with the Pritzker family
for some 30 years, to inquire whether the Pension Fund would be
interested in providing additional financing for the venture.
Owing to the nature of the reservations expressed by the Division
in its summation, it is necessary to digress at this point in order to
amplify the Clinton-Pritzker relationship. After graduating from law
school, Clinton accepted a position in June 1931 as an associate with
the law firm of Pritzker and Pritzker. Thereupon he embarked upon
a legal career that spanned nearly four decades. When the Pritzkers
abandoned the traditional practice of law in 1936, they gave Clinton
all of their active files and permitted him to continue to use the
Pritzker offices and support services. Thereafter, Clinton maintained
his own clientele, but he continued to do legal work for the Pritzker
family and occasionally was invited to invest in Pritzker business
One such opportunity that Clinton took advantage of was the
Burlingame hotel project referred to above. Although there is some
ambiguity in the record as to the exact percentages involved, it appears
that Clinton had either a five percent or a ten percent equity partici-
Clinton was appointed counsel to the Pension Fund during 1959 and con-
tinued in this capacity until his retirement in 1967.
Eventually, Clinton's representation of certain individuals came to be viewed
by the Pritzkers as incompatible with their commercial interests and the above
relationship was severed.

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pation in the project. 6 Nevertheless, both Abraham Nicholas Pritzker
and Clinton testified during these proceedings that the latter made
a capital contribution to the venture out of his personal funds.
Since Clinton was counsel to the Pension Fund at the time that
he was approached by Jay Pritzker regarding the possibility of seeking
additional financing for the Burlingame venture from such Fund,
Clinton faced a twofold conflict of interest. His thirty-year association
with the Pritzker family and his equity interest in the project necessi-
tated that he recuse himself during the loan application process.
Before withdrawing as counsel on this loan, Clinton went to the
Executive Committee of the Board of Trustees of the Pension Fund
and fully disclosed his involvement with the project. Upon the recusal
of Clinton, Frank J. McGarr, presently Chief Judge of the United
States District Court for the Northern District of Illinois, was retained
by the Pension Fund to represent its interests in negotiating and
ultimately closing the Burlingame mortgage loan transaction. On
August 31, 1959, the predecessor of the present Hyatt Corporation
obtained a $2,000,000 first mortgage loan from the Pension Fund at
an annual interest rate of six percent, with repayment due in 1979.
In its summation, the Division conceded that it "had been unable
to uncover any evidence which would demonstrate any impropriety
on the part of either Mr. Clinton, the Pritzkers, the Hyatt, [or] the
Pension Fund in this matter". Notwithstanding this assertion, the
Division expressed concern over how Stanford Clinton initially ac-
quired his interest in the Burlingame project and how his interest was
later reduced from a ten percent to five percent holding.
We have carefully reviewed the relevant testimony and numerous
exhibits with regard to this loan and based upon such review we find
that the circumstances of the above transaction do not adversely
reflect on the character, integrity, or honesty of either the Pritzkers
or the Elsinore entities.
2. The 1960 Loan
On March 15, 1960, another Hyatt financing proposal was sent
to the Pension Fund and was directed to the attention of its Executive
6The discrepancy as to Clintoh's percentage participation was referred to by
Jay Pritzker in his testimony before the Commission. Apparently, Clinton
had purchased a ten percent share of the original Pritzker investment in the
venture. Since the original Pritzker investment was a fifty percent interest,
Clinton most likely had a five percent investment in the total project.

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Secretary, Francis J. Murtha. In this proposal, Hyatt offered to sell
to the Fund subordinated debentures in the principal amount of
$4,000,000 bearing interest at the rate of 6 1/4 percent per annum
and maturing on March 31, 1979. This financing was to be used by
Hyatt for the expansion of its hotel chain and for the acquisition,
development, and construction of real estate projects.
Stanford Clinton again withdrew as counsel for the Pension Fund
and the firm of Thompson, Raymond, Mayer, Jenner and Bloomstein
was retained in order to render legal advice to the Trustees of the
Fund and to execute the appropriate legal documents. Pursuant to
the original proposal, only Rockwood and Company, a Hyatt-related
entity, would be obligated to guarantee unconditionally the first
$500,000 in principal and interest payable under the loan. After dif-
ficult negotiations, and Trustees of the Pension Fund approved a
revised proposal that personally obligated Abraham Nicholas and Jay
Pritzker for the first $1,000,000 in principal and interest payable under
the loan. The final agreement was executed on June 24, 1960.
The Division in its summation noted some complimentary
language used by James R. Hoffa in referring to the Pritzker family
at a Board of Trustees Meeting of the Pension Fund. This reference
may have been to the fiscal responsibility of the Pritzkers. Never-
theless, no evidence was presented during the current proceedings to
suggest any wrongful involvement by anyone in connection with this
loan transaction.
3. 1966-1970 Loatts
From April 1966 until December 1970, a series of three loans
was made by the Pension Fund to entities controlled by the Pritzker
fanlily in order to finance the expansion needs of the San Jose Hyatt
House. On April 1, 1966, Motel San Jose, Inc., ("MSJ") received a
first leasehold mortgage loan on the San Jose Hyatt House in the
principal amount of $2,450,000 with interest payable at the rate of
6 1/2 percent per annum, with repayment due on May 1, 1986.' On
November 25, 1968, MSJ received a second leasehold mortgage loan
from the Pension Fund in the principal amount of $737,000 with
interest payable at the rate of 7 percent per annum, with repayment
'Since Stantk)rd Clinton was still counsel to the Pension Fund at the time
that this loan application was pending before the Board of Trustees of the
Pension Fund, Frank J. McGarr, Esq., was again retained to represent the
interests of the pensioners.

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due on May 1, 1986. During this licensure hearing, no evidence was
introduced that suggests any wrongful involvement or impropriety in
connection with either of these first two San Jose Hyatt House loan
transactions. We find, therefore, that the foregoing transactions do
not adversely affect the qualifications of any applicant.
Since the Division, in its summation, focused on several aspects
of the third loan transaction, the chronology of that financial arrange-
ment must be examined further. By letter dated October 8, 1968,
Francis J. Murtha, Executive Secretary of the Pension Fund, advised
Abraham Nicholas Pritzker that his request for an additional loan
of $1,300,000 had been formally denied by the Steering Committee
of the Board of Trustees at their meeting held on September 26 and
27, 1968. In response to that denial, Mr. Pritzker wrote a letter dated
November 26, 1968, to Allen Dorfman, an individual of dubious
character and reputation who had at that time significant influence
over the affairs of the Pension Fund, in which he requested Dorfman's
assistance in getting the loan application approved. A second letter
written by Mr. Pritzker to Doffman, dated January 28, 1969, makes
reference to a prior conversation between the two individuals at which
time Doffman allegedly told Pritzker that he would reconsider the
loan request. The January 28 letter also contains another request for
the additional financing.
Moreover, a letter written by Jay Pritzker to Murtha dated July
17, 1969, indicates that by that date the Steering Committee of the
Board of Trustees had tentatively approved the loan request for
$1,300,000. Ill the July 17 letter, Jay Pritzker proposed increasing the
loan froIll $1,300,000 tO $2,000,000 in order to finance additional
expansion of the facility. Although the Board of Trustees of the
Pension Fund approved the loan package by the end of August 1969,
the closing did not occur until the middle of December of that year.
At closing, Hotel Equities, the successor to MSJ, received a third
leasehold mortgage loan from the Pension Fund in the principal
amount of S2,000,000 with interest payable at the rate of 9 l/2 percent
per annum, 'ith repayment due in 1986.
The concern expressed by the Division centers on the relationship
bet'een Abraham Nicholas Pritzker and Allen Doffman and when
any improper influence 'as brought to bear on the Pension Fund's
decision to reinstitute the loan package that had been formally denied
by the Steering Committee in September 1968. Although the Division
dras attention to the "Dear AI" salutation used by Abraham
Nicholas Pritzker in his t'o letters to Dorfman. 'e are not troubled

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by this after having heard the testimony of Mr. Pritzker whom we
find to be a very credible and forthright witness. He testified that he
first met Dorfman while vacationing at his summer home in Eagle
River, Wisconsin. Over the course of his 86 years, Pritzker has met
Dorfman only three or four times. Furthermore, when questioned
about the salutation used in the two letters, Pritzker stated that his
choice of words "didn't indicate any particular love or affection or
friendship or respect". Moreover, no evidence introduced at this hear-
ing suggests that there were any bribes, kickbacks, or other wrongful
conduct in connection with this third loan transaction.
Accordingly, based upon the record before this Commission, we
are satisfied that none of the three loan transactions described above
reflect adversely on the good character, honesty or integrity of the
Pritzker family or the Elsinore entities.
4. The 1974 Transaction
On June 24, 1969, Donald N. Pritzker entered into an agreement
to purchase the Dallas Cabana Hotel, which was then being adminis-
tered by a trustee in bankruptcy. At that time, two competing groups
were claiming beneficial ownership of the property. In view of this
cloud over the title, the trustee also executed a lease under which the
hotel would be leased to Donald N. Pritzker pending consummation
of the sale under the sale agreement. Pritzker thereafter assigned his
interest under the sale agreement and under the lease to Rockwood
and Company, a Pritzker controlled entity. The litigation over the
ownership question became quite protracted and remained unresolved
until 1974.
On July 11, 1974, Rockwood and Company purchased the hotel
subject to, but without assuming, the existing Pension Fund mortgage
with a then outstanding principal balance of $2,065,236. In exchange
for the Pension Fund's granting a stretch-out of the mortgage pay-
ments until 1994, Rockwood and Company agreed to increase the
interest payable to 8 1/2 percent per annum. A new note and security
documents were then executed which together established a non-
recourse first mortgage lien on both the real and personal property.
Additionally, Hyatt guaranteed all funds due under the note and the
deed of trust.
Despite Hyatt's operation and management of the facility, the
Dallas venture ultimately proved unprofitable and subsequently was
sold. The buyer purchased the property subject to the Pension Fund
mortgage at its then current outstanding balance.

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The Division, in its closing statements, expressed no reservations
in connection with this transaction. From our examination of the
record, we find that the financial background of this acquisition does
not negatively impact upon the qualification of either the Pritzkers
or any of the Elsinore entities.
5. The 1975 Loans
At the Hyatt Board of Directors meeting held in August 1974,
there was considerable discussion as to how the company could obtain
additional working capital in order to meet the cash flow requirements
of its ambitious expansion program that was then occurring. Melville
Marx, St., a member of the Hyatt Board of Directors, was requested
by the Board to investigate the possibility of obtaining a loan from
the Pension Fund.  Apparently, this decision was motivated by Marx's
experience in effectuating the private placement of debt obligations
and equity securities and his familiarity with various Trustees of the
Pension Fund and with the Pension Fund's Asset Manager, Alvin
Marx's testimony before this Commission indicated that he had
first met Baron while vacationing at the LaCosta resort in California.
During subsequent vacations at LaCosta, Marx had occasional social
contacts with Baron. Shortly after the August 1974 Board meeting,
Marx contacted Baron and inquired whether the Pension Fund might
be interested in making a long-term loan to Hyatt. Marx also sug-
gested the possibility of structuring a financial package that would
include the long-term loan and the acquisition by Hyatt of a facility
known as the King's Castle. '? In response to Marx's proposals, Baron
indicated that it would not be appropriate for him to comment be-
cause the King's Castle property was then the subject of ongoing
negotiations between the Pension Fund and another company. After
these negotiations proved unsuccessful, Baron contacted Marx and
expressed an interest in pursuing the Hyatt proposal. Marx thereafter
arranged for Baron to meet Jay Pritzker, who subsequently took the
lead role in negotiating the deal on behalf of Hyatt.
'At that time, Marx was also First Vice President of Dean Witter & Co.
"Baron, an individual of questionable character, has been the subject of
scrutiny by various law enforcement agencies.
'"Located at Lake lahoe, Nevada, the King's Castle Hotel and Casino had
previously been acquired by the Pension Fund in lieu of a foreclosure action
and was not in operation at the time.

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By letter dated December 21, 1974, Nathan Wolfberg, counsel
to the Pension Fund, indicated that Baron had instructed him to
inform Allen Turner, an attorney representing the Pritzker interests
in these negotiations, that the Pension Fund no longer wished to
pursue this proposal. In his testimony before the Securities and Ex-
change Commission ("SEC") on June 8, 1978, Abraham Nicholas
Pritzker stated that this impasse was due to the temperament of the
attorneys involved in these negotiations. None of the other witnesses
who testified before this Commission had an independent recollection
of the reasons why these negotiations were terminated.
Marx testified that upon learning of this difficulty, he called
Baron to ascertain the exact nature of the problem. Baron's response
was that he had had second thoughts regarding the proposed deal and
would be willing to speak to Marx after the upcoming New Year's
holiday. During his New Year's vacation at LaCosta, Marx met Frank
Fitzsimmons," who had been a social acquaintance and an occasional
golf partner of Marx's. Having previously spoken to Fitzsimmons
about the proposed financial deal between Hyatt and the Pension
Fund, Marx initiated a conversation with the labor leader and de-
termined that Fitzsimmons did not know that the negotiations had
been discontinued. Additionally, Fitzsimmons assured Marx that the
Pension Fund intended to proceed with the transaction. An internal
Hyatt memo dated January 17, 1975, indicates that negotiations had
resumed by that date.
The financial package that had been proposed originally in broad
terms by Marx was finally agreed upon in 1975. On February 27, 1975,
the Elsinore Corporation borrowed $30,000,000 from the Pension
Fund by issuing a debenture which was secured by Elsinore's own-
ership interest in its Four Queens Hotel and Casino. The Four Queens
Hotel and Casino is located in Las Vegas, Nevada, and had been
purchased by Elsinore in January 1973 for a total price of $17,600,000.
Bearing interest at the rate of 8 1/2 percent per annum, this debenture
will mature in 2007. In a related transaction, Hyatt Tahoe, Inc. ac-
quired the King's Castle Hotel and Casino from the Pension Fund
for a stated purchase price of $19,250,000 payable in the form of a
non-recourse purchase money note for that amount with interest
payable at the rate of 6 percent per annum, with repayment due on
August 1, 2007.
"Fitzsimmons succeeded James R. Hoffa as President of the International
Brotherhood of Teamsters Union.

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In its summation, the Division expressed reservations about two
aspects of these loan transactions. The Division's initial concern was
that the applicant failed to explain adequately why the negotiations
were terminated in late December 1974 and later reinstituted in early
January 1975. Although it is undeniable that none of the witnesses
who testified on behalf of the applicant at the hearing have any present
recollection of why these negotiations were terminated, we find
Abraham Nicholas Pritzker's testimony at the SEC proceeding on
June 8, 1978, to be persuasive. In attempting to effectuate a deal of
such magnitude, it seems reasonable that personalities and interests
of the principal agents might clash, precipitating a temporary break
in the negotiations. It is also undeniable that no witness testified as
to the reasons why the negotiations later resumed, although the testi-
mony of Marx suggests that Fitzsimmons may have had a role in
persuading Baron to reconsider his earlier decision to abandon the
negotiations. In any event, the failure of the witnesses to recall specific
details of this incident some seven years ago does not demonstrate
wrongful conduct or impropriety in connection with these loan trans-
The Division also expressed concern over a fee paid by Hyatt
to Dean Witter & Company that ultimately resulted in a bonus being
paid to Marx by his employer. On February 2, 1975, the Hyatt Board
of Directors agreed to pay $150,000 to Dean Witter & Company as
a brokerage commission for the professional services that Marx
rendered in connection with these loan transactions. In recognition
of his efforts, Dean Witter & Company gave Marx a $30,000 bonus.
Marvin Tepperman, who was general counsel for Hyatt at the time
of the Board decision to pay the brokerage commission to Dean
Witter & Company, testified here that he initially was concerned that
such a payment to an individual who was also a member of the Board
of Directors might be improper. He subsequently concluded, however,
that Marx's efforts were beyond the normal duties of a director and
that such a fee therefore would be appropriate. Full disclosure of this
payment was made by Hyatt to the SEC, the Internal Revenue Service
("IRS"), the Nevada Gaming Control Board, and to this Commission.
Although we express no opinion as to the propriety of such a practice,
we find that the payment by Hyatt of the finder's fee to Dean Witter
& Company does not negatively reflect upon its qualifications or the
qualifications of the Pritzkers.

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After having carefully reviewed all of the documentary and testi-
monial evidence presented during this hearing, the Commission is
satisfied that the Pritzker family and the Elsinore entities have estab-
lished by clear and convincing evidence their qualifications for
licensure. Both Abraham Nicholas and Jay Pritzker provided this
Commission with credible testimony that aided us in arriving at our
conclusions. Moreover, the testimony of the other witnesses and the
exhibits provided by both the Division and the applicant were respon-
sive to the areas of concern identified by the Division.
During its summation, however, the Division opined that the
Commission should direct the Pritzker family and Elsinore to have
no more financial dealings with the Pension Fund and should also
direct them to make efforts to extricate themselves from the financial
arrangements that they currently are involved in with the Pension
Fund. At the present time, however, no sound reasons have been
offered as to why such directives are essential. Absent evidence to the
contrary, New Jersey's casino regulatory process would not seem to
benefit by the imposition of such conditions. In making this de-
termination the Commission is aware that there is now substantial
supervision of the administration of labor pension assets, including
those of the Teamsters Central States, Southeast and Southwest Areas
Pension Fund. Accordingly, the Commission finds it unnecessary to
impose any conditions at the present time with regard to these loans.
If, in the future, however, the Division believes that some action is
necessary with regard to these Teamsters Pension Fund loans, the
Commission will entertain an appropriate application with supporting
Any attempt to chronicle the development of the Playboy': en-
''Throughout this Opinion, the name "Playboy" is used to refer collectively
to Playboy Enterprises, Inc. ("PEI") and its subsidiaries. When it is necessary
to distinguish between the parent company and its subsidiaries, the parent
is referred to as "PEI" and the subsidiaries by their full names or abbrevia-

Page 14 of 81 View in DJVU

tities must logically commence with a brief examination of the individ-
ual, Hugh M. Hefner, who has been publicly identified as the person-
ification of its various business ventures. Since his elementary school
days, Hefner has had a keen interest in journalism. After a series of
positions in magazine publishing and marketing, Hefner launched in
December 1953 what would later become Pla. t'bO' Magarine, publish-
ing the first two issues from his apartment with an initial capitalization
of $6,000. Appealing to a young and affluent male readership, the
magazine's circulation increased steadily as the periodical became
nationally known." As editor and publisher of the magazine, Hefner
was the individual most singularly responsible for its meteoric success.
Anxious, however, to concentrate on editorial and broad policy mat-
ters, in 1958 Hefner hired Robert S. Preuss, a college roommate and
C.P.A., to supervise the financial operations of the company. In 1971
Preuss became Chief Operating Officer of Playboy. He left the com-
pany several years later.
Toward the end of the 1950's Hefner and his associates concluded
that the nightclub business would be an appropriate avenue for the
expansion of the company's business interests. By the time its first
club opened in Chicago in 1960 Playboy had organized a separate
corporation to conduct the affairs of this venture. Since its formation
in 1959 Playboy Clubs International ('PCI") has become the com-
pany's largest and most important subsidiary. Much of the early
success of PCI can be traced to the efforts of two individuals, Victor
A. Lownes, III and Arnold Morton, neither of whom are employed
by the company today. Lownes originally joined the Playboy staff in
1955 and thereafter participated in a variety of promotional and
entrepreneurial activities on behalf of the company. Morton, an ex-
perienced restauranteur, joined Playboy in 1957 and ultimately be-
came responsible for the operation of the domestic Playboy Clubs.
During the 1960's and into the 1970's, Playboy further diversified
within the entertainment and leisure fields. Through a subsidiary of
PCI, Playboy entered the British casino industry with its acquisition
in 1966 of the Playboy Club of London ('PCL"). Subsequently,
further acquisitions were made in British gaming, including the Cler-
"From an initial press run of 70,000 copies, the monthly sales of the magazine
reached 1,000,000 copies by 1959, 3,000,000 copies by 1965 and a peak of
7,000,000 copies in 1972. Currently, monthly circulation ranges between
5,000,000 and 6,000,000 copies.

