toledoblade.com -- Noe invested Ohio's money in gambling firm

COLUMBUS — Tom Noe used state money to try to pump up an online gambling company in which he and other prominent Republicans were investors, records show.

Mr. Noe invested at least $100,000 of the state’s rare-coin money into financially troubled Games Inc., which has plummeted in value in the last year as its CEO Roger Ach II, a politically connected Cincinnati businessman, sought public contracts.

Mr. Noe is among several prominent Republicans who have invested in Games Inc.

Brian Hicks, former chief of staff to Gov. Bob Taft; Bob Bennett, chairman of the Ohio Republican Party; former Senate President Stanley Aronoff, and Lucas County Republicans Patrick Kriner and Sally Perz all own shares in the company, records filed with the Securities and Exchange Commission show.

Jerry Springer, a Democrat from Cincinnati and a talk show host, is also listed as an investor.

The company operates a Web site that offers multiple gambling games. Mr. Ach has also sought contracts with state lotteries, including Ohio’s, to allow people to buy lottery tickets online using its software.

In addition to being a personal investor, Mr. Noe is quoted in a company press release touting the benefits of online lotteries. Mr. Noe, identified in the release as chairman of the Ohio Board of Regents, said an online lottery could help ease funding woes for education by making the state lottery more accessible.

The study, paid for by Games Inc. and conducted by University of Cincinnati researchers, concluded Ohio could generate an additional $1.2 billion in lottery sales if it allowed online lotteries.
“In Ohio, we can buy our license plates online and even file a lawsuit online … why not make lottery online more convenient and accessible to create more educational funding dollars for community colleges and job retraining?” Mr. Noe is quoted as saying.

The press release never identifies Mr. Noe as an investor in the company.

‘It’s outrageous’

“It’s outrageous. These are the same people who are continually harping about the gambling issue,” said Ben Rothenberg, spokesman for the Ohio Democratic Party. Mr. Taft and others have continually fought plans for casino gambling in the state, although the governor did support increasing the gaming options of the Ohio Lottery.

‘‘At the very least it’s hypocritical,’’ Mr. Rothenberg said. “[But] it’s probably a safer gamble than giving money to Tom Noe.”
Financial records show that’s not necessarily the case.

The stock for Games, Inc. traded on Aug. 26, 2002, at $4.75 a share, which gave the company a market value of roughly $72 million. Since then it has had its ups and downs, but mostly downs. An April SEC filing said that the company was flirting with bankruptcy. Yesterday, the stock closed down a penny at 9 cents a share, giving it a market value of $2.35 million.

Mr. Noe’s attorney, Bill Wilkinson, said yesterday that he had no information about his client’s investments with Games Inc. He said Mr. Noe’s attorneys are more focused on the larger issues in the case, rather than specific investments.

“It is insignificant in comparison to other issues,” Mr.
Wilkinson “We’ve focused our attention on the most significant issues. And we don’t have any information on these specific investments.”

Donations to candidates

Mr. Ach has contributed $29,040 to state candidates and parties, and $16,000 to candidates for federal office, mostly Republicans. He has tried for years to get a contract from Ohio to allow people to buy lottery tickets online.

In March, the company hired Dennis Kennedy, a former executive director of the Ohio Lottery, to be president of its lottery division. Tom Hayes, the current executive director of the Ohio Lottery, said Mr. Ach pitched his firm to lottery officials in a meeting earlier this month. He said he doesn’t expect the state to do business with Games Inc.

However, the Ohio Lottery did have a contract until June 30 with Games Inc. That contract — signed by Mr. Kennedy — hired the company to send e-mail updates on lottery numbers to subscribers. The state paid the company about $1,000 a month.

In June, the state Department of Administrative Services provided a computer server to the lottery commission that allows it to handle the e-mail alerts itself.

Mardele Cohen, a spokesman for the lottery commission, said Mr. Ach has tried several times over the years to get the state lottery to hire his firm. But beyond the e-mail service, she said Games Inc. has no other business with the state lottery.

“He’s a salesman,” Ms. Cohen said “He certainly wants to do business with the Ohio Lottery.”

A Games Inc. spokesman said yesterday it could not comment about Mr. Noe, the state coin fund investment, or anything having to do with the company because it has a filing before the SEC and is in a “quiet period,” meaning officials cannot talk.

Mr. Hayes, in addition to his post with the lottery, is overseeing the management review team put in place by Governor Taft to review the Bureau of Workers Compensations’ investments following the disclosure by Mr. Noe’s lawyers that $10 million to $12 million is missing from the $50 million rare coin fund that he managed for the bureau.

