Morgan Stanley Leads the Way
With $2.5 Billion Investment Plan
As More States Allow Gambling

By RANDALL SMITH
December 4, 2006; Page C1

There is an old joke that stockbrokers are just bookies with neckties.

While Wall Street executives prefer to avoid overt comparisons between gambling and financial markets, some firms are putting more chips on casino-gambling investment as the number of states allowing such betting rises.

Wall Street firm Morgan Stanley stands out, targeting casinos for investment as part of a year-old program to invest $2.5 billion of its own funds to boost risk and profit.

The firm doesn't plan to operate casinos itself. But it paid $74 million in May for a beachfront casino site in Atlantic City, N.J. And it owns an 18% stake valued at $120 million in Trump Entertainment Resorts Inc., acquired mainly in exchange for debt it held before advancing Trump a new $500 million credit line. And it may eventually apply for ownership licenses.

Until September, Morgan Stanley also held a 75% stake in a casino proposed for a site near a historic civil-war battlefield at Gettysburg, Pa. But the firm withdrew after a local protest against the threatened "desecration" of the site.

When the firm dropped out of the Gettysburg project, Crossroads Gaming Resort & Spa, the owners of the remaining 25% promptly unveiled new debt financing from Goldman Sachs Group Inc. And replacing Morgan Stanley as the 75% owner was Silver Point Capital LP, a hedge fund run by two former Goldman partners.

While Wall Street firms have long provided casino financing, Morgan Stanley "is blazing a trail here," said Joseph Weinert, a consultant at Spectrum Gaming Group LLC in Northfield, N.J. He added that it is unusual to have "a sophisticated financial institution taking the lead in casino development. Typically, you have the gaming developer looking for money; here, you have the money looking for a developer."

As the current battle of Gettysburg shows, big Wall Street broker-dealers are tiptoeing cautiously. In addition to the need for licensing, which requires extensive disclosures about finances and even the character of the investors, the sector still carries the taint of "sin stocks," which also include tobacco and liquor products.

Wall Street markets are often compared to casinos; both attract big money and can be unpredictable. The firms, which aim to sell investors stocks and bonds for retirement based on their prospects for genuine long-term growth, want to distance themselves from such comparisons.

Indeed, Morgan Stanley changed the name of the entity that acquired the casino site from Morgan Stanley Gaming Cos. Holdings to Ventura Holdings to avoid being seen as a would-be casino operator. But as they scramble to find new investments for their burgeoning capital troves, some blue-chip securities firms and hedge funds are pushing ahead anyway.

"There's been a change in the nature of the investors in the gaming industry," said Cezar Froelich, a Chicago lawyer who represents casino investors including Morgan Stanley. "All of a sudden you have more substantial institutional investors, everything from private equity to hedge funds to investment banks."

One of the earliest private-equity buyout firms that went through the ownership licensing process was Colony Capital LLC, a fund group specializing in real estate that acquired the Harveys Casino Resorts chain and now owns Hilton casinos in Las Vegas and Atlantic City.

More recently, in October, two buyout fund sponsors, Apollo Management and Texas Pacific Group, made a $15.5 billion bid for Harrah's Entertainment Inc., a public company that operates 39 casinos. While executives of neither Apollo nor Texas Pacific hold casino licenses, one of the Colony partners licensed in 1999, Kelvin Davis, has moved to Texas Pacific.

David LeVan, the point man and 7.5% owner of the Crossroads casino project near Gettysburg, attributed Morgan Stanley's decision to pull out of the project not to the strident local opposition but to "licensing issues." He explained, "I don't think we understood what going through the licensing process entailed."

Some states' licensing practices date to the era 50 years ago when the business was "infiltrated by some fairly bad guys," said Mr. Froelich, the Chicago lawyer. Translation: Organized crime. For that reason, state casino regulators wanted to go "up the corporate chain so they knew who they were dealing with." Nowadays, he said, regulators may consider limiting such requirements to encourage investment by "large publicly held entities."

In 2004, the Nevada regulators required a personal appearance by a senior official of Goldman Sachs before granting a waiver for an 11.5% stake held by Goldman's asset-management unit in Harrah's. Passive investors often apply for such waivers.

In April, a team of outside lawyers representing Morgan Stanley, including Mr. Froelich, met with the staff of the New Jersey Casino Control Commission about the 20-acre beachfront site. "They indicated to us their interest in investing here and wanting to learn more about the licensing and regulatory process," a commission spokesman said. Since the meeting, the firm hasn't taken steps to obtain a license, which might be required for a stake of 15% or higher in a casino project.

In October, Morgan Stanley swapped the land for a stake in Revel Entertainment LLC, a closely held concern formed by Kevin DeSanctis, a casino industry veteran and former president of Penn National Gaming Inc.

Other experts say some historic barriers to casino investments are falling. Joseph Greff, who follows casino stocks for Bear Stearns Cos., says, "the taboo associated with gaming has become less of a taboo." Also, Mr. Greff says, as states allowing gambling proliferate beyond Nevada and New Jersey to a current 35, licensing procedures in some states are less onerous.

Morgan Stanley's $2.5 billion investment initiative, launched in October 2005 by Chief Executive Officer John Mack, is led by managing director Michael "Mitch" Petrick. A member of his group, executive director Michael Garrity, who followed gaming stocks at Putnam Investments before joining Morgan Stanley in 2002, spotted the Atlantic City site sale after working on the Trump investment.

--Peter Sanders contributed to this article.