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mont Club, two smaller casinos in the provinces of Portsmouth and
Manchester, and finally the Victoria Sporting Club.
On February I l, 1971, Playboy consolidated its operations under
the name of Playboy Enterprises, Inc. The company became publicly-
traded in November 1971. The proceeds of this public offering were
used primarily to fund the development of a Playboy resort hotel in
northern New Jersey which has been sold recently. It should be noted
that while the company is publicly traded, as of October 31, 1981,
Hefner owned approximately 65.9 percent of the common stock of
Within the last few years, PEI has consolidated its holdings and
has sought to divest itself of most of its unprofitable ventures. In
addition to publishing Playboy and Games magazines, the company
operates and has franchised clubs throughout the world. The.licensing
and merchandising of Playboy products continues to be a growth area
for the company. Continuing efforts are being made to revitalize its
book publishing and book club operations. Although Playboy has
recently sold its British gaming operations, a subsidiary of the com-
pany continues to operate a casino in the Bahamas, which is owned
by the Bahamian government. Through a wholly-owned subsidiary,
PEI currently owns approximately 85 percent of a limited partnership
known as Playboy of Atlantic City ("PAC").  That entity, in turn,
owns approximately 54 percent of Playboy-Elsinore Associates. PEI
thus effectively owns approximately 46 percent of PEA.
Accompanying the consolidation of Playboy's business ventures
was a restructuring of the senior management function and the ad-
dition of certain key executives. The September 1976 appointment of
Derrick J. Daniels as President and Chief Operating Officer of the
company marked a significant milestone in Playboy's history. Hefner
formally delegated the operational responsibilities of the company to
Daniels and assumed the positions he currently holds, Chief Executive
Officer and Chairman of the Board of Directors. Two other significant
appointments were those of Marvin Huston as Chief Financial Officer
in 1977 and Frank DiPrima as General Counsel in 1978.
In its opening statement to the Commission, the Division outlined
The limited partners and their respective interests in PAC are respectively:
Dorothy M. Whither, 5.665 percent; William C. Whitner, 4.388 percent;
William E. Craver, Jr., 2.304 percent: and Milton N. Zic, 3.350 percent.

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its major areas of concern with respect to the Playboy entities and
its principal shareholder, Hugh M. Hefner. The role of several key
Playboy officials, including Hefner, in the events leading up to the
New York State Liquor Authority investigation in the early 1960's
was identified as an important area of concern to the Division. Simi-
larly, the Division's opening statement made it clear that a substantial
portion of this hearing would also be devoted to a review of the events
that eventually culminated in the October 1981 decision by a commit-
tee of British magistrates that casino licenses for the Playboy Club
of London and the Clermont Club would not be renewed. A third
area of concern to the Division was the 1974 and 1975 Drug Enforce-
ment Administration investigation into the alleged use of and traffick-
ing in narcotics by certain Playboy personnel. Also of concern to the
Division was the relationship between certain Playboy employees and
various individuals of questionable character in connection with the
establishment and operation of Playboy facilities in Miami, New
Orleans, and the Bahamas. Finally, the Division raised questions
regarding Hefner's 1978 retention of an attorney named Sidney R.
During the course of this lengthy hearing, other issues relevant
to the qualifications of the applicant were explored. At the close of
the evidentiary portion of this hearing, the Division, in its summation,
focused on its two major areas of concern: the New York State Liquor
Authority investigation and the British magistrates' decision not to
renew the casino licenses of the Playboy Club of London and the
Clermont Club. The Division then voiced its position with respect to
the licensure of Hefner and the Playboy entities.
?.. it is the opinion of the Attorney General of this state
and the Division of Gaming Enforcement that Hugh M.
Hefner and the Playboy Corporation are unfit and un-
welcome to operate a casino in the State of New Jersey.
This Opinion will examine in detail the two major areas of con-
cern identified by the Division in its summation. The other issues
raised by the Division in its opening statement and in its proposed
findings of fact and conclusions of law will also be examined, albeit
in a less exhaustive manner.
1. The New York State Liquor Authority Investigation
The following is the Opinion of Commissioners Jacobson,
McWhinney, and Thomas. A substantial portion of this hearing exam-
ined the role of certain Playboy officials in the events that led to the

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New York State Liquor Authority ("SLA") investigations and pros-
ecutions of the early 1960's. Even though some 20 years have elapsed,
it is nonetheless possible to trace the cast of characters and sequence
of events in that scandal from beginning to end. Our inquiry has been
aided by two sets of trial transcripts, '5 and by numerous grand jury
transcripts admitted into evidence during the course of these proceed-
ings. Before proceeding with our legal analysis, we will initially re-
construct the factual background and chronology.
The first Playboy Club opened in Chicago in February 1960. A
distinctive, although not unique, feature of this operation was its
utilization of a membership key admission system. As a marketing
technique, patrons were required to pay a one-time admission fee and
in return were given keys which thereafter guaranteed free admittance
at all Playboy Clubs. All members of the public were invited to
purchase these keys.
While developing the Chicago Playboy Club, PCI officials de-
cided to open another key club in New York City. Concurrently,
literature advertising the advance sale of keys was mailed to prospec-
tive club members in the metropolitan New York area. Playboy of-
ficials also began to actively seek an appropriate location for the New
York Club.
During the summer of 1960, the Playboy management en-
countered the first in a series of obstacles with regard to the New
York project. In July, Ralph Berger, a Chicago-based real estate
entrepreneur and a casual acquaintance of Arnold Morton, ap-
proached at the latter's restaurant. By this juncture, Morton had
assumed this role as the PCI officer primarily responsible for the
operation of the Playboy Clubs. At this first meeting, Berger told
Morton that Playboy would have serious problems getting a liquor
license in New York City. Thereafter, Berger contacted Morton again
at the restaurant, and told Morton that he would be entertaining
Martin Epstein, Commissioner of the New York SIA, in Chicago.
Morton suggested that Bergen take Epstein to the Chicago Playboy
Club as Playboy's guest in order to afford Epstein the opportunity
to view the Chicago operation.
A week or so later, a third meeting between Berger and Morton
'fAll citations to D-905, the thai transcript of People v. Morhouse. refer to
the numbers at the bottom of the pages. All citations to D-904, the trial of
People v. Berger, refer to the number of the trial transcript page. With regard
to D-904B only, this means the parenthetical numbers in the body of the text.

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occurred. Although Epstein had not had sufficient time to visit the
Chicago Playboy Club, Bergen said that Epstein left Chicago extreme-
ly upset over the mailings made by Playboy and the company's
proposed method of operation in New York as a key club. Moreover,
Berger indicated that Epstein had told him that it would cost Playboy
$50,000 to obtain a liquor license to open the club in New York. After
Morton expressed some skepticism, Berger stated that another club
had paid $60,000 to get a liquor license and was still having problems
because its owners did not go through proper channels.
After hearing this startling information, Morton related it to his
associates at PCI. At that time, the inner circle at PCI consisted of
Hefner, Preuss, Lownes, and Morton. These PCI officials decided to
investigate Berger's claims. In the event that Berger could actually
deliver a liquor license that would allow the New York Club to utilize
a key admission policy, all four Playboy officials agreed to make the
$50,000 payment.
Approximately one week later, Berger informed Morton that a
meeting with Epstein had been arranged in New York. On August
15, 1960, Berger and Morton went to meet Epstein at the SLA offices.
The meeting amounted to little more than a handshake since Epstein
excused himself for another appointment shortly after having been
introduced to Morton in the lobby of the building. Although no
substantive discussions were conducted during this brief encounter,
the significance of this meeting was symbolic. By "delivering" Epstein,
Berger was able to at least partially substantiate what he had told
Morton at the third meeting in Chicago. Thereafter, satisfied that
Berger accurately represented the involvement of Epstein, the Playboy
officials proceeded on August 22, 1960, with the company's "first
major wave" of membership mailings to the State of New York.
Utilizing Bergen as an intermediary, Epstein subsequently in-
structed Playboy to retain attorney Hyman Siegel to handle Playboy's
liquor license application. Accompanied by Berger, Morton travelled
to New York to discuss the liquor license application with Siegel at
the end of October 1960. During their conversation, Siegel informed
Morton that Playboy could not legally use a key admission plan if
it wished to operate the club on a "for-profit" basis. Siegel suggested
that PCI circumvent this problem by foregoing the desired retail liquor
license, and applying instead for a "not-for-profit" private club
license. If Playboy chose the nonprofit alternative, then the key ad-
mission plan could be utilized, and any actual profits generated there-

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from could be siphoned into management corporations created speci-
ficially for that purpose.
After voicing his disapproval of this proposal, Morton returned
to Chicago and again conferred with his associates. Since the PCI
leadership adamantly opposed Siegel's suggestion, a second meeting
with Siegel was arranged. At this conference late in November 1960,
another New York attorney, Edward King, joined Siegel. Both Siegel
and King attempted to persuade Morton that the only viable option
available to Playboy was the nonprofit route. These efforts proved
unsuccessful because the Playboy officers had already concluded that
the suggested scheme would generate a myriad of tax problems for
the company. Despite this controversy, Siegel received a $5,000 re-
tainer from Playboy by a company check dated November 27, 1960.
While Playboy's licensing problems grew more acute, efforts were
underway to secure a suitable location to house the New York Play-
boy Club. In mid-October 1960, the Edgar Realty Corporation was
formed and served as an agent for Playboy in its acquisition efforts.
Playboy did not act expeditiously and the present Playboy facility was
purchased by another entity on October 26, 1960. However, by an
assignment dated November 27, 1960, Playboy obtained the right to
acquire the facility that is the site of its New York Club to this date.
On December 9, 1960, about two weeks after Morton's meeting
with Siegel and King, Hefner wrote a letter to Siegel. As an alternative
to the nonprofit club plan, Hefner suggested formation of two distinct
corporations, one "for-profit" and one "not-for-profit". Each corpor-
ation would operate a portion of Playboy's New York facility. The
"for-profit" operation would be open to the general public upon
purchase of an admission key. The nonprofit club would appeal to
an exclusive clientele and would have a limited admission policy.
In this letter, Hefner wrote that Playboy wanted to "eliminat[e]
any possible suggestion of subterfuge and keep everything very much
on the up and up". Hefner argued that "nothing in the Illinois or
New York statutes in any way prohibits the charging of an admission
to an establishment that offers food, liquor and entertainment". When
this letter was written, Playboy was awaiting a decision in an Illinois
case that it initiated involving an admission key issue similar to the
one under discussion in New York.
In December 1960, the PCI officers decided to contact Epstein
directly in an effort to convince him of the legality of their proposed
method of operation. kownes and Hefner went to New York in
January 1961 and met with Siegel, Epstein, and an SLA staff attorney.

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By the time of this meeting, Playboy had received a favorable court
decision in Illinois. A copy of that opinion was brought to New York.
Epstein held steadfastly to the view that New York law prohibited
a retail liquor licensee from selling admission keys in connection with
a "for-profit" business. Although pressed by the Playboy executives
to cite express legal authority to support this position, Epstein refused.
Shortly after this January meeting, Berger contacted Morton and
told him that Epstein was extremely upset with Lownes and Hefner.
Referring to these Playboy officers as "boy scouts", Epstein told
Berger that he wanted nothing further to do with these individuals.
Moreover, Epstein remained convinced that the continuing Playboy
mailings were illegal. Playboy responded by informing Berger that it
intended to secure the appropriate liquor license by undertaking legal
action. Although Playboy failed to institute any legal proceeding
during this period of time, the company continued to send mailings
advertising the sale of keys to the public. The breakdown in nego-
tiations resulted ultimately in Siegel's withdrawal as counsel to PCI.
By letter dated March 31, 1961, Siegel resigned as PCI counsel and
returned his entire $5,000 retainer. At one point during this impasse,
Morton told Berger "to try to keep the door open, to try to talk to
Berger was in contact with Epstein during this period of time.
In late April 1961, Berger informed Morton that Epstein had agreed
to reinstate his earlier deal with Playboy, but that now Morton would
also need to strike a separate deal with L. Judson Morhouse.
Morhouse was the Chairman of the Republican Party in the State
of New York and a political crony of Martin Epstein.
This new overture was then evaluated by the inner circle at PCI.
Hefner, Lownes, Preuss, and Morton all agreed that Morton should
meet with Morhouse in order to investigate what Bergen had said.
Assuming that an understanding could be reached with Morhouse,
the Playboy officials agreed to revive their earlier deal with Epstein.
Following the directive from his colleagues, Morton met with
Berger and Morhouse in New York on May 2, 1961. After Morton
explained the type of liquor license that Playboy wished to obtain and
the problems that had been encountered, Morhouse advised Morton
that he would assist Playboy in securing the desired liquor license in
one of several ways: interceding with Commissioner Epstein, replacing
the elderly Commissioner upon his retirement, or by seeking a legislat-
ive amendment to the New York State liquor laws. In exchange for
his services, Morhouse demanded $100,000 to be paid in installments

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over a five-year period, an option to purchase $100,000 worth of
Playboy stock in the event that the company became publicly-traded,
and a concession to operate gift shops within the Playboy clubs.
Morhouse also made it clear that his deal was separate from, and
supplemental to, the one that had already been made with Epstein.
Morton returned to Chicago after this meeting and presented the
Morhouse proposal to his associates at PCI. kownes suggested that
Playboy contact the authorities and expose these corrupt public of-
ficials. Instead of adopting this course of action, a decision was made
to dispatch Morton and kownes to New York to negotiate with
Morhouse regarding the terms of his proposal.
At the second meeting with Morhouse, the Playboy representa-
tives told him that if he received a stock option and the company
became publicly-traded, then his name would have to be disclosed in
the company's prospectus. The problems that would arise if Morhouse
was granted concessions at the Playboy Clubs were also discussed.
Although a consensus had not yet been reached on all issues, the
Playboy officials made it clear that they had decided to pay Morhouse
$100,000 in exchange for his assistance in securing the desired liquor
license. During this discussion, Morhouse stated that he desired his
payments to emanate from H.M.H. Publishing Company (the pub-
lisher of Playboy magazine) instead of PCI. For obvious reasons,
Mothouse wanted to insulate himself from a direct relationship with
the prospective liquor licensee.
To finalize the terms of their agreement, Morhouse met with
Hefner, kownes, Preuss, and Morton in Chicago in June 1961. Con-
cessions were made on both sides. Morhouse agreed to abandon two
of his original demands, the stock options and the gift stores in the
clubs. Playboy reciprocated by agreeing to pay Morhouse through the
publishing company instead of through PCI. To further shield his
involvement, Morhouse also agreed to retain and pay another at-
torney to actually file the appropriate liquor license applications for
Playboy. Through the use of an intermediary, Morhouse retained
Jerome Marrus in July 1961, and thereafter Marrus filed Playboy's
liquor license applications.
After Playboy reached an agreement with Morhouse in June
1961, Berger contacted Morton to arrange for Epstein to be paid the
first half of his $50,000 fee. On June 28, 1961, two PCI checks, each
in the amount of $12,500 were made payable to two designees of
Ralph Berger. Presumably, Berger then forwarded these funds to

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After his agreement with Playboy had been finalized, Morhouse
on July 17, 1961, submitted a bill for $20,000 to HMH Publishing.
On August 9, 1961, a check drawn on PCI in the amount of $10,000
was sent to Morhouse. Later, at Morhouse's request, a check drawn
on the magazine was substituted for the first instrument. Preuss later
reimbursed H.M.H. Publishing Company with a PCI check.
Playboy continued to make payments to Epstein and Morhouse
well into 1962. During this period, Berger also received remuneration
from Playboy for his services. He had received earlier a series of small
payments to reimburse his expenses, and, in February 1961, a $5,000
payment for services.
In November 1961, Marrus filed a liquor license application on
behalf of Playboy. By letter dated December 26, 1961, the SLA con-
ditionally approved this license application pending completion. of
construction on the project. Thereafter, the SLA and Playboy nego-
tiated a series of stipulations regarding Playboy's key admission plan.
While these events were occurring, unbeknown to the parties
concerned, the New York County District Attorney's Office was
conducting an investigation into corruption at the SLA. The District
Attorney's investigation was publicly revealed in November 1962 on
the day after Election Day, when newspapers reported that Com-
missioner Epstein had been subpoenaed to testify before a grand jury.
After learning of the SLA inquiry, Governor Nelson Rockefeller
offered his assistance to the District Attorney's Office. On November
30, 1962, the Governor issued a public statement urging all liquor
licensees to cooperate with the District Attorney's investigation and
promising those who cooperated there would be no reprisals affecting
the conduct of their businesses.
When Epstein appeared before the investigating grand jury, he
invoked his privilege against self-incrimination and refused to testify.
Governor Rockefeller responded by removing Epstein from his pos-
ition with the SLA. Epstein's termination thwarted Playboy's plans.
By stipulation dated December 7, 1962, Victor Lownes, on behalf of
the Playboy Club of New York, agreed that the club would be open
to members of the general public without the purchase of keys. Ac-
cordingly, a liquor license was issued and the club finally opened early
in December 1962. After this December stipulation was executed,
Playboy, for the first time, sought redress in the New York courts.
Ultimately, Playboy prevailed, as the courts upheld the right of New
York liquor licensees to require keys for admission to "for-profit"

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On December 12, 1962, the books and records of the Playboy
Club of New York were subpoenaed by a New York grand jury.
Thereafter, Morton, acting on his own initiative, telephoned
Morhouse, notified him of the seizure, and told him that the com-
pany's books reflected payments to him by Playboy. There is no
evidence Morton consulted Hefner, Preuss, or [.ownes, individually
or collectively, before he did this.
Shortly after the subpoena was served, Playboy retained Milton
Pollack, a New York attorney who presently serves as a Federal court
judge in the Southern District of New York. An arrangement was
worked out between Pollack and representatives from the District
Attorney's Office. In exchange for their full cooperation and testi-
mony, Hernet, [.ownes, Morton, and Preuss were granted immunity
from prosecution.
The testimony of the Playboy officials aided the prosecution in
obtaining convictions against Berger ' in 1964 and Morhouse in 1966.
Although Hefner testified before the 1963 New York County Grand
Jury, he was not called as a witness at either the Berger or Morhouse
After having detailed the involvement of Playboy and its officers
in the above matter, we begin our legal analysis with a review of the
pertinent sections of our enabling legislation, the Casino Control Act
('Act"), N.J.S.A. 5:12-1 et seq. Under Section 86(g) of the Act, an
applicant for a casino license will be denied licensure if such applicant
has committed any act or acts which constitute any offense under
subsection c. of Section 86, even if such conduct has not or may not
be prosecuted under the criminal laws of this State. Assuming that
an applicant has committed any act or acts which constitute disquali-
fying offenses under Section 86(c), there need not be a disqualification
in every instance. Section 86(c)(4) provides that:
[T]he automatic disqualification provisions of this subsec-
tion shall not apply with regard to any conviction which
did not occur within the 10-year period immediately
preceding application for licensure and which the applicant
demonstrates by clear and convincing evidence does not
justify automatic disqualification ...
'6Although Berger's conviction was affirmed by the New York courts, it was
ultimately reversed by the United States Supreme Court in a decision that
limited the use of evidence obtained by means of electronic eavesdropping.
Berger v. New York, 338, U.S. 41, 87 S. Ct. 1873, 18 L. Ed. 2d 1040 (1967).