Not ‘very successful’

Multiple state and federal agencies are investigating Mr. Noe and the coin funds, which the state is liquidating.

“Am I surprised Tom Noe made an investment [with Games Inc.]? I would be surprised if he made an investment in a company whose stock went up, given his history,” Mr. Hayes said. “He hasn’t been very successful.”

Bill Brandt, hired by the state to liquidate the coin funds, could not be reached yesterday to find out if the state was aware of the Games Inc. stock and whether the state has sold those shares.

Bob Bennett yesterday confirmed that he and two of his brothers invested in Games Inc. after he was approached by Mr. Ach, who he has known through Republican circles for several years.

He said he was not aware that Mr. Noe was an investor, nor did he know that other prominent Republicans had placed their money with Mr. Ach.

Mr. Bennett added that he regularly invests in Ohio companies like Games Inc.

Mr. Kriner, who is treasurer of the Lucas County Republican Party, said he has been an investor for several years. He said Ms. Perz introduced him to Mr. Ach, who then sold him on the company.
“I thought it was an opportunity to get in on the ground floor with an online gaming company,” he said.

Mr. Aronoff, in addition to being an investor, is also a registered lobbyist for Games Inc. “My gut feeling is it’s an issue whose time is on the verge of coming, not only in Ohio, but across the country,” Mr. Aronoff told the Associated Press in August, 2003.

The transactions

Mr. Noe purchased $80,000 worth of Games Inc. stock in January, 2003, for himself. He added $100,000 worth of Games Inc. to his personal portfolio that October.

Between those months, the share price had dropped from $2 to 50 cents a share.

There are no records showing when Mr Noe first used state coin fund money to invest in Games Inc., but records show that in 2004 he converted $103,537 worth of Games Inc. bonds owned by the coin funds into company stock. Mr. Noe’s separate companies also converted bonds worth $103,538 into stock.

The coin funds picked-up an another 100,000 shares of Games Inc. for 46 cents each in October, 2004.

In agreeing to the conversion from bonds to shares, Mr. Noe accepted stock from Games Inc. to settle the debt. The conversion means that in the event of a Games Inc. bankruptcy, the state as a stockholder would have a harder time getting its money back.

In a bankruptcy, bond holders are in line before stock holders to be paid back.

“Normally, if you go from being a bond holder to being a stockholder, you’d be in the worst possible position,” said Howard Friedman, a University of Toledo law school professor emeritus who specializes in business law. “If a company is doing well, you’re better off being a stock holder. If a company’s doing poorly you’re better off being a bond holder.”

Mr. Friedman was also a lawyer with the U.S. Securities and Exchange Commission.

Convertible bonds, like the ones the state owned, allow the bond holders, who are sometimes among the initial investors in a company, to transform the debt owed them into a preset number of company shares — regardless of the share price. Companies can also “call,” the bonds, meaning force conversions into stock.

But because of the way bonds work, that usually does not happen unless the company stock is doing well, said Edward Altman, a professor of finance and the director of credit and debts at New York University’s Salomon Center.

“When the stock is tanking, there is almost no chance the company would call them,” he said. “And why would you [choose] to convert? What do you get — cheap stock; it’s not worth it.”

Called a bad idea

Mr. Friedman agreed that converting bonds into stock when a company is foundering is usually a bad idea.

According to SEC filings, the company is close to bankruptcy. Even though shareholders have contributed more than $20 million to Games Inc., the company will need an additional $2.5 million to continue operating for the next 12 months and another $4 million to $5 million to fund any growth, according to the SEC filings.

“Our weak financial condition has raised, and will likely continue to raise, substantial doubt regarding our ability to continue as a going concern,” according to a company report filed with the SEC in April.

Earlier this month the company wrote to the SEC saying it would appeal a federal court order to pay game maker Atari $5.1 million over a dispute concerning a Web site that Games Inc. wanted to buy from Atari.

In 2003, Mr. Ach was arrested and charged with a second degree felony, theft of services between $100,000 and $200,000, stemming from a dispute in Denton County, Texas.

The charge was later dropped after Mr. Ach reached a settlement out of court with the complainant in the case, press reports show.

Mr. Rothenberg of the Ohio Democrats said the news of Mr. Noe’s investment in Games Inc. was troubling.

“They’re not gambling with anybody’s money but the money of injured workers, small businesses, and Ohio businesses,’’ he said.

Staff writers Joshua Boak and Christopher D. Kirkpatrick contributed to this report.

Contact Mike Wilkinson at:
mwilkinson@theblade.com
or 419-724-6104.

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