SAN JOSE -- Casino M8trix has found itself in a high-stakes showdown with a legal high-roller -- the state attorney general's office -- and risks everything if it loses.The cardroom allegedly hid hefty profits through a confusing maze of corporate entities created by M8trix owners to reduce the gambling establishment's reported income, according to an accusation filed by the attorney general's Bureau of Gambling Control.The allegations threaten to close the doors of M8trix, which opened its gleaming, $50-million tower next to Mineta San Jose International Airport less than two years ago.Eric Swallow, one of the M8trix owners, did not return phone messages. In a statement, casino spokesman Sean Kali-rai declined to discuss specifics of the state's claims, but said, "Casino M8trix believes that the charges are unfounded and that the legal process will show that to be the case."It was unclear from the accusation how much profit M8trix allegedly underreported. But it asserts that the practice shortchanged a gambling-addiction program the city requires the cardrooms to fund and perhaps underpaid taxes as well.An administrative law judge will consider the accusation, filed May 2, and issue a recommendation to the independent California Gambling Control Commission. Penalties could range from fines to stripping the casino of its license."The nuclear option would effectively shut down the cardroom unless they got new ownership," San Jose City Attorney Rick Doyle said. "It reads like revoking the license is definitely on the table."Attorney General Kamala Harris' office wouldn't comment on the accusation, first reported on KTVU TV. But the 33-page accusation details how the 49-table cardroom's proceeds have been transferred to limited liability companies whose members are the M8trix owners. It includes a flow chart that tracks the dizzying path of the money.The result, because the payments to the LLCs were listed as expenses and not distributions to owners, was that the casino's net income was claimed to be essentially zero in three out of four years between 2009 and 2012. The accusation notes that other California card clubs of similar size reported net income that averaged 10 percent of gross gaming revenues over the same period.Swallow and his fellow owners, husband and wife Peter and Jeanine Lunardi, "provided misleading information," and "engaged in self-dealing to siphon off monies for themselves and reduce the reported net income," according to the accusation, written by Wayne Quint Jr., chief of the Bureau of Gambling Control.When asked for documentation for "payments involving millions of dollars annually," Swallow reportedly responded: "There are no invoices."The state gambling licenses for the M8trix and its owners are due to expire on May 31 unless extended by the commission in a previously scheduled hearing May 29. But, Quint wrote in the accusation, the casino owners "are not suitable or qualified," and recommends that the commission discipline them.Doyle said his reading of the accusation is that the state investigation has turned up many more questions than answers -- and that raises red flags in the heavily regulated gaming business."Why are there all these entities and agreements?" Doyle said. "Are they just siphoning money to avoid taxes and fees? Why did they set up all these entities to move around money from the cardrooms? It just seems very odd."City officials, Doyle added, are watching the case closely. San Jose assesses a special tax on cardrooms' gross receipts and fees to cover regulatory costs. In addition, under a 2009 settlement agreement to a cardroom lawsuit over city regulations, the clubs must pay a portion of their profits to support gambling addiction programs."If the city is not getting its fair share, that's a very serious concern," he said.Also, according to an agreement reached in 2009 with the city, Casino M8trix must pay $125,000 or 5.15 percent of its profits to Asian Americans for Community Involvement to fund a gambling addiction program each year. But when that formula took effect in the 2012-13 fiscal year, the casino only made the minimum payment of $125,000 the following year, which surprised CEO Michele Lew."We thought they would be making a profit," Lew said. "But when we asked to see their records, they said they couldn't show us. So if they weren't paying their full amount, then the community lost out."San Jose has a complex relationship with its two cardrooms: Bay 101 and Casino M8trix. Public officials and voters have tried to balance the thirst for the lucrative tax revenues they provide without expanding legalized gambling too much in the city.In 2010, voters cast their bets with the cardrooms, approving a measure that increased the number of gambling tables in exchange for a boost in the tax revenue from the establishments.But two years later, a ballot measure was rejected that would have further expanded the cardrooms without extracting more tax revenue.Doyle said the two cardrooms currently put about $15 million annually into city coffers -- by far the most of any city businesses.Casino M8trix opened its snazzy digs on Aug. 8, 2012. The eight-story tower represented the first big shake-up in the city's cardrooms in nearly two decades.But M8trix and the city have continued to squabble over the pace of permit approval and a decision to ban gaming on the eighth floor.Contact Mark Emmons at
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and Mark Gomez at
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