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While the above proviso speaks in terms of convictions, we deem that
it must apply equally where it has been found pursuant to Section
86(g) of the Act that an applicant has committed a disqualifying
offense although not convicted therefor.
We find that the facts related above which are drawn from the
evidence in the record herein, demonstrate by a fair preponderance
of the credible evidence that Hugh M. Hefner and Playboy engaged
in conduct falling within the proscription against bribery contained
in N.J.S.A. 2C:27-2, one of the enumerated offenses under Section
86(c) of the Act.
N.J.S.A. 2C:27-2 defines the crime of bribery in official and
political matters, and provides in pertinent part:
A person is quilty of bribery if he directly or indirectly
offers, confers or agrees to confer upon another ...
a. Any benefit as consideration for a decision, opinion,
recommendation, vote or exercise of discretion of a public
servant, party official or voter on any public issue or in
any public election; or
b. Any benefit as consideration for a decision, vote, rec-
ommendation or exercise of official discretion in a judicial
or administrative proceeding: or
c. Any benefit as consideration for a violation of an official
duty of a public servant or party official; or
d. Any benefit as consideration for the performance of
official duties.
For the purposes of this section "benefit as consideration"
shall be deemed to mean any benefit not authorized by law.
It is no defense to prosecution under this section that a
person whom the actor sought to influence was not quali-
fied to act in the desired way whether because he had not
yet assumed office, or lacked jurisdiction, or for any other
In any prosecution under this section of an actor who
offered, conferred or agreed to confer ... a benefit, it is
no defense that he did so as a result of conduct by another
constituting theft by extortion or coercion or an attempt
to commit either of those crimes.
Any offense proscribed by this section is a crime of the
second degree. If the benefit offered, conferred, agreed to
be conferred ,.. is of the value of $200.00 or less, any
offense proscribed by this section is a crime of the third
We have considered all the arguments advanced by the parties

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regarding whether under then-existing New York law Herher could
have been successfully prosecuted for the crimes of bribery of a public
official and conspiracy to bribe. Reasonable individuals could ob-
viously differ with regard to this matter. Significantly. Nicholas
Scopctta, a former New York County Assistant District Attorney and
an expert on the New York criminal laws, testified during this hearing
that, based on his subsequent review of the Berger and Morhouse
transcripts, "the Playboy people would have been able to offer a viable
defense of extortion.'* In view of our above determination, it is un-
necessary to make a specific finding about Herher's guilt or innocence
in the State of New York during the early 1960's. However, various
mitigating factors exist, which do not justify, but which help to put
in perspective how Hernor succumbed to the influence of corrupt
public officials.
Specifically, we find that there was pervasive corruption within
the New York SkA during the early 1960's. One of the corrupt public
officials, Martin Epstein, actively sought out Playboy, nefariously
peddling his influence in regard to Playboy's prospective club oper-
ation and liquor license application in New York. Subsequently a
more powerful but equally corrupt public figure, L. Judson Morhouse,
joined Epstein to coerce Playboy to make improper payments to him.
Prior to being enticed by the venal influence of Berger, Epstein, and
Morhousc, it is clear that neither Playboy nor its officials had a
predisposition or desire to unilaterally make unlawful payments to
public officials.
At the time Playboy agreed to make payments, there was at least
some, albeit limited, financial commitment to operate a key admission
club in the State of New York. Additionally, corrupt officials at the
SLA were also demanding and receiving tribute from numerous other
persons and entities subject to their regulatory authority because it
was the way the SLA did business.
Rather than making payments, other options may have been
available to Playboy. It serves no purpose in this case to retro-
spectively examine these other options. Payments were made. How-
ever, as Hefner acknowledged before a 1963 grand jury and before
this Commission these payments were wrong. This acknowledgment,
by itself, does not wipe away what occurred, but it should not go
unnoticed or unrecognized by us in evaluating Hefner's present
Furthermore, it is noteworthy that Playboy and its officials coop-
erated with the New York Distict Attorney's Office in its investigation

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and prosecution of corruption at or associated with the SLA. This
cooperation was subsequently acknowledged by Alfred J. Scotti, Chief
Assistant District Attorney who, on December 8, 1965, forwarded a
letter to the Commissioner of Licenses in New York, requesting that
no adverse action be taken with respect to Playboy's then pending
cabaret license application.
Jeremiah McKenna, the District Attorney who prosecuted Ralph
Berger and who had been integrally involved in the SLA investigation,
wrote two letters on behalf of Playboy. The first was written on
November 6, 1964, to Wiley Manuel, Deputy Attorney General of
California, wherein he recommended that no adverse action be taken
with regard to Playboy's request for a liquor license in that State. The
second letter was written on October 21, 1969, and was sent to Inspec-
tor Brian Gilliard of the London Police in connection with Playboy's
application for a casino license in Great Britian.'"
In this letter McKenna indicated that "corruption had reached
such a level in that agency that one could hardly obtain a license to
sell liquor without paying off officials of the New York State Liquor
Authority". He further opined that: "Throughout [the] investigation
and subsequent trials, the Playboy Club officials cooperated fully at
considerable expense and embarrassment to themselves". Moreover,
McKenna noted that the testimony of the Playboy officials was crucial
in indicting and convicting certain New York public officials. The
letter also states that no indictment was ever contemplated or returned
against Hefner or his associates. Finally, the letter points out that the
New York District Attorney's Office "characterized Playboy's pos-
ition in the scandals as being that of a victim of moral extortion".
McKenna's view comports with the testimony of Nicholas Scopetta
which we cited earlier.
It has been approximately 20 years since the events underlying
Playboy's involvement with the SLA occurred. If Hefner had been
involved in those events one week ago, one year ago, or even 10 years
ago, we could not find Hefner qualified. See N.J.S.A. 5:12-86. The
passage of time is an important factor for us to consider. By itself,
it can never remove the stain of unlawful or improper activity. Cou-
pled with other considerations, however, this factor may aid an appli-
cant in demonstrating his or her present fitness for licensure. There
'"We note that Playboy was, thereafter, the recipient of a gaming license from
the British gaming authorities and operated casinos there for a period in excess
of ten years.

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has been no evidence that during the last 20 years, Hefner has been
charged with, or convicted of, any criminal offense. Nor has he been
found by us to have committed, or been involved in, any other
disqualifying act or association. See this Opinion, infra. Hence, in this
case the passage of time reflects the fact that the SLA matter was
an isolated incident that has never been repeated.
In order to determine whether Hefner is in fact qualified, we must
make a judgment as to how he will conduct himself in the future.
The need to make that predictive judgment, in turn, requires investiga-
tion of what has been denoted an individual's "character." This
character inquiry is not undertaken to pass moral judgment on a
person's behavior or to punish past wrongs. Rather, the good charac-
ter standard has been established under the Act because of its clear
and close relationship to the paramount objective of an honest and
efficient casino industry. See N.J.S.A. 5:12-1(b)(7) and (15). Ihe good
character requirement heads off the risk of wrongdoing. It assures to
the extent practicable honest performance. It meets the public expecta-
tion that casinos and the industries which directly serve them will be
operated by individuals of honesty and integrity.
"Good character" is a concept used repeatedly in legal as well
as everyday affairs. It is demanded in sundry situations, including,
among others, business, personal and governmental relationships.
Character is usually thought to embrace all of an individual's good
.qualities but also his deficiencies regarding traits of personality, behav-
ior, integrity, temperament, consideration, sportsmanship, altruism,
etc., which distinguish him as a human being from his fellow men.
Because of its generality, the subject defies a cataloguing of all con-
ceivable facts and factors which define the standard. When viewed
in a vacuum, the concept loses all significance. The standard, however,
draws specificity from each setting and from the particular objectives
sought to be achieved. Hence, we must look to an individual's past
conduct as a guide to how that individual is likely to operate a casino
facility in the future.
In an effort to meet the statutorily imposed burden, Hefner
produced evidence in support of his good character, honesty, and
integrity. Various witnesses appeared before this Commission and
testified regarding Hefner and the company's excellent reputation in
the Chicago and Los Angeles communities. One specific example that
was brought to this Commission's attention involved Hefner's volun-
tary $75,000 reduction of salary and his foregoing of approximately
$1,200,000 of dividends in order to assure that the minority share-

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holders of Playboy would be able to receive their dividends. A.A.
Sommer, a former Commissioner of the SEC and counsel to Playboy's
Audit Committee during the SEC inquiry of that company, also
testified that Hefner was cooperative and forthright in that matter.
Furthermore, Hefner's character comes into sharper focus when
his commitment to the Playboy Foundation is examined. The Playboy
Foundation was created in 1965 and supports those organizations in
the United States which are concerned with issues of First Amendment
freedoms, human rights, and civil liberties. As Hefner testified before
this Commission:
... if we were going to be devoting a magazine to the good
life we really ought to deal with the problems that made
the good life not available to certain parts of society.
Championing many unpopular social causes, Hefner has "put his
money where his mouth [is]". Former Ambassador to NOrway Louis
A. Ierner and former Congresswoman Yvonne Brathwaite Burke
both acknowledged the contributions of Playboy and its Foundation
to a variety of civic endeavors.
Obviously, in evaluating one's character, evidence of specific acts
is of paramount significance. We have heretofore discussed Hefner's
involvement in the SLA matter and the attenuating circumstances
surrounding that 20-year old episode. The shadow cast by that inci-
dent has given way to the light shed by a career of social commitment,
honest business dealings, and an otherwise unblemished personal re-
cord of integrity.
It has been suggested that the Commission's final decision enti-
tled In the Matter of the Application of Seymour Alter for Licensure
as a Casino Key Employee, Docket No. 79-EA-60 (1980), affirmed by
the New Jersey Superior Court, Appellate Division, Docket No.
A-4106-79TI (June 24, 1981), is controlling here and thus requires the
disqualification of Hugh M. Hefner. The Alter case is distinguishable.
The Commission disqualified Alter for having, in 1962, committed
acts that constituted bribery, an offense listed in Section 86(c) of the
Act, for lacking in good character, honesty and integrity, and for his
less than candid testimony with regard to the events in question. He
sought to bribe a public official to clear the record of a charge of
illegal activity and to enable him to continue to engage in that activity.
The issue then became whether Alter had demonstrated by clear
and convincing evidence the inapplicability of the automatic dis-
qualification provision contained in Section 86(c)(4) of the Act. Id.

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at 44. We noted in the Alter case, supra at 44, that this issue was a
"close one". It is not so close here.
We have also observed in our Alter decision that
[B]ribery strikes at the very heart of the integrity of govern-
ment regulatory processes in a manner common to few
other offenses. The very object of bribery is, inescapably
and in all contexts, the corruption of government. Its com-
mission demonstrates on the part of the offender not only
a complete disregard for regulatory processes but a willing-
ness to actively corrupt them for private ends. [ld. at 46-47].
In the instant case, Hefner and his associates clearly did not seek
to corrupt a governmental regulatory process. The New York State
Liquor Authority and the individuals associated with it undeniably
were already corrupt by the time Playboy decided to open a New York
club. Moreover, as noted earlier, there were extenuating circumstances
involving the payment of money to these venal and detestable public
officials. These circumstances, which obviously weigh heavily in
Hefner's favor, were lacking in the Alter matter. Whereas Alter sought
out the bribe takers, the bribe takers sought out Playboy. Moreover,
Alter with the assistance of a corrupt SLA official also attempted to
show another how to break the law.
To satisfy the 10 year proviso of N.J.S.A. 5:12-86(c)(4), Hefner
must clearly and convincingly demonstrate his present good character,
honesty and integrity. Unlike Alter, Hefner has accomplished this
task. Alter was not a mere victim of circumstances nor was his involve-
ment in a bribery scheme an isolated incident. He was the "prime
mover" seeking to "fix" a violation of the laws with illegal payments.
Alter, supra at 47. This was not so with Hefner. We believe that
Hefner's involvement with the SLA affair was unusual in nature and
not indicative of his overall good sense and honesty. His actions with
regard to the SLA episode suggest a singular, albeit serious mistake
on his part, the singularity of which is underscored by the very fact
that it occurred over 20 years ago.
In evaluating an applicant's good character, honesty and integri-
ty, that individual's sworn testimony before the Commission or a duly
authorized representative thereof is important. Evasive testimony by
an applicant in Commission proceedings reflects negatively on his or
her good character, honesty and integrity. Indeed, such evasive testi-
mony was most significant in the Alter case. He deliberately fabricated
the pertinent facts when testifying under oath in a Commission
proceeding. We have listened carefully to the testimony of Hugh M.

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Hefner. We have judged his demeanor on the witness stand. We have
compared his testimony before us with his testimony in the early
1960's, and we find it to be reasonably consistent despite the passage
of so many years. More important, we do not believe that Hefner
has sought, as Alter did, to mislead this Commission. He has been
candid and has forthrightly acknowledged the events and the mistake
of 20 years ago.
Jeremiah McKenna, Esq., testified in this proceeding that in his
mind there were substantial differences between the Seymour Alter
matter and the Playboy mitter. He observed: Alter 'did not tell the
truth on his first time to us". "[N]obody came to Alter. He went
looking to somebody who would in effect put a fix in for him ..."
"Playboy didn't go looking to put in a fix. Alter did". These comments
are significant to us and comport with this tribunal's decision that
was made in the Alter case and support our conclusions here.
The Commission is responsible for assuring that licenses are not
issued to, nor held by, unsuitable persons. Moreover, unsuitable per-
sons must also not have any material involvement, directly or indirect-
ly, with a licensed casino operation or the ownership thereof. N.J.S.A.
5:12-64. We do not take this responsibility lightly. To date, we have
issued five plenary casino licenses. We have applied the relevant
statutory criteria delineated in the Act to the particular facts and
circumstances present in each one. Our method of evaluation and the
standards we apply have remained constant in the face of changing
factual scenarios.
We must protect the casino industry and ensure public confidence
while also being fair and just in the application of the provisions of
the Act to prospective licensees. We are convinced that the above
responsibility has been discharged in the instant matter. Indeed, the
difficulty of our task has been narrowed to a certain extent by the
following acknowledgment made by the Division in summation:
... I want to make it clear we are not suggesting that
Playboy in any way, shape or form is in organized crime,
has any ties to organized crime. ket that be said once and
for all.
Were this circumstance present, as it has been plainly acknowledged
it is not, the passage of time, whether alone or in concert with other
mitigating circumstances, would not have been enough to shoulder
the burden the applicant must bear, and that others have failed to

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We [Commissioners Jacobson, McWhinney and Thomas] find
that none of the circumstances surrounding the SIA episode present
disqualifies either Hefner or any of the Playboy entities.
2. The Events Surrounding the British Magistrates' Decision Not
to Reneu' the Casino Licenses of the Playboy Club of ?ondon and
the Clermont Club.
The following is the Opinion of Commissioners Jacobson,
McWhinney, Thomas, and Zeitz. A substantial portion of this plenary
casino license hearing focused upon the circumstances surrounding
an October 1981 decision by a committee of British Magistrates that
the casino licenses for the Playboy Club of London and the Clermont
Club should not be renewed. Numerous witnesses testified about this
subject and thousands of pages of documents were introduced into
evidence, including the transcript of the legal proceeding in the United
Prior to passage of the British Gaming Act of 1968 ("1968 Act"),
the London Playboy Club operated a casino under earlier legislation
that did not require licensure. Under one provision of the 1968 Act,
corporate casino licensees must be incorporated within the United
Kingdom. To comply with this statutory requirement, Playboy's club
operation in London was incorporated in England under the name
of PCL. This company was a wholly-owned subsidiary of PCI, which
was itself a wholly-owned subsidiary of PEI. PCL eventually acquired
casinos in Manchester and Portsmouth in the early 1970's, the Cler-
mont Club in 1972, and, through an intermediary company, the Vic-
toria Sporting Club in 1979.
The 1968 Act also established the Ganring Board for Great
Britain ("Gaming Board"). Charged with responsibility for super-
vising the operation of casino gaming in Great Britain, the Gaming
Board, under the leadership of Sir Stanley Raymond, took the view
that British casino licensees should not be controlled by foreign com-
panies. After a period of negotiations between Playboy representatives
and the Ganring Board, an agreement was reached, and a trust deed
was executed in January 1970. Under the ternrs of this instrument,
75 percent ot' the shares in PCL was transferred to four trustees, all
ot' whom were British residents. These trustees included Victor Low-
nes, the Chairman and Managing Director of PCL from its inception
until his removal on April 15, 1981: Clement Freud, a Member of
Parliament and a director of PCL: Arnold Finer, an English solicitor
who was legal advisor to the Playboy group in Great Britain and a

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director of some of PCL's subsidiaries; and, Lord Desmond
Hirshfield, a Chartered Accountant. By virtue of their voting rights,
the trustees possessed the power to appoint and remove the directors
of PCL. Led by Victor Lownes and his associate William Gerhauser,
the PCL Board of Directors exercised operational responsibility over
the Playboy casinos in England.
Acting at the direction of Lownes, PCL in 1979 joined the Metro-
politan Police of London ("police") and the Gaming Board in object-
ing to the renewal of casino licenses for Ladbroke, Ltd., a major
competitor of Playboy. In retaliation, Ladbroke conducted its own
investigation of Playboy and forwarded its findings to the police. That
led to a police investigation that continued throughout 1980 and
culminated on February 20, 1981, when search warrants were executed
upon the PCL, the Clermont Club, and the company's financial offices
in the United Kingdom. Thousands of documents were taken from
Playboy's possession and held by the police.
Upon learning of this seizure, the PEI management in Chicago
attempted to ascertain what had precipitated this police raid. Their
efforts proved largely unsuccessful. At the PEI Board of Directors
meeting of March 24, 1981, Lownes reported to his fellow directors,
but fifiled to explain adequately why the raids had been conducted
and what the likely ramifications would be. Accordingly, the senior
American management of the company dispatched Frank DiPrima,
PEI General Counsel, to London to supervise the investigation and
report back to them.
Before DiPrima departed for London, the Division of Gaming
Enforcement negotiated an agreement with Playboy regarding the
association of Lownes, Gerhauser, and two other PCL employees with
the PEA project in Atlantic City. As a condition precedent to the
issuance of a temporary casino permit in New Jersey, the Commission
required these four individuals to sever their relationships with PEA.
Playboy complied with this directive, and a temporary casino permit
was issued in April 1981 by the Commission.
After reviewing the voluminous materials seized in February, the
police and the Ganling Board, on April 10, 1981, interposed objections
to the renewal of the gaming licenses for PCL, the Clermont Club,
the Victoria Sporting Club and the casinos at Manchester and
Portsmouth. The substance of these objections will be discussed in
a later portion of this Opinion.
In response to this development, Playboy sought the counsel of
an eminent British barrister. Gavin Lightman, Q.C. Previously, Light-

