Las Vegas gambling giant Caesars Entertainment has launched a federal suit against the state’s top casino regulator, accusing him of manipulating an investigation that ended its bid for the prized Eastern Massachusetts casino license.
The lawsuit, filed late Wednesday, contends that Stephen Crosby, chairman of the state gambling commission, “intentionally and wrongfully singled out” Caesars for “adverse treatment” in order to help a former business associate who would benefit if a competing project in Everett won the license.
Specifically, Caesars argues that Crosby caused state investigators to issue an unflattering background report on the gambling firm, a onetime partner in a $1 billion Suffolk Downs casino proposal. Based on that report, issued in October, Suffolk Downs dropped Caesars from the project, costing the casino company a lucrative opportunity and tainting the firm as potentially “unsuitable” to hold a license, the ultimate scarlet letter in the highly regulated gambling industry.
The commission called the lawsuit “without merit” and defended the independence of its Investigations and Enforcement Bureau.
“The IEB is ultimately responsible for the report it presents to the commission,” the commission said in a brief statement. “Chairman Crosby had no role in the investigation, report, or recommendations.”
Crosby has led the five-member gambling commission since it was created in 2012. The lawsuit, the latest in a series of surprising twists in the gambling sweepstakes, seizes on revelations that he has a potential conflict of interest with a co-owner of property in Everett on which Wynn Resorts wants to build a casino.
Crosby declared in an August ethics filing to Governor Deval Patrick that he has known landowner Paul Lohnes since the two were in the National Guard in the 1970s and that they were business partners from 1983 to 1990 at a publisher of cable television guides.
The potential conflict was not widely known until this month, and though the State Ethics Commission cleared Crosby to participate in the licensing, the chairman has been criticized for not disclosing the relationship sooner.
Caesars argues “this conflict would, on its face, predispose Crosby to favoring a rival application for the . . . license.” The company also asserts in the suit that Spectrum Gaming Group, the industry consultant the state hired to help vet Caesars, had recommended Caesars be deemed suitable to hold a casino license. The suit alleges that Karen Wells, director of the Investigations Bureau, failed to disclose the Spectrum recommendation after consulting with Crosby.
Crosby, in an interview, called that allegation “false top to bottom.”
Spectrum backed up Crosby, saying the company “did not recommend a finding of suitability or a finding of unsuitability in its draft report.”
The lawsuit asks the court to declare the background check “constitutionally flawed” and to rule that the investigators’ report on Caesars “is a nullity, entitled to no force or effect.”
Roger Gros, a gambling industry specialist and publisher of Global Gaming Business, said Caesars is seeking to discredit the commission’s report because bad news sticks to gambling companies. Caesars, he said, will have to explain what happened in Massachusetts whenever it tries to enter another jurisdiction.
“They want to clear their name,” Gros said. “That report is something they’d really like to get thrown out.”
Caesars’ two-year partnership in Massachusetts, once seen as certain to win a license, ended as a debacle for the company.
The firm says it invested over $100 million in the Suffolk Downs casino venture, including “tens of millions” spent on development, plans, and architectural designs. But the gambling giant, licensed in more jurisdictions than any other casino company, was tripped up by the mandatory background check in Massachusetts. Investigators raised several red flags, including the company’s licensing deal with a boutique hotel firm owned in part by a businessman allegedly tied to Russian mobsters.
The commission’s investigative arm issued a damning recommendation in October, saying Caesars had not proved it was suitable to hold a license. The company wanted to plead its case before the commission, but Suffolk Downs insisted on breaking up the partnership, and Caesars agreed to withdraw. The sudden divorce shocked the electorate and may have tipped East Boston against the project: East Boston voters rejected the Suffolk Downs casino plan three weeks after Caesars left the venture.
Suffolk Downs is now hosting a new proposal from Mohegan Sun, without Caesars, on track property in Revere. Local voters will decide that project’s fate in a referendum anticipated for February.
A Suffolk Downs spokesman declined to comment on the suit.
In its suit, Caesars asks the federal court to permanently seal the unflattering 500-page background report by state investigators, arguing that the company was the target of discrimination. The company, while seeking unspecified damages in its suit, is not attempting to interrupt the licensing process.
Caesars cited the investigative reports on other applicants, including MGM Resorts, which has proposed a casino in Springfield. State investigators recommended MGM be found suitable to operate a casino, with several conditions, including that the company explain its business practices in Macau, China.
The lawsuit notes that the background report on MGM describes a controversial partnership in Macau with Pansy Ho, whose father is allegedly tied to organized crime, and cites a 2009 report from New Jersey regulators that paints the MGM partnership in a bad light.
“Yet the issue did not make it into the bureau’s recommendation letter to the commission, and did not prevent the bureau from recommending that the commission find [MGM] suitable subject to certain conditions,” Caesars said in the lawsuit.
The commission reviewed the findings of the 10-month MGM investigation Monday. The panel is expected to issue a written decision soon on whether the company is suitable to hold a license.
Crosby has said he is confident he can be impartial in deciding which project should win the Greater Boston casino license and intends to participate in that decision.
But Crosby has announced he would recuse himself from a hearing Friday on Wynn’s land deal in Everett. Wynn has asked the commission to review changes he has made to his option to buy land on the Mystic River, in response to concerns from investigators that undisclosed partners may have an interest in the property.
The attorney general’s office is expected to defend Crosby in the suit, the commission said.
Caesars is led by chief executive Gary Loveman, who lives outside Boston. He declined to be interviewed Thursday. A company spokesman said the lawsuit speaks for itself.
Mark Arsenault can be reached at email@example.com.