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man had assisted Playboy in obtaining a license for its Victoria Sport-
ing Club casino. In order to salvage the company's casino licenses,
which were then in serious jeopardy, Lightman recommended that
Playboy take a series of decisive steps. Specifically, he strongly sug-
gested that Lownes and Gerhauser be terminated and replaced with
an interim management team, even if the latter was not domiciled in
the United Kingdom. This interim management team would function
only until suitable British replacements could be located and em-
ployed. Significant among his other recommendations was that an
independent, outside Board of Inquiry be convened to investigate fully
the grounds for objection and to recommend any appropriate correc-
tive measures.
The senior PEI executives in the United States agreed to accept
fully Lightman's advice. On April 15, 1981, Lownes and Gerhauscr
were terminated and were replaced by Marvin Huston and Frank
DiPrima, who were installed as Chairman and Managing Director,
respectively. Shortly thereafter, a Board of Inquiry was formed and
its members selected. Two of England's most respected professionals,
Charles Sparrow, Q.C., and A.H. Chapman, the former managing
partner of Price Waterhouse in Great Britain, agreed to serve on this
panel. These individuals conducted a comprehensive investigation
which resulted in 19 interim reports, a final report, and some 60
recommendations. While in Great Britain, DiPrima, reorganized the
legal function of the casinos by hiring a new law firm, Messrs. Clif-
ford-Turner. On August 4, 1981, Admiral Sir John Treacher replaced
Huston as Chairman of PCL. This marked the emergence of a new
British management structure for Playboy's British casino operations.
On September 14, 1981, the Gaming Licensing Committee for
South Westminster ("Licensing Committee") commenced a hearing
on the objections that had been filed by the police and the Gaming
Board to renewal of Playboy's British casino licenses. During the 1 l-
day hearing, numerous witnesses testified and voluminous records
were admitted into evidence. On October 5, 1981, the Licensing Com-
mittee issued an opinion denying renewal of the licenses of both the
PCL and the Clermont Club. No reasoned decision accompanied the
Licensing Committee's findings. The premises of the PCL were found
to have been used "habitually" for unlawful purposes, and the license
holder for that club was found not to be a "fit and proper person"
under the 1968 Act. With respect to the Clermont Club, the Licensing
Committee found that the license holder was not a "fit and proper
person" under the 1968 Act and that the premises had been used for

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unlawful purposes. Since British gaming law mandates denial of
licensure where a finding of habitual unlawful conduct has been made,
the Licensing Committee had no discretion as to the appropriate
sanction for the PCL.
Under the British regulatory scheme, Playboy's casinos received
the least severe of three possible sanctions. No criminal charges were
filed nor were cancellation proceedings instituted. Both these measures
may result in harsher sanctions than merely objecting to the renewal
of a casino license, which was the alternative sought by the police
and the Gaming Board with respect to the Playboy casinos. Paren-
thetically the New Jersey Casino Control Act provides a variety of
sanctions that may be used for statutory violations. In addition to
revocation and suspension of a license, the Commission may assess
penalties, order restitution, enter cease and desist orders, or issue
letters of censure or reprimand. See N.J.S.A. 5:12-129.
Under British law, Playboy was able to continue operating its
British casinos after this adverse decision had been rendered since the
company had the right to an appeal. This appeal would have involved
a trial de no'o before the Crown Court for Knightsbridge. Instead
of pursuing this option, Playboy chose to sell its British casino oper-
ations to Trident Television Limited. This transaction closed on Janu-
ary 8 1982.
Since the opinion of the Licensing Committee did not include
specific reasons it is impossible to determine which objection(s) for-
reed the basis for the decision to deny the license renewals for the
PCk and the Clermont Club. Prior to the Licensing Committee's
hearings Playboy made certain admissions of fact. In evaluating the
various objections levelled against Playboy by the police and the
Gaming Board we will make factual determinations, but will not draw
legal conclusions based upon disputed interpretations of British law.
The events that would later be described as the "Hall Porters
Scheme ' provided the basis for an objection lodged by the police and
the Gaming Board. Pursuant to Section 12 of the 1968 Act, a member
of a casino club is not eligible to game at such facility until the
expiration of a 48-hour waiting period that commences with the initial
application for membership to the club. If a member of a casino club,
however, is eligible to game, then his or her bona fide guest may also
game without having to wait 48 hours.
During 197& two members of the PCL reception staff suggested
to the Gaming Director, Bernard Mulhern, that it might be profitable
for the club to recruit porters at several of the major hotels in the

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area to serve as honorary members of the club. After Mulhern ap-
proved this proposal, porters at five London hotels were made honor-
ary members of PCL. Thereafter, these honorary members brought
their "guests" to PCL, and these individuals were able to participate
in gaming activity without having to wait the 48-hour statutory period.
This practice continued for several months and ended in May 1977.
In substance, Playboy admitted the existence of this practice in its
submission to the Licensing Committee.
Another objection to the renewal of the casino licenses for the
PCL and the Clermont Club related to the gaming activities of Cle-
ment Freud, who was then a director and trustee of the PCL. Playboy
conceded in its admissions of fact that Freud had participated in
gaming at the PCL and the Clermont Club on numerous occasions
between 1976 and 1980. Section 12(2)of the 1968 Act expressly forbids
the holder of a casino license or any person acting on his behalf or
employed on the premises from participating in gaming activity.
Whether Freud's gaming is a violation of Section 12(2) of the 1968
Act is an unresolved question of British gaming law.
The activities of Abdul Khwaja, a member of the PCL, provided
the basis for another of the police and Gaming Board objections.
Again, the substance of this allegation was admitted by Playboy as
indicated below:
The license holder failed to bar or adequately control the
activities of Abdul Khwaja, a member, whom William
Gerhauser was informed by the Security Office had been
banned from all the Casinos run by Ladup Limited and
also from the Curzon House Club because of his disruptive
influence and bad behavior within the Casinos and also
because of his dubious honesty. It is also admitted that
some of the staff within the Playboy Club believed that
Khwaja wrongly disputed call bets, that he misbehaved
both with staff and with patrons and that he loaned money
to patrons. A number of members of management wanted
to have Khwaja banned from the Club but this was pre-
vented by the direct decision of Victor Lownes.
At the outset of the Licensing Committee hearing, the objections
alleging that the PCL and the Clermont Club had consolidated checks
were dropped by the police and the Gaming Board.
Several of the police and Gaming Board objections implicate the
credit provisions of the 1968 Act. Section 16 of the 1968 Act prohibits
a casino licensee from extending credit to gamblers. Notwithstanding
this prohibition, casino licensees may accept checks and give in ex-

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change cash or tokens to enable individuals to participate in gaming
activities. Any checks so received must be deposited by the licensee
at a bank within two banking days. Additionally, Section 16 forbids
licensees from releasing or discharging debts "in respect of any losses
incurred by any person in the gaming".
Playboy's utilization of a credit practice known in Great Britain
as "cheque-on-cheque" was the subject of an objection. Under this
procedure, a licensee would accept a check from an individual who
had previously had a check made payable to that same licensee dis-
honored. In its admissions of fact, Playboy stated that "there were
occasions when certain patrons were permitted to continue gaming
whilst owing the license holder sums of money by reason of previously
dishonored cheques". Approximately 37 patrons made use of the
"cheque-on-cheque" practice and some were able to incur individual
debts in excess of one million pounds. Both Playboy and the Division
produced expert witnesses who testified before this Commission as
to the legality of this practice. These experts differed in their legal
conclusions and in their interpretations of Section 16.
Beginning in 1975, the PC[. began to accept what later would
be known as "no-account" checks. Such instruments are drawn on
banks at which the drawer has no account. Approximately 25 patrons
participated in this practice. The "no-account" checks accepted by
the casino amounted to millions of pounds. The acceptance of such
checks by the PC[. formed the basis for another of the objections
lodged by the police and the Gaming Board. The specific allegation
read as follows:
... between 1975 and October 1979 a credit scheme was
operated within the casino whereby certain heavy gamblers
numbering not less than 30 were permitted with the full
knowledge of the license-holder to draw cheques on a
massive scale on banks where the patron had no account.
In its admissions of fact, Playboy stipulated that "no-account"
checks had been accepted by the PCI, and that this had been done,
on at least some occasions, with the knowledge of a member of the
management of the casino. The Playboy Board of Inquiry concluded
that "there must have been acceptance of no-account checks by the
Playboy Casino with the knowledge that there was no account and
that the cheque was a mere pretense". This conclusion is buttressed
by the fact that certain gamblers issued many such "no-account"
checks to the casino over a period of months. Moreover, many of

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these invalid checks were drawn on blank forms supplied by the casino
and completed with the name of Playboy's bank.
In his testimony before this Commission, Robert Alexander.
Playboy's primary counsel at the kiterising Committee hearing, can-
didl, admitted that the knowing acceptance of "no-account" checks
by a casino licensee violates the credit provisions of Section 16 of the
1968 Act.
An objection also raised was that bets were allowed to be "called"
at the PCk. Ordinarily, a bet is placed by a physical deposit of chips
or cash on the marked part of the gaming table. As an alternative.
a bet ma5 be "called", that is, stated orally and confirmed by casino
personnel, without any formal placing of chips or cash on the gaming
lable. Although Playboy did not include "call betting" in its ad-
missions of fact. the independent Board of Inquiry investigated this
practice and reached the following conclusions:
Having considered the evidence produced by our EnquiD
and that contained in the police documentation. we are
satisfied that bets of the kind described in Allegation 3
["call betting"] have occurred. In our judgment. some Play-
bo. casino staff have allowed bets to be called without any
mOlley having been staked.
The legal objection to "call betting" under Section 16 is that such
a bet allows the casino licensee to extend credit to the gambler. even
if only for a few moments.
Additional allegations were made that the PCL and the Clermont
Club had contravened Section 16 by settling and releasing a small
number of debts owed to the casinos by gamblers. A settlement is
a transaction of compromise, whereby a casino would accept a sum
of money less than the full amount of a debt and agree to forgive
the remaining unpaid balance of the obligation. A release is a total
forgiveness of indebtedness. Playboy, in its admissions of fact, listed
certain transactions that had been settled or released by either the PCL
or the Clermont Club. At the hearing before the Licensing Committee,
Playboy did not dispute the fact that these practices had occurred at
its casinos. Rather, the Playboy position was that the settlement and
release of debts did not constitute violations of Section 16. Again,
this issue has not yet been definitively resolved by the British judicial
Another allegation was that the PCL failed to comply fully with
a November 1980 request of the Gaming Board. Specifically, it was
alleged that PCL withheld the names of some 33 individuals who owed

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the casino amounts in excess of 10,000 pounds. Playboy's Board of
Inqui O investigated this allegation and thereafter concluded that Wil-
lilun Gerhauser had knowingly withheld certain information that had
been requested by the Gaming Board. This concealment was found
by the Board of Inquiry to be a violation of Playboy's statutory
obligation to supply information to the Gaming Board on demand.
In June 1981, the Gaming Board supplemented its objections to
include an allegation that Playboy violated the spirit of the Gaming
Act when it removed Lownes and Gerhauser, thereby demonstrating
that PCL was actually controlled from the United States. The Ganting
Board also objected to the removal of these individuals from their
positions its Directors of PCL, contending that this action violated
the terms of the trust deed.
Relying on the advice of their British counsel. Gavin Lightman,
Playboy did not notify the Gaming Board of Lownes' and Gerhauser's
impending termination. Approximately one week later, the Ganling
Board wits notified of these dismissals. Michael Hogan, the spokes-
man for and Secretary of the Ganling Board, testified at this hearing.
He indicated that his employer viewed this lack of prior notification
unfitvorably. He also acknowledged that the company had received
advice from British counsel that it was not violating the trust deed
in taking these actions.
After reviewing the facts surrounding each of the objections to
licensure, the following conclusions may be drawn. The management
of Playboy's British casinos failed to uphold scrupulously the
provisions of the 1968 Act. Moreover, their actions were at times
contemptuous of the pervasive regulatory framework that governs
gatming in the United Kingdom. The "no-account" scheme and the
knowing failure to produce records requested by the Gaming Board
typified this cavalier attitude toward regulatory compliance. In order
to enhance the already impressive profitability of these casinos, Play-
boy's British management loosely construed and occasionally ignored
statutory provisions. Since Victor Lownes and William Gerhauser had
operational responsibility over Playboy's British casinos, these indi-
viduals are clearly accountable for the improper activities that oc-
curred at the casinos.
Although we do not condone any of the improprieties sanctioned
by Playboy's British management, we recognize that no evidence has
been adduced suggesting any tax evasion, skimming, or the defrauding
of patrons at any of the company's British casinos.
The pivotal issues which must be resolved by this Commission

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are whether officials at PEI's corporate headquarters in Chicago knew
or should have known of this regulatory misconduct prior to the
execution of the February 1981 raid. With one exception, it is clear
that no member of the company's management outside the United
Kingdom had any specific awareness of the events that ultimately were
the subject of the licensure objections. The company's U.S. manage-
ment learned in April 1980 that Lownes had admitted in a British
television broadcast that the company's middle management in the
United Kingdom had, more than three years earlier, engaged in the
"Hall Porters Scheme". Save for this exception, even the Division
acknowledged in summation that
there is no direct proof that they [U.S. management] did
know what was going on ...
This lack of knowledge by U.S. management is buttressed by the
testimony of numerous witnesses, including Marvin Huston, Robert
Alexander, Gavin Lightman, Timothy Cassel, an English barrister,
and Derrick Daniels. Accordingly, we find that the U.S. management
of PE! had no prior knowledge of the improper activities that occurred
at the Playboy casinos in the United Kingdom.
We now turn our attention to the question of whether PEI's U.S.
management should have been aware of the management deficiencies
that ultimately surfaced in the licensure objections. Although the 1968
Act does not expressly prohibit the foreign ownership of British
casinos, the Gaming Board has, as we noted earlier, taken the position
that British casino licensees should not be controlled by foreign com-
panies. Indeed, Michael Hogan testified that the purpose of the trust
deed was to
insure that so far as day-to-day operations were concerned
they were in the hands of the license holding company, the
London Playboy Club, and it would have been a matter
of concern to the board [Gaming Board] if, in fact, Chicago
had been in control of those day-to-day operations.
This fact was verified by the testimony of other witnesses. PEI respect-
ed the wishes of the Gaming Board and refrained from interfering
with the operation of the British casinos until April 1981.
Although PE!'s U.S. management was not able to exercise oper-
ational control of its British casinos, nothing in the trust deed or in
the 1968 Act precluded it from requesting or reviewing financial data
and management reports regarding its British subsidiaries. In fact,
U.S. management had received periodic financial reports during the

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1970's. After }luston became associated with Playboy in 1977, he
made efforts to increase the flow of information to the U.S. He
directed that the British auditors' reports, which had not been
previously provided, be transmitted to corporate officials in the U.S.
Even though additional information was becoming available to
U.S. management, we believe, given the operational limitations placed
on it by the Gaming Board, that Playboy could not reasonably have
been expected to uncover independently the evidence that resulted in
the objections to licensure. Indeed, the difficulty of ascertaining any
improper conduct is illustrated by the following examples. With club
membership in excess of 35,000, Abdul Khwaja's disruptive activities
would not ordinarily have attracted the attention of U.S. corporate
officials. This is true also with respect to the failure of the British
management to forward documents requested by the Gaming Board.
Equally difficult to uncover would be the improper garding by a
British director and trustee, the utilization of "call betting," and the
release or settlement of a small number of debts. Indeed, even the
Gaming Board's inspectors failed to uncover these improper practices
during their periodic inspections.
In further evaluating the issue of whether PlI's U.S. management
should have been aware of regulatory improprieties in the United
Kingdom, it is important to consider the positive signals that had been
communicated. As a member of PlI's Board of Directors, Lownes
regularly attended the company's quarterly board meetings in the
.United States. kownes, at these meetings, misled the Board of Direc-
tors by failing to reveal any information that suggested the existence
of any regulatory misconduct at the British casinos. As late as August
26 1979, Arnold Finer and kownes addressed the PIti Board of
Directors and offered assurances that Playboy's British casinos pos-
sessed an excellent record and reputation in the United Kingdom.
Prior to the February 1981, raid, it is clear that PIayboy's British
casinos enjoyed an excellent reputation and were considered to be
efficiently operated. Indeed, PlI's U.S. management knew that the
Ganting Board had taken foreign dignitaries to visit its British casinos.
Another strong signal to bolster PlI's confidence in its British
operations was received in October 1980. When Playboy acquired the
Victoria Sporting Club in 1979, the latter's license was being
challenged by the gaming authorities in violation proceedings because
of the misdeeds of prior owners. In a trial before the Crown Court
of Knightsbridge, senior Gaming Board Inspector John Bragoli
praised the Playboy internal control systems that had been instituted

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at the Victoria Sporting Club. He further indicated that he found no
fault with these systems and no flaw in their implementation. A casino
license ultimately was issued to the Victoria Sporting Club, providing
further comfort to U.S. management. Additionally, Playboy's U.S.
management knew that the licenses of its British casinos were renewed
annually without objection for over a decade.
Elmer Johnson, Esq., a partner in the Chicago law firm of
Kirkland & Ellis and an expert in the field of corporate law, testified
in these proceedings that corporate directors are entitled to rely in
good faith on the statements of officers "until they have good reason
to believe the contrary that those officers are unreliable". He further
indicated that no adverse implication may be drawn regarding the
issue of actual or imputed knowledge by the PEI Board of Directors
as to the business practices of its British casinos. Moreover, the mere
fact that one director had knowledge of the underlying violations
cannot be attributed to the entire Board, especially where the knowl-
edgeable director had been reliable in the past. Despite his earlier
involvement with the SLA, no evidence in the record suggests that
Lownes' reliability for providing accurate information to the Board
was suspect prior to 1981.
After considering all the evidence presented during this hearing,
we find that the PEI officials in the United States could not reasonably
have been expected to ascertain the extent or existence of the improper
practices that led to the licensure objections in the United Kingdom.
We agree with the conclusions expressed by Johnson and find that
no knowledge of any wrongful conduct may be imputed to U.S.
After the February 1981 police raid on its British casinos, U.S.
management undertook forceful and decisive action to uncover the
truth and to rectify any deficiencies that were discovered. We believe
that the bold course of action taken exemplifies the good character
and integrity of present U.S. management. Prior to the raid, Huston
and DiPrima had sought to professionalize the internal audit and legal
functions of the British casinos. Specifically, Playboy's British
auditors were replaced in 1980 by Price Waterhouse, which became
the company's worldwide audit firm. Following their appointment as
an interim management team, their efforts intensified and proved
effective. The role that Huston and DiPrima played after their arrival
in London cannot be minimized.
We find Playboy's present management highly qualified and com-
petent. Derrick Daniels, Marvin Huston, and Frank DiPrima testified

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in these proceedings. We have been particularly impressed by their
candor and professional demeanor. There can be no doubt that these
individuals clearly satisfy the Act's criteria for licensure in this
jurisdiction. Although not called upon to testify as a witness in these
proceedings, we also note that Marilu Marshall, PEI Vice President-
Casino Regulations, has in the past appeared before us in other
matters. We find that she too, is qualified and suitable for licensure
in New Jersey. We are confident that these individuals would comply
with the letter and spirit of the Casino Control Act.
Another issue raised during this hearing involved the exercise by
Victor Lownes on April 15, 1981, of a stock option. On that date,
Lownes was terminated under the terms of his employment agreement
which provided 30 days notice if his termination was "not for cause".
That same agreement also containing a provision permitting immedi-
ate termination "for cause" in the event that certain specified wrong-
doing was found to have occurred. Since his termination was "not
for cause," he was able to exercise an option which allowed him to
purchase 100,000 shares of PEI common stock at $3.82 per share. On
April 15, 1981, the market price of the stock was approximately $15
per share.
There was considerable testimony about the appropriateness of
PEI's decision to terminate kownes "not for cause" as opposed to
"for cause", thereby affording him the opportunity to exercise what
at that time was an advantageous stock option. We note that prior
to making the decision to terminate "not for cause", Playboy sought
the advice of British counsel and was advised that the severance should
be "not for cause". Playboy followed this advice. Currently, a Com-
mittee of PEI's Board of Directors has been given the responsibility
to evaluate Lownes' participation in the London affair and to de-
termine whether any legal recourse against him exists.
Based upon all of the facts then available to PEI's U.S. manage-
ment and the aforementioned advice from British counsel, we find
this decision to terminate kownes "not for cause" was reasonable
under the circumstances.
For all of the reasons set forth above, we [Commissioners
Jacobson, McWhinney, Thomas & Zeitz] find that the events sur-
rounding the Magistrates' decision to deny the renewal of the casino
licenses for Playboy's British casinos do not negatively impact upon
the qualifications for licensure of any qualifter or Playboy entity.

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3. The Drug Enforcement Administration Investigation
In its opening statement to the Commission, the Division ident-
ified as an area of concern the investigations conducted during 1974
and 1975 by the Federal Drug Enforcement Administration ("DEA")
and other law enforcement agencies into the alleged use and distribu-
tion of narcotics by individuals affiliated with the Playboy organiza-
tion. The facts regarding this matter are not in dispute. In March 1974,
Roberta "Bobbie" Amsrein, an executive secretary to Hugh M.
Hernet and a resident of the Chicago Playboy Mansion, ' was arrested
and charged with conspiracy in connection with the distribution of
a quantity of cocaine in 1971. After being informed of Arnstein's
arrest, Hernet issued instructions that Allen Crawford, then Security
Director of Playboy, conduct a search and remove any narcotics found
in the Chicago Mansion. A similar sweep was performed by [.es
Marshall, an assistant to Hernet, at the Playboy Mansion West in
[.os Angeles. Apparently, some quantities of illegal drugs were found
in some of the rooms in the Chicago Mansion. The drugs secured
from the Chicago Mansion were then transported to the Playboy
office building in Chicago for storage. After the prescription drugs
had been separated and returned to the Chicago Mansion, the re-
mainder of the items were destroyed by Crawford.
In the autumn of 1974, Arnstein was convicted and provisionally
sentenced to 15 years in prison. '' She committed suicide in January
1975. After Arnstein's conviction, Federal drug agents and the Chi-
cago Strike Force received information that Hernet and several other
employees of Playboy were personally involved in the acquisition and
distribution o? cocaine. An extensive investigation ensued.
Significantly, on December 29, 1975, Samuel K. Skinner, the
United States Attorney in charge of this investigation, issued a public
statement declaring an end to it and exonerating Hefner and Playboy.
1'The Chicago Mansion consists of two buildings, purchused independent13
in 1959 and 1970 for a totul of S920,000. that were subsequent13 joined
together. The Pla. boy Mansion West. 1ocuted in Los Angeles, California, was
purchased on Februao 2. 1971. for $1.050,000. At the time of these investiga-
tions. both Mansions ere used for traditional business purposes. to publicize
the " lifestyle". and its a residence to accommodate Herher and his
personal guests.
'"This sentence, the maximum penair.,, for the crime charged. was imposed
to permit further evuluation of the defendant and was subject to later modi-
fications. See 18 /_'.S.C.A. ?4208{b} (repealed 1976}.

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He stated:
No evidence of the unlawful acquisition or distribution of
cocaine or other hard drugs by Mr. Hefner, the corpor-
ation, or its employees has been adduced. Accordingly, we
have concluded our investigation and ended our inquiry.
Apparently, this most unusual statement of exoneration by a Federal
prosecutor was motivated by Skinner's conclusion that Playboy and
Hefner may have suffered adversely as a result of the widespread
negative publicity attendant to these investigations.
In view of Mr. Skinner's remarks, and the outcome of his in-
vestigation, we find that the drug allegations that were described
above do not adversely reflect on the qualifications for licensure of
either Hefner or any of the Playboy entities.
4. Hugh M. He,/ner Retention o,/' SMne)' R. Korshak, Esq.
In their opening remarks to the Commission, the Division raised
questions regarding Hugh Hefner's one-time retention of a Chicago
attorney named Sidney R. Korshak. The evidence reveals the existence
of a bill dated March 16, 1978, in the amount of $50,000 from the
Chicago law offices of Korshak to Hernet. A check in that amount,
made payable to Korshak and signed by Hefner, bears the same date.
Hefner testified that he retained Korshak in connection with a
lawsuit which was brought against himself and Playboy by Universal
Studios. Universal alleged that Playboy's private film library con-
stituted a copyright infringement, and was seeking the return of all
videotapes of Universal motion pictures.
Hefner desired to protect the film library as well as his personal
reputation. He was also concerned about his relationship with the
motion picture studios.
Korshak was known to be a close friend of Lew Wasserman, the
president of MCA, Inc. (which controlled Universal), and Hefner
wanted to avoid a court proceeding which could affect his standing
in Los Angeles and in the Hollywood community. According to
Hefner, Korshak enjoyed a very good reputation in the entertainment
circles in Los Angeles. Thus, Hefner wanted to arrange a meeting with
Wasserman, at which the two men could discuss the issue and, Hefner
hoped, reach a resolution without the need for litigation. For that
reason, Hefner believed it was appropriate to utilize the services of
At the time Korshak was retained, Hefner believed him to be
a member in good standing for many years of the Bar of the State

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of Illinois. Korshak, in fact, appears to have been a member of the
Illinois Bar for over 50 years without any disciplinary action having
ever been taken against him.
Hefner indicated that he did not have specific knowledge of
Korshak's allegedly questionable reputation at the time that he re-
tained him, but that he was aware of some question about his repu-
tation. Subsequent to his employment of Korshak, Hefner became
aware of further publicity which identified Korshak as a link between
crime and big business. Hefner stated that in light of this publicity
he would make a different decision today with regard to the retaining
of Korshak. Korshak was subsequently not successful in his mission.
It should be noted that the Board of Directors of PEI authorized
Hefner to be reimbursed for his legal fees in connection with the
Universal case, but that Hefner never sought reimbursement. Instead,
he paid the $50,000 by personal check.
The Division did not focus upon the Sidney Korshak retention
in summation. However, they very briefly noted it in their Proposed
Findings of Fact that were submitted to the Commission.
We have examined, to the extent possible, the nature and scope
of Hefner's relationship with Korshak. On the record before us, we
can find nothing improper or sinister in the one-time retention of
Sidney R. Korshak, Esq. The relationship appears to have been solely
for a singular professional purpose and did not continue in any way
thereafter. Thus, based on the present record, we do not believe that
there are any negative inferences which would require disqualification.
5. The Securities and Exchange Commission Inquiry
Under the applicable Federal securities laws, publicly-held cor-
porations are required to disclose fully, among other things, all forms
of remuneration provided to their officers and directors. Additionally,
any potential conflicts of interest and the use of corporate assets for
the personal benefit of officers or directors must also be disclosed in
a wide variety of filings with the SEC, including prospectuses, proxy
statements, and annual reports to the SEC.
In February 1978, the SEC notified Playboy that it was commenc-
ing an informal inquiry concerning possible undisclosed management
remuneration and asked Playboy to provide information with respect
to its compensation of certain officers during the fiscal years 1975,
1976, and 1977. Several months earlier, in December, 1977, a share-
holder derivative suit had been filed in a state court in Illinois seeking
on behalf of the company reimbursement from Hefner for his allegedly

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improper utilization of certain corporate properties. A third related
development was the Internal Revenue Service's disallowance of cor-
porate deductions for depreciation and operating expenses totaling
$716,626 for the Chicago Mansion and $714,201 for the Playboy
Mansion West for the tax years 1970 through 1976.
In response to these events, the Playboy Board of Directors
established an independent Audit Committee on August 10, 1978.
Two newly-appointed directors, Donald W. Diehi and William A.
Emerson, were selected by the Board to serve on the Audit Committee
since neither had any prior affiliation with the company. In February
1979, the Board of Directors delegated to the Audit Committee the
responsibility for conducting a thorough investigation into whether
the company had legal claims against any members of its management
on account of their receipt of remuneration or personal benefits. If
meritorious claims resulted, the Committee was directed to assert such
claims on behalf of PEI. The Board mandate also directed the Audit
Committee to consider and recommend prophylactic policies and
procedures with respect to Playboy's remuneration and benefit prac-
After conducting an exhaustive year-long investigation, the Audit
Committee submitted its 546-page final report to the Board of Direc-
tors on January 31, 1980. A summary of the report, prepared by
outside counsel for Playboy at the request of the Board of Directors,
was sent to Playboy's shareholders in order to inform them of the
Audit Committee's basic findings and recommendations. The findings
of the Committee were also summarized in an internal Playboy report.
The Committee found no meritorious basis for Playboy to
recover any amount of cash compensation paid to its of-
ricers and directors. However, it found several instances
where other kinds of benefits had been received by officers
from the Company without proper authorization,
documentation or disclosure. These benefits included per-
sonal use by certain officers and their guests of Playboy
property particularly the Mansions and other accommo-
dations. Also, professional services were sometimes
rendered to officers by personnel in the employ of the
Company: automobile, travel and entertainment, and other
expenses were not always properly documented or
authorized: and miscellaneous additional benefits were re-
The Audit Committee also concluded that Playboy should seek to
recover specific amounts from the following individuals:

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Total Amount
Officer Recoverable
Hefner $796,413
Daniels 24,278
Lownes 20,915 British pounds 2,870
Gerhauser 18,560 British pounds 4,091
C. Hefner 769
Other 80
39,475 British pounds
All of these individuals promptly paid to the company the full amount
of the Audit Committee's demand.
Moreover, the Committee recommended the formation of a Com-
pensation Committee that would be responsible for advising the Board
of Directors concerning compensation matters. Other recommen-
dations were also made in order to ensure that future management
benefits would be properly authorized, documented and disclosed.
Ihe testimony of A.A. Sommer, Jr., who was retained as counsel
by the Audit Committee, indicates that the Playboy management and
officials fully cooperated in the prolonged investigation. Subsequently,
by order dated August 13, 1980, the SEC and Playboy entered into
a consent decree wherein Playboy agreed to institute certain internal
controls and to comply with the relevant report requirements under
the securities laws. Since the late 1970's a comprehensive internal
control system has been utilized by Playboy in order to prevent a
recurrence of these improper practices.
We have examined the subject matter of the SEC inquiry, and
we find that the explanation given by the Audit Committee for these
practices to be reasonable.
?.. This is not a case of surreptitious misappropriation by
management. Rather, it is a case of Playboy's failure to
adjust practices that began when it was a private company
to the standards expected of a Company with 30 percent
public ownership. Playboy failed to give management rela-
tions and transactions the critical scrutiny, and failed to
establish the kinds of procedures, customary in corpor-
ations with a history of public ownership. Playboy's dif-
ficulty in adjusting to its public status was compounded
by its rapid growth and diversification, problems ex-
perienced in structuring its management organization, and
management's concentration on other matters during a
period of financial stress.

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Significantly, no evidence has been adduced during this hearing
which indicates that the officers or directors involved willfully sought
to defraud the Company. Based upon the record before us, we are
satisfied that the underlying circumstances surrounding the S?C in-
quiry do not negatively impact upon the qualifications for licensure
of any individual or Playboy entity.
6. The Playboy Club of New Orleans
In its investigative report with respect to the Playboy entities, the
Division included a section entitled "Playboy Club of New Orleans".
The Division's concern with regard to this matter stems from Play-
boy's relationship with Michael Zuppardo, an individual of question-
able character.
By way of historical background, the first Playboy Club of New
Orleans was opened in the French Quarter of that city in 1961.
Operating as a franchise of PCI, that club functioned until the
mid-1970's at which time a decision was made to close it and to seek
a new location in an area of New Orleans known as Fat City. Follow-
ing some preliminary inspection and discussions, Victor kownes re-
ported to the Company that he had found a suitable facility, which
was the Crystal Palace, owned by Anna DiPietro, the wife of Michael
During the summer of 1975, officials of PCI received cor-
respondence and internal memoranda suggesting areas of possible
concern relating to the Company's dealings with Zuppardo. Daniel
Stone, then and currently a Vice President of PCI, stated in an inter-
view conducted by the Division that the Company had also been
receiving reference letters on behalf of Zuppardo during this same
period of time. :?
On October 9, 1975, Daniel Stone sent Zuppardo a letter confirm-
ing PCI's intent to open a Playboy Club in the Crystal Palace with
Zuppardo as the franchisee. Paradoxically, on October 13, 1975, a
memorandum written by William H. Klein, then General Counsel for
Playboy, reflects his conversation with other key Playboy executives
on October 9, 1975, in which Klein exhorted the other individuals
"to do everything to prevent the Company's granting a franchise to
2?The applicant has produced favorable letters of reference on behalf of
Zuppardo, but these letters bear the date of October 20, 1975, which is after
the Company had already communicated its intention to deal with Zuppardo.

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Zuppardo" unless they were convinced the information previously
supplied was not true.
The 'information previously supplied *' apparently refers to infor-
mation supplied to PCI by the New Orleans Crime Commission, a
quasi-official body. By letter dated October 15, 1975, Victor Lownes
wrote to Zuppardo advising him that PCI could not risk an associa-
tion with him as its New Orleans franchisee until a 'major cloud"
hanging over the negotiations had been dispelled. Lownes indicated
that Playboy had been told by Aaron Kohn of the Crime Commission
that Zuppardo had 'definite links with organized crime figures". Also,
the banks with whom Zuppardo had transacted business were
suspected of being conduits through which money was funnelled from
organized crime into legitimate businesses. Additionally, this letter
stated that before Playboy would be willing to close the deal, Zup-
pardo would have to open his books to an impartial investigative
accountant selected by the Crime Commission, and would have to
satisfy the Crime Commission that he was untainted by his alleged
associations. This Zuppardo declined to do.
Subsequently, a decision was made by PCI to proceed with plans
to open a Playboy Club in the Crystal Palace without granting a
franchise to Zuppardo. No Playboy Club was, however, operated at
the Crystal Palace location. A bar with very limited food services was
opened under the name of "The Great Playboy Warm-Up-. There
were no other Playboy indicia on the premises such as logos,
glassware, etc. Moreover, the limited facilities made a keyholder ad-
mission policy impractical. It had been anticipated that a Playboy
Club would operate on the premises once the necessary remodeling
was accomplished. This was to be effectuated by having the Company
lease the premises from Zuppardo's wife, run the club using PCI
personnel, and employ Zuppardo as director of sales and promotion.
The agreement between Zuppardo and PCI was set forth in a letter
dated November 6, 1975.
After a brief period of operation, the Great Playboy Warm-Up
closed, and PCI decided to terminate its Crystal Palace lease arrange-
ments. In August 1976 financial settlements were made with all parties
concerned, at a cost to the Company in excess of $130,000. This
amount encompassed negotiated settlements of lease and personal
service contract obligations, reimbursement for the removal of various
equipment from the premises, and legal fees. Significantly, Playboy
never granted a franchise to Zuppardo, Hefner never knew or heard
of Zuppardo, and Zuppardo has no present relationship with Playboy.

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In reviewing the record before us, we view disfavorably Playboy's
decision to employ Zuppardo after having received the derogatory
information detailed above, even though such information was largely
unsubstantiated. Apparently, Playboy was sufficiently concerned by
these allegations not to grant Zuppardo a franchise for the New
Orleans Playboy Club. Moreover, the October 15, 1975 letter written
by Lownes reflects his sincere desire, on behalf of the Company, to
uncover the truth regarding these allegations of impropriety. From
the evidence presented to this Commission, we find that in considering
the totality of the circumstances the above area of concern does not
negatively impact upon Hefner's or Playboy's qualifications for
licensure in New Jersey.
7. The Pla)'boy Club of Miami
In its opening statement to the Commission, the Division made
reference to the Playboy Club of Miami and indicated that certain
circumstances surrounding the operation of that club were of concern
to the Division. The Division's reservations were triggered by two
1973 memoranda written by Allen Crawford, then Security Director
of Playboy, to Robert Preuss, then Executive Vice President. These
intelligence reports summarized the results of a six-month long in-
vestigation of the Miami Club. Serious allegations of impropriety were
levelled against two club employees, Richard Ancona and Paul
Cavari. Ancona, the general manager of the club, was alleged to have
links to members of the Miami criminal community. Cavari was
suspected of operating a bookmaking business while performing his
bartending duties at the club. Additionally, these memoranda were
replete with other unsubstantiated allegations that had been furnished
by confidential informants. Both individuals are still employed at the
Miami Playboy Club.
In his testimony before the Commission, Don Hubbard, Play-
boy's present Security Director, testified that Crawford told him that
Preuss had informed Crawford, several months after the memoranda
were filed, that Preuss intended to do nothing about the Miami
situation, since the Miami Club was the only club making money at
that time. Since Preuss was unwilling to testify at this hearing, and
was beyond the scope of the Commission's subpoena power, it is
impossible to verify these statements. Moreover, after viewing all of
the evidence presented during this hearing, we are unable to ascertain
definitively what actions, if any, Preuss or any other Playboy official

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took in response to the allegations contained in the Crawford
There is no doubt that Playboy's present management was un-
aware of the existence of the Crawford memoranda prior to the
issuance of the Division's investigative report with respect to the
Playboy entities. After this matter was brought to his attention, Hub-
bard retained, on behalf of Playboy, David Peisner, a Miami-based
private investigator. Peisner's comprehensive investigation revealed
that there were no illegal activities ongoing at the Miami Club, and
there was no current law enforcement interest in the club.
In February 1982, Playboy retained another private investigator,
Daniel Fullen, in order to verify as many of the allegations made in
the 1973 memoranda as possible. Although hampered by the passage
of time, Fullen was able to find serious inaccuracies in the Crawford
memoranda. Indeed, the evidence reveals that the memoranda were
unprofessionally prepared, incorrect and untrustworthy in a number
of material respects. Since none of the specific allegations of wrong-
doing levelled against Ancona or Cavari were corroborated by either
Peisner or Fullen, Playboy has taken no action against these two long-
term employees of the Miami Playboy Club. However, the Playboy
investigation in this matter is continuing, and Hubbard has expressed
his intention to terminate these individuals if any derogatory evidence
is uncovered.
Based upon the record before us, we conclude that the allegations
contained in the Crawford memoranda are suspect at best and do not
impact negatively upon the qualifications for licensure of Hefner, any
individual qualifier or any of the Playboy entities.
8. The Playboy Club of Dallas
Neither in its opening or closing remarks did the Division suggest
that the Commission should draw negative inferences about Hugh
Hefner or Playboy because of activities that occurred at the Playboy
Club of Dallas. In fact, the Division only briefly addresses this matter
in its Proposed Finding of Fact and seems to indicate that the matter
is not of a disqualifying nature. Nevertheless, a brief review of this
area is appropriate.
The Playboy Club of Dallas opened as a franchise in July 1977.
From its inception, however, the operation appears to have been
plagued by financial and personnel problems, even though it was
located in an apparently good market. The franchisee at the time was

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Joel McQuade, about whom Playboy, after some period of time,
received negative information.
The above information led Derrick Daniels to write a memoran-
dum in August 1977, regarding the Dallas Club. Therein, he remarked:
Dallas, meantime, continues to draw good business but to
scare the hell out of me because of the franchisee's continu-
ing misbehavior, questionable associations and shaky
We've read the riot act' we're watching like hawks and we
are prepared, if necessary, to put them on legal notice in
regard to the franchise.
After Daniels wrote the above-noted memo, Playboy directed its
financial and security personnel to monitor the operations of the
Dallas Club. The results of such monitoring as well as the continued
unprofitability of the Dallas franchise led Playboy to find a new
In 1978, the interests of McQuade and a co-owner of the Dallas
franchise were purchased by Peter Couvall, who had been the manager
of Playboy's Chicago Club. Unfortunately, the Dallas Club continued
to experience financial problems and in August 1980, Playboy sought
to take the franchise away from Couvall. However, he immediately
filed for bankruptcy, both personally and on behalf of the Dallas
Playboy Club. The case remained pending until December 1980
whereupon Playboy purchased the assets of the club from Couvall.
Playboy then owned and operated the Dallas Club for a short period
of time.
In May 1981, the assets of the Dallas Playboy Club were sold
by Playboy of Texas, Inc. (a PEI subsidiary) to Diversified Entertain-
ment, Inc. (a non-affiliated company), under a franchise agreement
which was entered into on May 6, 1981.
Based upon the foregoing and the record before us, we find that
the franchising of the Dallas Playboy Club does not, in any way,
negatively impact upon the qualifications of Hugh M. Hefner or
9. Francis K. (Frank) Lloyd and the Creation of Playboy
(Bahamas) Limited.
An issue has been raised regarding Frank Lloyd's background
and his request for a findefts fee from Playboy.
Prior to 1977, Frank Lloyd was involved in efforts to locate a
management operator for a proposed government-owned casino to

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be constructed in the Ambassador Beach Hotel, Nassau, Bahamas.
Victor Lownes and Playboy initially learned of the potential for Play-
boy's operating a casino in the Bahamas from Lloyd. Lloyd rep-
resented to Lownes that he was the official representative of the
Bahamian gaming authorities, who were attempting to find a casino
operator to come to the Bahamas.
Lownes and Lloyd and their respective attorneys reached an
initial understanding as follows: (1) that Lloyd and the government
would put up whatever money was necessary to construct and open
the casino; and (2) that Lloyd would receive 25 percent of Playboy's
management fee.
At the very first meeting among Lownes, Julian Maynard (the
solictor in the Bahamas for Playboy), the Bahamian Solicitor General
and the Hotel Corporation of the Bahamas (which is the licensee),
Lownes disclosed Playboy's arrangement with Lloyd. However, the
Bahamian government informed Lownes and Maynard that they
would not countenance the payment of any commission or fee to
Lloyd for introduction to the Hotel Corporation or the government
of the Bahamas. The government denied the fact that Lloyd was acting
as their agent and, in fact, they did not want Lloyd as a potential
Lloyd was once the head of the prestigious Marlborough Art
Galleries. In a New York state civil proceeding he had been found
to have participated in a fraud involving the Estate of Mark Rothko,
an artist. Lloyd was also the subject of criminal proceedings involving
the Rothko estate and had been indicted. In fact, Lloyd was a fugitive
from justice relative to his New York indictment. He has since, how-
ever, surrendered himself to the New York authorities.
Despite Lloyd's problems in New York, Lownes believes that
Playboy had a moral obligation to pay Lloyd something in return for
his bringing the Bahamian opportunity to Playboy's attention. There-
after, Playboy and the Bahamian government came to an agreement
that Playboy could pay Lloyd a settlement in the form of a one-time
payment of $200,000.
Ultimately, however, Playboy's Chief Financial Officer Marvin
Huston, became aware of the matter and believed that it was unnecess-
ary to pay Lloyd anything since Lloyd had misrepresented his position
to Lownes and was also under indictment in New York. Thus, Huston
took the position, which was finally adopted by the company, that
it would not pay Lloyd any money. In fact, Playboy has never paid
any money to Frank Lloyd.

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Frank Lloyd is not and was not a participant in Playboy's Baha-
mian casino operation. To a certain extent, Playboy was misled by
Lloyd. More important, however, is the fact that Playboy has never
paid any money to Lloyd and has not entered into any suspicious
relationship with him. Accordingly, after reviewing the testimony and
exhibits, we conclude that this particular matter does not impact
negatively upon the qualifications of Playboy or its management.
10. Other Issues
During the course of this hearing, the Commission heard testi-
mony and received evidence with regard to other matters. These
include, but are not limited to, Attendant Service Corporation, the
Playboy Bahamas Limited, and the Playboy Plaza Hotel. The Division
has not seriously contended that these other areas are of a disqualify-
ing nature. Nevertheless, we have independently reviewed the testi-
mony and exhibits that deal with the above. We find that no negative
inferences may be drawn against Hefner or Playboy. Therefore, in the
totality of this hearing, these matters are insignificant and of no force
or effect.
For the reasons set forth above, we find that the Pritzker family,
the Elsinore entities, Hugh M. Hernet and the Playboy entities have
each established by clear and convincing evidence their qualifications
for licensure in New Jersey.
I agree with this Commission's decision which finds the Elsinore
entities and the Pritzker family qualified. Additionally, I concur in
all respects with the majority-but-not-controlling decision. However,
I wish to note my concern about some of the operating practices of
the Hyatt Corporation during its years as a public company. In my
opinion, various records of the actions of the Board of Directors were
incomplete and inadequately explained the use to which shareholder
funds were put.
A prime example of this lack of documentation involves the
finder's fee paid to Melville Marx with respect to the King's Cas-
tle/debenture transaction. The Pritzkers and Hyatt had borrowed
money from the Teamsters Central States Southeast and Southwest
Areas Pension Fund on previous occasions. In fact, they had outstand-
ing loans from the Pension Fund on their books at the time of the

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King's Castle deal. They did not need an introduction to the Pension
Fund or to its officials. Moreover, there is no evidence that a finder's
fee had been previously granted in connection with any Pension Fund
Additionally, Robert L. Heymann, an outside Hyatt director, was
an officer of the First National Bank of Chicago. He was familiar
with the officials of the Pension Fund because of his banking connec-
tions. He had offered his good offices, presumably without compensa-
tion, in obtaining financing from the Fund.
!t is especially important for any organization concerned with
casino gambling to document fully its routine operations. !t is equally
essential that unusual ones such as the fee paid to Mr. Marx also be
properly documented. While I do not believe that proper documenta-
tion with regard to the Marx matter exists, such as failure to maintain
this documentation does not, in my opinion, render the Pritzkers or
any Elsinore entity unfit for licensure. Nevertheless, ! expect that as
long as the Elsinore entities and the Pritzker family are involved in
casino gambling in Atlantic City complete records and appropriate
documentation of all transactions will be maintained.
I agree with this Commission's decision which finds the Elsinore
entities and the Pritzker family qualified. Additionally, I concur in
all respects with the majority but-not-controlling decision. ! believe
it necessary, however, to offer a comment relating to Hugh M. Hefner
and his involvement in the New York State Liquor Authority scandal
of the early 1960's.
Complex and conflicting legal opinions have been offered by
several learned members of the Bar in an attempt to instruct this
Commission how to identify the fine line between bribery and extor-
tion. The extent of the Hefner violation hinges upon such a distinction.
While a persuasive case can be made that Hefner and Playboy
did offer payments to Martin Epstein and L. Judson Morhouse under
some degree of duress, I still regard such payments as a grievous error.
Throughout his testimony in this proceeding, Hefner conceded this
But, in the more than 20 years which have ensued since the
commission of this error, Hefner has revealed a determination, and

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manifested a characteristic widely heralded in law enforcement circles
as "rehabilitation".
I have reached the conclusion that despite this shadow of the past,
Hugh Hefner is a cut or more above the routine "bottom-line" ac-
quisitor. As a New Jersey casino operator in the future, Hefner pos-
sesses a greater potential to help this Commission implement the noble
social and economic gains envisioned in the statute than others already
licensed in New Jersey.
I find particularly commendable the establishment of the Playboy
Foundation and its significant contributions in dispensing charity, in
identifying citizens' rights under our First Amendment freedoms, in
articulating the demographic goals of civil rights, civil liberties and
personal human dignity, and in supporting other meritorious social,
community and civic causes, always with conviction and with courage.
Furthermore, since the early, formative days of the Playboy em-
pire, there has been no evidence that Hefner has borne any taint of
association with organized crime.
I reject the argument that Hefner's culpability in New York over
20 years ago disqualifies him from offering to New Jersey today--as
the Casino Control Act directs--"a substantial contribution to the
general welfare, health and prosperity of the state and its inhabitants".
Hugh Hefner has the right to be free in New Jersey of the
relentless pursuit of Inspector Javert.
Accordingly. I find Hugh M. Hefner and the Playboy entities
qualified for licensure in New Jersey.
I concur in the finding that the Elsinore entities and the Pritzker
family meet the statutory criteria for licensing set down in the Casino
Control Act. I concur also in all the findings of Commissioners
Jacobson, McWhinney, and Thomas concerning all but one issue
regarding Playboy Enterprises Incorporated, and notably with their
findings as to Playboy's British casino operations and the suitability
for licensure of current management including Mr. Daniels, Mr.
Huston, Mr. DiPrima, and Ms. Marshall. The exception I take is to
the findings on that issue entitled the New York State kiquor
Authority Investigation. As to that issue, I disagree in so much as
it bears on the suitability and qualification for licensure of Hugh M.

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I agree with the recitation of facts pertaining to the New York
State Liquor Authority matters as set down by the majority-but-not-
controlling opinion on this subject. I do not agree with the finding
in that opinion that sufficient mitigating and extenuating circum-
stances now overcome the otherwise adverse conclusion, with which
I agree, that Mr. Hefner did participate in the early 1960s in a bribery
scheme that under Section 86(g) of the New Jersey Casino Control
Act automatically disqualifies him from eligibility to participate in the
casino industry in this state.
In that opinion, in the separate opinion of Commissioner
Danziger, and in this opinion the Commission has concluded unani-
mously that Hefner's conduct in the New York State Liquor
Authority matter constituted willing participation in bribery, as de-
fined today in the "New Jersey Code of Criminal Justice". See
N.J.S.A. 2C:27-2. I believe it was also bribery in New York at the
time it occurred, no matter whether Hefner contends that it was a
case of extortion in which he was an unwilling victim.
It is sufficient that from the moment an illegal payment was
mentioned to him in August 1960 as the means to obtain a liquor
license in the State of New York, it became the way Hefner and the
company he headed then in its private form, as he heads it now in
its public shape, went about seeking that license.
From that moment, when he and his company could and should
have said no to the illegal proposition that they pay, that they bribe
for a license, Hefner's course was set and never altered from the path
of bribery.
Thus, the Commission is confronted in this case, by this issue,
with a negative finding of fact that reaches to and attacks the heart
of sound, honest government regulation, a point it made emphatically
on May 20, 1980 in the opinion entitled In the Matter of the Appli-
cation oJ' Se)'mour Alter for Licensure as a Casino Key Employee,
Docket No. 79-EA-60, which the Appellate Division of the New Jersey
Superior court affirmed on June 24, 1981, Docket No. A-1406-79TI.
In that opinion, in a case which also revolved around events that
transpired in connection with corruption in the New York State
Liquor Authority in the early 1960s, the Commission declared:
... [B]ribery strikes at the very heart of the integrity of
government regulatory processes in a manner common to
fe other offenses. The very object of bribery is, in-
escapably, and in all contexts, the corruption of govern-
ment. Its commission demonstrates on the part of the of-

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fender not only a complete disregard for regulatory pro-
cesses, but a willingness to actively corrupt them for private
There is no need, and no point in attempting to say better what was
said in the Alter opinion. Any further explanation of why bribery is
so specially repugnant to the honest government that deserves and
has the public's confidence would be superfluous. So the question
becomes whether this finding that Hefner participated in bribery, a
crime which it has been noted as an automatically disqualifying of-
fense under the New Jersey Casino Control Act, N.J.S.A. 5:12-86(c)
and (g), can be overcome.
It can be only because amendments to the Act, which took effect
on January 9, 1980, added provisions to N.J.S.A. 5:12-86(c)(4) making
it possible for an applicant to attempt to demonstrate by clear and
convincing evidence that an automatic disqualification should be
waived by the Commission on a showing that the disquaIifying offense
occurred more than 10 years before and has been fully redeemed.
I find although this last barrier is not insurmountable it is nearly
so, and can be scaled in the end only by the most forthright testimony
before this Commission. I have concluded that Hugh M. Hefner failed
to scale that barrier, failed to carry the burden that statutorily is his
to bear, and which this Commission must demand and in a notably
similar circumstance, the Alter case, did demand.
That Hefner clings to the fiction that at all times he and his
company were victims of extortion, without the free will to release
themselves from the squalid demands of corrupt officials in the State
of New York, is not acceptable and without justification. We need
not, and we have not in any of the other opinions on this matter,
yielded to the temptation to walk the tightrope between the over-
lapping legal definitions of extortion and bribery, whether in the State
of New York in 1960 or the State of New Jersey then or now.
It is indisputable that the New York officials involved in this
matter, Martin Epstein, the public official, and L. Judson Morhouse,
the political official, were venal, corrupt men. That Ralph Berger, the
agent they injected between themselves and Playboy to carry the
virulent infection of corruption, was equally venal is also beyond
dispute. The unconcealed face of their corruption, at each and every
turn of an affair that lasted from August 1960 to December
1962--when the books and records of the New York Playboy Club
were subpoenaed by the office of the district attorney in New York

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County--is the very reason that Hefner and Playboy should have
turned their backs on this scheme from its inception.
No one, finding himself, herself or itself in the circumstances in
which Hefner, Playboy, and his associates in Playboy in those years
(Victor kownes, Arnold Morton, and Robert Preuss) found them-
selves, needs to be a victim. They were not faced with a threat against
life, as is the case in a kidnapping. Here, there was at most a threat
to a property interest that had barely been established, and in reality
was not to be established until November 1960, four months after
Berger brought them Epstein's sordid deal.
Hefner and Playboy should have said no the first time they were
told it would require illegal payment to obtain a liquor license in New
York. Such a payment never is, and never can be involuntary.
Hefner's real state of mind, not now but then, contemporaneous
with the events, is revealed in his testimony before the grand jury.
Asked by the grand jury examiner, then Assistant District Attorney
Jeremiah McKenna, what persuaded him to go through with the
agreement which by June 1961 clearly required a payment of $50,000
to Epstein and a separate $100,000 for Morhouse, Hefner replied:
Because it was obvious that to take the matter through the
courts would cost us, even without any special legal harass-
ment, probably a like amount. We wound up spending that
much in legal fees alone in taking the case through the
courts in Illinois.
Bribery, thus, by June 1961, had become a business judgment,
a voluntary decision by Hefner and Playboy that the best way to spend
the company's money was corruptly, not honestly.
All of this being so in my mind as a trier of fact, the remaining
question is what mitigating circumstances exist that would make it
possible for Hefner to overcome this barrier and meet the burden that
is his under the Casino Control Act, to establish clearly and convinc-
ingly his present suitability for licensing.
There are many, and they have been recognized in the opinion
that now forms the majority-but-not-controlling view of the impact
of the New York State kiquor Authority issue on Hefner's suitability
for licensure.
It recognizes that more than 10 years, in fact 20 years have passed
since these events. It recognizes that several witnesses came forward
in this hearing to testify to Hefner's good works and good character
as they know it. It recognizes that Hefner saw to the establishment

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of the Playboy Foundation, an organization that has directed corpor-
ate philanthropy to causes and issues that comport with the
philosophy espoused by Playboy for a quarter-century in Playboy
But none of these mitigating factors, including the attenuation
in time of the otherwise disqualifying events, is equal on the scales
to the burden Hefner needed to shoulder squarely in this hearing.
His candor, or lack of it, in this hearing before this Commission
as to the events in New York in the 1960s is the chain that links them
irrevocably to the present. I find Hefner's testimony lacked the candor
that was required to establish, clearly and convincingly as the statute
mandates, that what happened in New York was an aberation and
that no trace of it will linger in any relationship today between himself
and the duly authorized casino regulatory authorities in New Jersey.
Certain of these key elements of testimony will be cited below. I find
them controlling because they go to the heart of Hefner's credibility.
Hefner has said "memory is not morality", and he is right. He
has told us that for him, and he believes for most of us, remembrances
of things past are controlled by what he terms "islands of recollec-
tion". If Hefner's metaphor is an accurate description of the function
of his memory in particular, or of human memory in general, then
it can be said equally that islands of memory should stand out in stark
relief, like sharp cliffs rising from a sea otherwise filled with lesser
memories eroded by time and events until they become indist-
In the end, his testimony here becomes the craggy peak of another
of those islands, a peak too high for Hefner to climb.
Asked whether he remembered being granted immunity before
the New York County Grand Jury before which he appeared on
March 25, 1963, Hefner replied, not once but twice, that he did not.
I find this testimony inherently incredible, and especially so because
Hefner has also testified that never before and never again has he gone
into a grand jury room. The record establishes in the transcript of
his grand jury appearance that to receive the immunity from pros-
ecution granted to him, Hefner first had to invoke his Fifth Amend-
ment privilege, a searing experience that could be forgotten by no one.
Similarly Hefner recalls no agreement in August 1960 to pay the
money demanded by Epstein, when the record is replete with testi-
mony that in fact at the third meeting with Arnold Morton in August
1960 Berger said the price for a license was $50,000. Morton carried
this word back to Hefner and their associates, Lownes and Preuss.

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They could have said no. they could have refused. Instead they dis-
patched Morton to New' York on August 15. 1960 in the company
of Berger to meet Epstein. If Berger was in fact dealing with and for
Epstein. and that was what Morton ,xent to New' York to find out,
then Playboy was ready and willing to meet Epstein's demands and
Herher knew it. This too can be construed only as incredible testi-
mony. If. as Herher has testified, he has never since engaged in this
kind of corrupt transaction. then the day he did agree to it ought to
be etched in his memory, and I cannot believe it is not.
Also. Herher testified that he looked for an opportunity "to blow
the whistle". a strategy recommended only once by any of the Playboy
officials. and in that instance by Lownes not Hefner. There is no
evidence in the transcripts of the Berger or Morhouse trials. or in the
grand jury testimony of any of the witnesses in 1963 or 1965, that
Herher even once attempted to put a halt to this nefarious scheme.
To suggest otherwise, as he did to this Commission. is misleading.
The Commission cannot afford to be misled.
Herher testified also that at the first opportunity to come forward
before the appropriate New York authorities Playboy did so. The facts
are exactly the opposite. Even if the first opportunity is taken to mean
the moment when the State Liquor Authority scandal became public
knowledge through the newspapers, on November 8. 1962, Herher's
testimony about coming forward at the first opportunity fails and fails
In fact it was not until December 13. 1962, the day after the New
York County District Attorney subpoenaed the books and records
of the New York Playboy Club, that Playboy sent an emissary, a
newly retained attorney, to visit the District Attorney and begin to
arrange cooperation with the law enforcement authorities. It took 21
days more before Hefner or any of the other Playboy officials actually
submitted to interviews with the representatives of the District At-
torney, and even than only after their attorney had made a deal by
which they would be granted transactional immunity from pros-
Similar deficiencies scar the testimony of Herher before this Com-
mission and have been noted in the opinion by Commissioner
In sum they add up to a failure by Hefner to exhibit the forthright
candor he had to display to overcome the unanimous finding that his
conduct 20 years ago constituted willing participation in bribery of
public officials. The only conclusion to be drawn is that Herher

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preferred it this way, that he chose to evade the real, truthful answers.
In so doing, I find, he has failed to demonstrate before this
Commission the present good character it had to see displayed to find
him suitable for licensum in 1982, and to take the measure of his
transgressions in 1960, 1961 and 1962.
Because of this finding I must conclude that Hernet, in the words
of the alter opinion, supra at 48 "has not purged himself of the cavalier
and manipulative attitude toward government process evidenced by
his earlier conduct ..." He is disqualified. However, I find that the
Playboy entities have otherwise established by clear and convincing
evidence their qualifications for licensum in New Jersey.
I concur with the other Commissioners that the Elsinore entities
and the Pritzker family meet the Casino Control Act's statutory
criteria for licensum. However, I object to the licensum of Hugh M.
Hefner and Playboy Enterprises, Inc. In so doing, I make the follow-
ing findings.
The overriding policy of the Casino Control Act demands that
public trust and confidence in the credibility and integrity of the
regulatory process and the casino industry be fostered and maintained.
N.J.S.A. 5:12-1(b)(7). To license Hugh M. Hefner and Playboy would
result in this Commission licensing an individual and a company that:
(1) actively participated in bribing public officials: (2) was found by
a British regulatory body not to be a "fit and proper person" to
operate gaming facilities within its borders; (3) was required by the
Securities and Exchange Commission ("SEC") to revise and adopt
improved internal audit controls and to reimburse the corporation in
excess of $700,000 after finding that corporate assets were misused
and expenses not adequately documented; and (4) knowingly had
business dealings with, and ultimately employed, an individual with
alleged organized crime ties. I believe, therefore, that licensing Hugh
M. Hefner and Playboy would negate the stringent requirements of
the Act and would make a mockery of New Jersey's casino regulatory
1. The New York State Liquor Authority lnvestigalion
With regard to the New York State Liquor Authority investiga-
tion, Hefner and Playboy contend that the only masonable inference

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that may be drawn from the evidence is that extortion, and not
bribery, was committed. Therefore, they argue that this Commission
should view their actions from the summer of 1960 through 1965
regarding k. Judson Morhouse and Ralph Berger in a favorable light.
In fact, they contend that they were victims of extortion and not co-
While acknowledging that payments to public officials were
made, it is argued that these payments were induced by a threatened
interference with then existing property rights, that is, threats to
withhold a liquor license to which they believed they were entitled
as a matter of law. Playboy also asserts in support of its victimization
theory that the New York SEA was so corrupt that no reasonable
alternative existed except to make payments that were requested in
order to enter the State of New York and protect their property
interests. Accordingly, they conclude that the transactions that re-
sulted constituted extortion since they were making payments to
protect rights that were already theirs. In my opinion, the facts do
not support these arguments.
The majority, but-not-controlling-opinion, recites at length the
factual scenario that occurred. l'am in general accord with this chron-
ology of events. Pursuant to the provisions of the Casino Control Act,
New Jersey law at the time of application for a license must be applied.
The majority, but-not-controlling-opinion, concludes, therefore, that
Hugh M. Hernet did commit an offense. They refuse to specifically
find that under New York law in the early 1960's, which is admittedly
different from New Jersey law today, Hefner committed the crime of
bribery. Therefore, several commissioners seek to excuse the conduct
of Hefner and Playboy by noting extenuating circumstances and the
passage of time.
I believe that Hefner committed bribery and I do not excuse this
conduct. Below I will briefly review the pertinent facts and the con-
clusions I have drawn.
During the summer of 1960, prior to any financial investment by
Playboy in New York City, but during a period of time when consider-
ation was being given to opening a key club in that city, Arnold
Morton, Playboy Executive Vice President, was approached by Ralph
Berger, an acquaintance, on several occasions. Berger advised Morton
that Martin Epstein, a member of the New York State kiquor
Authority wanted $50,000 in order to assure a liquor license for their
proposed New York club. This information was shared with Hefner
and other corporate officers, and it was agreed that negotiations with

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Berger should proceed and a $50,000 payment should be made. A
conspiracy to bribe a public official, Martin Epstein, was thus hatch-
ed. This decision was not reached after a continuing barrage of re-
quests for the payment of money. Indeed, the decision to "deal" was
made early in the SEA matter and without coercion.
In furtherance of the conspiracy, and as evidence of the willing-
ness of Hernet to participate in the bribery scheme, Morton was
dispatched to New York. On August 15, 1960, he went with Berger
to meet Epstein. This meeting was ostensibly arranged to verify that
Berger had a relationship with Epstein so that Playboy could be
assured that they would be paying money to a person who would
deliver a liquor license to them. This conduct further demonstrates
the willingness of Hefner and Playboy to participate in the sordid
scheme and to bribe a public official, albeit a corrupt one.
On August 22, 1960, after satisfying themselves that Berg{Sr was
accurately representing his involvement with Epstein, Playboy
proceeded with its first wave of mailings in New York announcing
its intention to open a club there and soliciting membership. This was
a minimal investment by Playboy in its planned New York enterprise
and certainly does not justify a claim that it was being extorted. In
fact, the conspiracy continued and Playboy and its officials became
more involved in the corrupt scheme.
By October 1960, before the prospective site for a New York club
had been purchased, Playboy received a communication from Berger
that Epstein, who on September 13, 1960, became chairman of the
SEA, had identified an attorney that it should use to process its liquor
license application. Subsequently, in November 1960, Playboy com-
plied with Epstein's suggestion and retained this lawyer.
In mid-October 1960, Playboy established a real estate holding
company which it intended to use in purchasing the site for the New
York club. However, it was not until late December 1960, that Play-
boy ultimately took title to a site, at a cost of $700,000. It is only
reasonable to assume that Hefner and the Playboy officials moved
forward with the real estate purchase because they believed that they
had guaranteed, through bribery of the then Chairman, favorable
treatment on their application for a liquor license. Consistent with
this view, this application was not filed until November 1961.
In January 1961, Hefner and another corporate official, Victor
kownes, travelled to New York to meet the Chairman Epstein. They
attempted to persuade Epstein that it was permissible to grant them
a liquor license which allowed them to restrict entry to persons who

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purchased a key or membership in the club. Epstein was unpersuaded,
and the meeting terminated without a resolution. Epstein was extreme-
ly upset with Hefner and Lownes and referred to them as "boy
scouts". He also wanted nothing further to do with them.
The conspiracy could have ceased at this point. Epstein had
terminated discussions. Playboy could easily have attempted to secure
their liquor license, as they had in Illinois, through legal means.
However, with the approval of Hefner, Morton told Berger "to try
to keep the door open, to try to talk to Epstein". By April 1961, the
deal with Epstein was reinstituted. The foregoing actions are not those
of a recalcitrant victim, but are instead the purposeful steps of an eager
and willing co-conspirator. In my opinion, this belies the argument
of Playboy that they were mere victims of a corrupt political system.
In late April 1961, Berger advised Morton that Epstein agreed
to reinstate the $50,000 deal, however, Playboy would have to nego-
tiate with L. Judson Morhouse, the Chairman of the Republican party
in the State of New York as well. Thereafter, at the behest of Hefner,
Morton met with Morhouse in New York. Morhouse demanded
$100,000, stock options, and a gift shop concession. After consultation
with Hefner, Morton again meets with Morhouse and a deal is struck
for $100,000. In June 1961, this agreement was ratified in Chicago
after Morhouse met with Hefner and other Playboy officials. The
agreement with Morhouse was concluded with reluctance only as to
price, not the fact of payment, as evidenced by Playboy officials
negotiating only the terms of this corrupt scheme. These actions again
suggest that Playboy was not a victim but rather a willing participant
in a criminal offense.
By June 1961, payments began to flow to Epstein, and by August
1961, Morhouse also began to receive payments. Both the corrupt
public officials and Playboy were satisfied. Playboy officials were
justified in feeling secure with the arrangements since Morhouse had
assured them that if Epstein did not deliver the license he could have
a new chairperson named who would look on favorably on the Play-
boy application.
While the above events were occurring, the New York County
District Attorney's Office was conducting an unrelated investigation
into corruption at the SLA. The District Attorney's investigation was
publicly revealed in November 1962. Thereafter, Governor Nelson
Rockefeller issued a public statement urging all liquor licensees to
cooperate with the District Attorney's investigation and promising
those so cooperating that there would be no reprisals affecting the

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conduct of their businesses. Playboy officials were, however, silent.
On December 12, 1962, the books and records of the Playboy
Club of New York, which had just opened, were subpoenaed by a
New York grand jury. Morton, however, secretly telephoned
Morhouse and notified him that the company's books reflected pay-
ments made by Playboy to him. This notification generated a self-
serving letter dated December 20, 1962, from Morhouse to Playboy
which attempted to establish he was consulted by the company on
matters other than the New York Club. The circumstances surround-
ing the letter were not revealed or explained by Hefner or other
corporate officials until confronted with the facts during the 1965
criminal trial of Morhouse. Playboy's lack of cooperation is further
evidenced by their unwillingness to voluntarily supply the District
Attorney's office with documentation for the first $10,000 payment
to Morhouse in the summer of 1961.
By early January 1963, Playboy retained an attorney who worked
out an arrangement with representatives of the New York District
Attorney's Office. In exchange for their cooperation and testimony,
Hugh M. Hefner, Victor Lownes, Arnold Morton, and Robert Preuss
were given transactional immunity from prosecution. At first, Hefner
was a recalcitrant witness and Morton lied. Ultimately, and with
prodding from the District Attorney's office, they became more coop-
erative witnesses.
In March 1963, Hefner testified before a New York grand jury.
In response to a question about his failure to consult an attorney prior
to agreeing to pay Epstein and Morhouse, he remarked that the
Playboy officials were embarrassed and also noted that the scheme
"got stinkier and stinkier as it went along". I agree with Mr. Hefner's
characterization and note that attempts to portray the SLA matter
in any other light must obviously fail.
Every decision rendered by this Commission has precedential
value. It is, therefore, incumbent upon this tribunal to attempt to
maintain rational consistency in its rulings. Similar fact patterns
should produce the same results. If we do not follow our prior de-
cisions, or validly and cogently distinguish them, then this Com-
mission's effectiveness as a quasi-judicial body will be undermined,
public confidence in our performance will be shattered and finally the
public may grow suspicious of our actions.
On May 20, 1980, this Commission issued a sophisticated opinion
entitled In the Matter of the Application of Seymour Alter for Licensure
as a Casino Key Employee, Docket No. 79-EA-60, affirmed by the

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New Jersey Superior Court, Appellate Division, Docket No.
A-4106-79TI (June 24, 1981). The facts in the instant matter are
uniquely comparable to those of the Alter case. Indeed, they are even
more egregious. For that reason, I believe that the Alter case is
dispositive of Hefner's and Playboy's qualifications for licensure.
Alter agreed to pay $10,000 to corruptly dispose of liquor license
violations in New York. Hernet and Playboy, on the other hand,
agreed to pay $150,000 to secure a liquor license in New York. Each
tried to claim extortion as a defense to their bribery. The differences
between the cases relate mainly to the magnitude of the offenses.
Alter's conduct was serious; Hefner's was outrageous. Alter instigated
the bribe of the SLA official while Hefner responded to an invitation.
The law, in virtually all jurisdictions, does not distinguish nor adjust
culpability on such basis. Alter was held responsible for his corrupt
deed involving a lower level kiquor Authority official. Hefner, who
bribed the highest level officials in the same Authority, should not
be excused on the basis that the officials were corrupt and therefore
to blame. Such a result would be inconsistent and utterly without
Hugh M. Hefner is a qualifier, a substantial stockholder in Play-
boy Enterprises, Inc., and Chairman of its Board of Directors. If
permitted to remain in New Jersey's casino industry he could exert
tremendous influence over PEA's casino hotel facility. His bribe in-
volved $150,000, of which a substantial portion was paid, and his
actions were as a principal, not merely an employee, as in the case
of Alter. In comparison, Alter's acts were minimal. No money actually
changed hands and the benefits, if he had been successful, would have
accrued more to another than to himself. Further, Alter's position,
influence, and visibility in the Atlantic City casino industry and the
nation may be considered almost inconsequential when compared to
that of Hefner.
I believe that the Alter decision establishes a minimum standard
against which this Commission should measure applicants. That
opinion noted that bribery is a specific disqualifying offense in Section
86(c) of the Act. Moreover, Section 86(g) of the Act holds qualifters
to the same standard as Section 86(c), even if not convicted of any
offense, if the person had committed "any act or acts which would
constitute any offense" under Section 86(c). Alter case, supra at 13.
There can be little doubt that Hugh M. Hefner and other corpor-
ate officials conspired to bribe and did, in fact, bribe public officials

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of the State of New York. This Commission remarked in the Alter
case, supra at 46-47, that
... [B]ribery strikes at the very heart of the integrity of
government regulatory processes in a manner common to
few other offenses. The very object of bribery is, in-
escapably and in all contexts, the corruption of govern-
ment. Its commission demonstrates on the part of the of-
fender not only a complete disregard for regulatory pro-
cesses, but a willingness to actively corrupt them for private
The bribery by Alter and Hefner occurred almost 20 years ago.
When the Commission considered this factor and the issue of rehabili-
tation in its Alter opinion, it found the burden of persuasion to be
a "very heavy one". Id. at 45. Thus, the applicant is obliged to clearly
and convincingly produce in the minds of the Commissioners a "firm
belief or conviction" that his offense does not justify disqualification
under all pertinent circumstances. Id. at 45.
The Commission went on to point out in the Alter case, Id. at
45, that the position applied for is an extremely important factor,
particularly if a high management role is sought. If a person can, as
Hefner would be able to do if licensed, "... direct and control ...
the future course of the casino gaming industry in New Jersey ...
[he] must meet the very highest standards of qualification in terms
of character, honesty, integrity and business probity; not just barely,
but clearly and convincingly". Id. at 45-46.
Management positions require "the most stringent scrutiny".
Alter case, supra at 46. When subjected to such scrutiny, Hugh M.
Hefner does not meet the standards set forth in the Act or in prior
Commission decisions.
Alter and Hefner may be compared in other respects. To para-
phrase the Alter opinion, the testimony of each contains a "disturbing
pattern". On nearly every occasion where the evidence "indicated a
culpable state of mind" they both sought to "place responsibility for
... illegal acts upon third parties" in order to exculpate themselves.
Yet both men were sophisticated and worldly business persons at the
time of the bribes, not "ignorant youth". Id at 47.
The Alter opinion also focused upon the applicant's evasive testi-
mony in Commission proceedings, and it was found that he uttered
deliberately fabricated testimony which reflected negatively on his
good character, honesty, and integrity. Alter sought to make excuses
for his behavior in the early 1960's. Despite Hefner's comments that

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what he did was immoral and wrong, he has also sought to excuse
his immorality and wrongdoing by presenting the "facts" in a fashion
which would not make him culpable for the SEA events.
Examining Hefner's testimony before this Commission in juxta-
position to the objective facts surrounding the SEA scandal is reveal-
ing. On direct examination Hefner initially claims he met Morhouse
once in a "social context". He then goes on and attempts to couch
his relationship with Morhouse initially as an attorney/client rela-
tionship. He says his "original assumption was that he [Morhouse]
was going to be able to solve the problem for us by representing us".
At another point in his direct testimony, he claims the Morhouse
payment "was simply a payment to an attorney to solve the problem".
He then goes on to claim that as the Morhouse "thing unfolded he
realized it was extortion". These assertions by Hefner before the
Commission are patently false. Hefner, Morton, Preuss and Iowneg'
grand jury testimony in 1963 at the Morhouse and Berger trial records
clearly establish that the agreement to pay Morhouse was, from its
inception, to assure a liquor license for Playboy as a private member-
ship club and not for attorney fees. Only in 1982 does Hefner dis-
semble the evidence in this fashion and try to justify his actions in
this manner.
Though all the evidence establishes that Hefner and others agreed
to pay Epstein $50,000 during the summer of 1960, at no point during
his direct testimony does he reveal this fact. Was it inadvertent or
At several points in his direct examination Hefner tried to con-
vince the Commission that the Morhouse payments were to secure
a license to operate. He attempted to give the impression that Playboy
was being denied any license at all. Can anyone familiar with the facts
in this case find this testimony credible?
Hefner claimed before us that he and his associates were not
breaking or subverting any laws, but that the company had no other
way to secure a license except through Morhouse. These claims were
inade even though no liquor license application had been filed, no
reputable attorney consulted, and no litigation attempted at the point
he agreed to bribe public officials.
Hefner also testified before this Commission that to the best of
his recollection, he contacted the District Attorney and wanted to
cooperate before any subpoena was served. We know the facts are
otherwise not only as to the sequence of events, but also the initial
lack of cooperation by Hefner and Morton. He also stated he was

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not represented by an attorney at the District Attorney's office, when
in fact not only was he represented, but his attorney had arranged
for his immunity if he cooperated fully. If Alter's testimony and
disposition 18 years after the bribe were equivocal, Hefner's were lies.
If Alter dissembled, Hefner was untruthful. If Alter was correctly
denied licensure, Hefner should expect and receive no more.
We should also measure Hefner's testimony before this Com-
mission in contrast to his testimony before the New York grand jury
in 1963. In 1963, he unequivocally stated that he agreed to deal with
Morhouse for "the understanding ... he [Morhouse] was to get us
a liquor license for our Playboy advertised". Before this
Commission he argued extortion and sought to have us believe he
was the victim of some nefarious scheme. In 1963 Hefner testified that
"those big shots in Albany didn't want to have anything to do with,
little old Hefner out in Chicago". Yet now, in 1982, Hefner testifies
"we had refused the previous overtures from Epstein". The facts
clearly dispute Hefner's contention in his recent testimony that Berger,
Morhouse and Epstein exclusively maintained the initiative behind the
conspiracy. Berger testified in 1963 that "he [Morton] told me to try
to keep the door open, to try to talk to Epstein". Hefner was a willing
Hefner explained to the grand jury in 1963 that the costs and
attorney fees for pursuing the matter through the courts in Illinois
equaled the illegal payments agreed to in New York. This comment
reveals a motive. Through bribery he was more certain of victory.
Hefner never even tried to legitimate the process by filing an appli-
cation for a liquor license until November 1961, several months after
payments were made to Epstein and Morhouse.
I reject the argument that Hugh M. Hefner is contrite and should
be forgiven for events which took place over 20 years ago. I find that
his behavior and the company's behavior during the intervening years
indicate a lack of moral courage as evidenced by the SEC, New
Orleans, British matters, and his testimony before this body. I am not
persuaded that establishment of the tax exempt Playboy Foundation,
dedicated to good deeds, is sufficient to overcome objectionable and
illegal conduct.
In response to Hefner's claim of extortion, this Commission
should determine that this crime is generally defined as obtaining
property from others, with their consent, induced by wrongful use of
actual or threatened force, violence or fear, or under color of official
right. The fear may be fear of economic loss as well as of physical

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harm. Extortion involves payment in return for something to which
the payor is already entitled. Bribery, on the other hand, is a voluntary
payment made in order to exert undue influence upon the performance
of official duty. The essence of bribery is voluntariness: the essence
of extortion is duress.
I conclude that the statements, meetings and payments by Hugh
M. Hefner and the other Playboy officials were in furtherance of the
conspiracy to bribe Martin Epstein--to influence him to act favorably
on their license application. There was no fear of economic injury.
It is clear that Hefner agreed to pay Martin Epstein $50,000 to secure
a liquor license in New York prior to Playboy having made any
financial investment in the city or even having filed a formal appli-
cation. Further, the law was and still is that a liquor license is not
a right but a privilege. Though ultimately found by the New York
State courts to be without merit, the SkA had consistently denied
private club licenses like or similar to that being requested by Playboy.
Options were clearly available to Hefner and the Playboy corpor-
ate officials. They could have consulted their attorney, but they did
not. They could have sought redress in the New York court system
as they had done in Illinois, but they did not. They could have gone
to various law enforcement agencies and complained, but they did
not. They could have resisted, but they did not. They chose instead
to forego these options by willingly participating in an unlawful,
sordid affair.
I find the testimony of Hugh M. Hefner before this Commission
to be untrue and insincere. His appearance was, quite simply, an
attempt to mislead this Commission. Hefner has not proved to me
by clear and convincing evidence that he has purged himself of a
"cavalier and manipulative attitude" toward government processes.
Alter case, supra at 48.
After examining all the facts involving this SkA matter, I find
that Hugh M. Hefner and other corporate officers were not extortion
victims. They were bribers. They were eager co-conspirators in a
scheme to bribe public officials. Two separate grand juries and two
separate petit juries identified the scheme as such. Four different
appellate courts reviewed these cases and supported these determina-
tions. Only today do some of the Commissioners, in reexamining the
facts, judge Hefner under different standards. I respectfully submit
that neither the evidence nor the law permits or supports such a
Bribery subverts and mocks the democratic process, turning it

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upon itself. Among other things, Hefner has admitted to having
participated in a conspiracy to bribe a public official. The evidence
does not support in a clear and consistent manner in the licensure
of Hugh M. Hefner, a 66 percent stockholder of Playboy Enterprises,
Inc. By operation of law, Playboy Enterprises, Inc. may thus not be
licensed. N.J.S.A. 5:12-85. The fact that they have made a substantial
investment in this state's economy is not adequate justification.
2. The Events Surrounding the British Magistrates' Decision Not
to Renew the Casino Licenses of the Playboy Club of London and the
Clermont Club
It is undisputed that Playboy was found by the British gaming
authorities not to be a "fit and proper" person to hold a casino license
because the Playboy Club of London was found to have been habitu-
ally used for unlawful purposes while the Clermont Club was found
to be used for unlawful purposes. Playboy admitted some of the
charges prior to the hearing conducted in the United Kingdom.
Among their admissions were: (l) knowingly accepting checks drawn
on banks where the patron did not have an account; (2) knowingly
permitting patrons to continue gaming while owning the casino money
by reason of previously dishonored checks; (3) allowing a few patrons
to settle debts for less than face value; (4) failing to control and bar
a disruptive patron; (5) permitting a director of the holding company
to gamble.
Playboy's basic contention is that it should not be held respon-
sible because the parent, Playboy Enterprises, Inc. and its Chicago
officers and directors were totally unaware of what had occurred in
Britain; and further, that they were precluded from obtaining this
information by an agreement with the British Gaming Board. Playboy
does not deny the alleged irregular transactions by its British clubs
but argues that Playboy Enterprises, Inc.'s (PEI) United States of-
ficials knew nothing of the violations during the period they were
being committed.
A corporation can only act through its employees or agents (a
foreign subsidiary corporation may be an agent for a domestic parent
corporation) and consequently the acts of those employees or agents,
within the scope of their employment, constitute acts of the corpor-
ation. Likewise, collective knowledge acquired by employees or agents
within the scope of their employment is imputed to the corporation
even if the information is not acquired by any one employee. Ad-
ditionally, a corporation is held responsible for failure to act in con-

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formance ith the law based upon this collective' knowledge. A cor-
poration may be found guilty of a criminal offense requiring intent
if at least one individual participated, and that person's intent ma3
properly be imputed to the corporation. The actions and intent of
a corporate officer, such as Victor Lownes, who acted ithin the scope
of his authority are obviously imputable to the corporation.
While the Chicago and British operations may, on paper, look
like separate entities to satisfy the British gaming authorities, for
practical purposes they were one big, albeit not well organized, cor-
poration. They were controlled from the top b)' Hefner and a few
trusted employees such as Lownes. Clearly, because of the importance
placed on Hefner as a personality and the Playboy name and lifestyle,
the company held its enterprises out as one giant corporation. The
shareholders of this public corporation had the expectation and right
to consider the company as a single entity.
Lownes was an officer and director of the parent corporation,
managing director of the British clubs, and one of the trustees of the
holding corporation. His duties involved control of all of the Playboy
Clubs. The fact that the parent Playboy and the subsidiary had a
common director in Lownes does not by itself indicate an agency
relationship with an automatic imputation of knowledge. But the fact
that Lownes was specifically delegated broad authority by the PEI
Board of Directors does indicate the requisite agency relationship and
carries with it the concomitant responsibility of imputed knowledge.
Playboy does not content it was unaware of the British law and
regulations that it was ultimately found to have violated. The sole
issue regarding knowledge is whether Playboy knew, or can be held
responsible for knowing, of the specific improprieties.
In analyzing the facts we must keep in mind that Victor Lownes
and William Gerhauser, both Playboy executives for over a decade,
were responsible for the operations of the British casinos. Lownes,
in particular, had been a friend and business associate of Playboy
Chairman Hefner for over 20 years. It is reasonable to assume that
the power and influence of Lownes were derived not only from his
personality, but equally or more so from his relationship with the 66
percent stockholder and founder of the company, Hugh M. Hefner.
This unique relationship can be seen in the remuneration Lownes
received (over $500,000 annually) and the value of the stock option
he exercised on the day of his termination (calculated to have been
worth over one million dollars).
I cannot accept the reasoning that Playboy Enterprises, Inc. and

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its officers and directors were not aware and had no responsibility
to be aware of how the British clubs were operated. First, kownes
was a member of the Board of Directors of Playboy Enterprises, Inc.,
attended Board meetings and regularly reported on the clubs' ac-
Second, Michael Hogan, Secretary to the Gaming Board for
Great Britain, clearly and unequivocably point out that although the
British gaming authorities licensed Playboy under an agreement
whereby the clubs would be managed and operated by persons resi-
dent in England, the parent was not prohibited from being
knowledgable about their operations, or from assuring that the clubs
were operated with integrity and in full conformance with the British
gaming laws. In fact, the parent had the affirmative obligation to its
shareholders and the British regulators to monitor its subsidiary.
Playboy should not be permitted to use this trust deed as a crutch
to avoid a disagreeable and difficult responsibility. I believe that such
self-imposed restrictions existed because of Hefner's unique rela-
tionship with kownes and the "protected" position he had within the
corporate structure.
Third, Arnold Finer, British Counsel for Playboy and one of the
trustees under the trust deed, indicated in substance that he reported
frequently to PEI's principal officials including Hefner regarding oper-
ations in England. Additionally, Robert Preuss, PEI Vice President
until 1976, maintained a close liaison with William Gerhauser who
would report monthly on operations in Great Britain.
Fourth, though Derrick Daniels, Marvin Huston and Frank
DiPrima joined PEI between 1976 and 1978, they claim it was not
until the kondon police raid in 1981 that they had any indication that
the clubs were being operated in violation of the British gaming laws.
Even if I accept their testimony as truthful, I cannot excuse the parent
for this dereliction of duty. I cannot support a legal principle and
licensing standard that permits a corporation or its officers to insulate
themselves from responsibility by claiming lack of knowledge under
the facts of this case. I submit, as reasonable prudent business persons,
responsible for the company's leading profit center, they should have
been informed and should be held responsible as if they were so
informed. All they were required to do was ask, look and listen.
There were numerous indications that information was not read-
ily forthcoming from the subsidiary's officers. The Playboy officials,
however, refused to respond to the warning this type of behavior
presented. When a corporation president, chief financial officer and

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general counsel can each testify that a subsidiary's manager would
not readily share information and they did not take firm, immediate
and direct action, such conduct cannot be excused. Io do so would
totally defeat the licensing and regulatory process of the Casino Con-
trol Act. We cannot permit so loose a system of corporate responsi-
bility. Were we to adopt such a standard, potentially any company
could be licensed in this state--whatever its prior trans-
gressions--provided they were carried out through effective, manipu-
lative insulation.
Fifth. financial, audit and management letter reports were avail-
able to the parent company and its officials on a regular basis, at least
from 1976. and without question they could have been secured by the
parent before that date. These reports, though not dispositive on the
issue of corporate knowledge, should have contributed to the corpor-
ate concern on the issues under review. Dishonored checks and bad
debts had increased in number, profits had multiplied several fold and
the character of the business was admittedly going through drastic
changes. Corporate concern should flow not only when profits fall,
but to a cautious business person, rapid escalation in earnings de-
mands explanation.
Another aspect of the English club operation is disquieting.
Financial and other club records reveal the company's willingness to
engage in foreign currency violations. Ihis is but another indication
of their contumacious disregard for law and strict adherence to regu-
lhe proposition this Commission should adopt is that Playboy
is deemed to have knowledge of the English regulatory violations since
the means were readily available for them to have detected serious
infractions and senior officials, operating within their authority, par-
ticipated in defalcations.
3. Securities and Exchange Commission
lhe SEC investigation commenced on February 13, 1978. Prior
to the SEC inquiry a stockholders lawsuit had been brought raising
similar issues. Playboy reacted to the SEC by retaining Coopers and
Lybrand to develop specific responses to the inquiry and establishing
an independent audit investigation. Pursuant to negotiations with the
SEC the audit committee was composed of two independent directors.
lhe Coopers and Lybrand review, completed in October 1978, pointed
up the inadequacy of Playboy's accounting procedures and internal
controls. Ihe audit committee reported in January 1980 and estab-

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lished, among other things, the misuse of corporate funds by Hefner.
Though cash compensation paid to officers and directors was not
questioned, other kinds of benefits were identified as having been
received without proper authorization, documentation or disclosure.
The benefits include use of corporate property for personal use by
corporate directors, officers and their non-employee friends. In some
instances expenditures were improper.
Can we condone this misuse of corporate assets? Certainly the
twenty-five thousand stockholders of Playboy had a fight to feel
abused by their fiduciaries. Federal securities laws require disclosure
of all directors' and officers' remuneration and prohibit use of corpor-
ate assets for other than corporate business. Playboy failed to ap-
propriately disclose to their stockholders and the investigating public
the inappropriate and/or undocumented corporate payments for the
benefit of Hefner and his friends. Hefner's the
corporation of over $700,000 is a measure of this abuse. Playboy's
payment of plaintiff's lawyers fees of approximately $70,000, in settle-
ment of the stockholder suit, is additional evidence of indiscretion.
The SEC found in 1980 that although Playboy became a public
corporation almost a decade earlier, its internal controls were still in
need of improvement. Playboy and its existing audit committee were
found to have failed to carefully scrutinize management and its trans-
actions and establish customary accounting and control procedures
required for a public company. The SEC recommended specific
changes in the ways the corporation handled its financial affairs.
Playboy's acceptance of these recommendations is reactive corporate
management rather than the preferred proactive variety. The SEC
findings are but another example of Playboy's failure to pursue correc-
tive action without the prodding of government. Exposure by the SEC
and the stockholders lawsuit should be interpreted by this Com-
mission as evidence of the failure of Hefner and others to control
corporate abuse through their own initiative.
The gaming control system in this State establishes two inaepen-
dent checks to assure the integrity of both the regulatory and the
regulated. The Division of Gaming Enforcement and the Commission
constitute the former; the hotel/casinos the other. Both components
of the system have the burden of maintaining the high standards
envisioned by the Casino Control Act. An essential foundation block
in New Jersey's casino regulatory scheme is voluntary compliance with
our laws and regulations by licensees. Can we believe Playboy will
meet its responsibilities, given a history that includes misuse of corpor-

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ate funds, as revealed through the SEC investigation? I do not believe
this company has met its burden of establishing that it meets the
ethical standards required by the Act. Further, I do not believe that
this company can in its present posture, become a responsible partici-
pant in the New Jersey regulatory scheme. This investigation also
points up that Hefner's conduct during the early 1960's was not an
aberration. As late as 1980 his judgment and conduct have been
unacceptable. There is no conceivable way to justify his misuse of
corporate assets.
4. New Orleans and Miami Clubs
We have heard testimony about Playboy's relationship in
1975-1976 with Michael Zuppardo in connection with its New Orleans
Club. This matter has been documented during these proceedings.
Although memoranda from Playboy's attorney reflected his conversa-
tions with various corporate officials advising them of the inap-
propriateness of their doing business or having any relationship with
Zuppardo, the company went forward and employed him as a director
of sales and promotions. In Playboy's eyes, Zuppardo's alleged or-
ganized crime background apparently only justified discontinuing
plans to grant him a franchise, not prohibit employment.
Zuppardo allegedly had links with organized crime figures and
his financial sources were believed to be conduits through which
organized crime moneys were funnelled. Playboy, having evidence of
Zuppardo's organized crime associations, disregarded this unequivo-
cal notice and proceeded to employ him in a most sensitive pos-
ition--a position that would require licensure in New Jersey. Obvious-
ly, his friends and associates were found acceptable by Playboy since
he was seen as useful in the role of host and promotional personality.
Playboy should be judged both on the extent to which it has
maintained a corruption-free reputation, and the extent to which it
has actively safeguarded its integrity by initiating vigorous and mean-
ingful prevention programs. Playboy has failed on both scores and,
rather exhibited a willingness to knowingly compromise all ethical
considerations for potential profits.
The issues raised by the Miami Playboy Club are documented
fully in the opinion of the other Commissioners and need not be
repeated. They are important not because of the accuracy of the two
memoranda (from Playboy's security director at the time) questioning
particular employees' alleged associations with organized crime fig-
ures, but because these allegations remained unanswered until this

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proceeding some 10 years later. I believe that the disregard of an
allegation of that type suggests this company is hardly likely to adhere
to this State's strict standards of integrity.
5. Conclusion
In considering the suitability of Playboy for a casino license, we
must assess the impact on the public confidence in this State's regu-
latory process and on the integrity of gaming in New Jersey. We must
ask at what point, if at all, does Playboy's illegal and embarrassing
behavior become unacceptable conduct. Should one, two, three or
four instances nullify years of acceptable business operation, or should
years of acceptable business operations nullify four instances of il-
legality and impropriety? Can any other company with a similar
background be allowed into New Jersey?
The good character requirement contained in the Casino Control
Act has been interpreted as an important indicator of future wrong-
doing. A finding of a qualifier's good character is an important
element in shaping a measure of the public's perception of the integrity
and honesty of both the industry and the Commission. Finding Hefner
qualified and licensing Playboy risks his future indiscretion. I doubt
Hefner would now knowingly violate the laws and regulations of this
State in the same manner and under the same circumstances as he
has done elsewhere in the past. Nonetheless, I have reservations about
his ability to exercise the judgment and fortitude to avoid trans-
gressing the law if confronted with a challenging problem in the future.
Hefner exhibited poor judgment in dealing with the SEA affair, kow-
nes' accountability and the British gaming scheme, corporate assets
and corporate security. Based upon his conduct up until very recently,
he did not respond in an acceptable manner when confronted with
a judgmental business issue. Hefner's behavior indicates he fails to
recognize the consequences of his actions and may as a result violate
his obligations as a licensee. Based upon this finding I would hold
that Hugh M. Hefner does not have the requisite character to justify
Unfortunately, and not as a consequence of some unique or
peculiar standards extant only in New Jersey, Playboy's ethics are
unacceptable. This company's unethical conduct required New York
law enforcement authorities, the Securities and Exchange Commission
and the British Gaming Board to insert themselves into corporate
affairs. We should not excuse corporate behavior previously found
unacceptable by other knowledgeable, sophisticated and prestigious

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public officials. We should not permit Hugh M. Hefner's beguiling,
evasive testimony to mitigate or confuse the facts. The criminal law
was still violated in New York, the British gaming laws and regu-
lations were still violated and subverted; Federal laws and rules
pertaining to corporate accountability and governance were still
abused by this applicant. We must not permit our standards to be
so different from those of other jurisdictions. Even if we choose not
to elevate our standards above other jurisdictions, we cannot in good
conscience lower them.
Ethics deal with what is good or bad, right or wrong, and the
principles of what constitutes a moral duty or an obligation. Ethics
in business must encompass all spheres of the company's activities,
its public relations, corporate behavior abroad, and compliance with
regulatory processes. Often only a thin line separates an ethical from
an unethical act. Similarly, there is often a thin, albeit real, separation
between the unethical tactic and the actual violation of law. This
Commission should refuse to condone corporate practices entered into
solely to maximize profits when the means employed involved the
subversion of a government, its laws and/or its regulations.
As indicated by the evidence in this case, Playboy has, in my
opinion, violated the principle of good ethics and integrity. Playboy
reasons they were justified in some of their behavior because various
government regulations and laws encountered during their years of
business operations were unnecessary, unreasonable or counter-
productive. However, did they seek to change these laws and regu-
lations in an appropriate and acceptable fashion? I contend they did
not. Nor did they approach resolution of their problems and dif-
ferences with the high ethical standards required of this State's gaming
Playboy's decisions to testify under immunity for the government
after having bribed public officials: to assume control over its British
gaming clubs and comply with the county's gaming regulations, after
the company was under scrutiny by the authorities for gaming law
violations: to repay misappropriated corporate assets, after a stock-
holders' lawsuit and inquiry by the SEC, were only marginally accep-
table responses having occurred only after government intervention.
I find these actions and motives violative of the very essence of
concepts of ethical responsibility and integrity.
I submit that this Commission should not contemplate too lenient
a set of penalties for such corporate offenses or misconduct. Adminis-
trative agency sanctions such as warnings, consent agreements and/or

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promises by a principal to deport oneself differently in the future, are
of limited, if any, value in this particular case. The facts herein warrant
a denial of licensure. Any lesser sanction will justify the belief of future
applicants that denial of corporate licensure by New Jersey is a myth
so long as corrective corporate action follows government discovery
of an indiscretion or criminal act.
Licensing Playboy would be tantamount to encouraging corpor-
ate leaders to believe this Commission has ruled that time will cure
even the most reprehensible conduct. Licensing Playboy, with its
history, would signal the abandonment of virtually all licensing
criteria requiring ethical restraint. If the unethical practices and illegal
acts of corporations are not checked, the future of a crime free casino
industry in Atlantic City would be in jeopardy. At stake would be
the success of gaming in this State and our credibility in the eyes of
the public.
Playboy should not be denied a gaming license in this State
because this Commission, the Division of Gaming Enforcement, the
Attorney General or the citizens of New Jersey are unreasonable,
unfair or insensitive to the business community. Rather, Playboy
should be denied a gaming license in this State because it abused the
public trust and failed objectively to demonstrate good corporate
citizenship. The applicant failed the test that each of us is required
to pass in the conduct of our affairs. This applicant has not met its
burden to establish by clear and convincing evidence its qualifications
to hold a casino license.
For the reasons set forth above, I join with Commissioner Carl
Zeitz in finding that Hugh M. Hefner is unqualified for licensure in
New Jersey. Pursuant to Section 85 of the Casino Control Act I must
and I do find Playboy Enterprises, Inc., and Playboy Elsinore As-
sociates unqualified as well.
For the reasons expressed in this Opinion, we find that the
Pritzker family and the Elsinore entities have established by clear and
convincing evidence their good character, honesty and integrity to
participate in casino operations as required by Sections 84 and 89 of
the New Jersey Casino Control Act. [Signed by Commissioners
Thomas, Danziger, Jacobson, McWhinney and Zeitz.]
For the reasons expressed in our Opinions, we find that Hugh
M. Hefner and the Playboy entities have established by clear and

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convincing evidence their good character, honesty and integrity to
participate in casino operation as required by Sections 84 and 89 of
the New Jersey Casino Control Act. [Signed by Commissioners
Thomas, Jacobson and McWhinney.]
For the reasons expressed in this Opinion, we find that the
Playboy entities have established by clear and convincing evidence
their good character, honesty and integrity to participate in casino
operations as required by Sections 84 and 89 of the New Jersey Casino
Control Act. [Signed by Commissioners Thomas, Jacobson and
For the reasons expressed in this Opinion, we find that Hugh
M. Hefner has esta151ished by clear and convincing evidence his good
character, honesty and integrity to participate in casino operations
as required by Section 89 of the New Jersey Casino Control Act.
[Signed by Commissioners Thomas, Jacobson and McWhinney.}
For the reasons set forth in our Opinion, we find that all of the
qualifters other than Hugh M. Hefner have established by clear and
convincing evidence their good character, honesty and integrity to
participate in casino operations as required under Section 89 of the
New Jersey Casino Control Act. [Signed by Commissioners Thomas,
Danziger, Jacobson, McWhinney and Zeitz.]
For the reasons set forth in our separate Opinions, we find that
Hugh M. Hefner and the Playboy entities have failed to establish by
clear and convincing evidence their present qualifications for licensure
in New Jersey. [Signed by Commissioners Danziger and Zeitz.]
You must check the New Jersey Citation Tracker in the
companion looseleaf volume to determine the
history of this case in the New Jersey courts.