Monday, May 18, 2015

The Early History of Sega - Service Games Part 3 - Running Afoul of the Government

Last time we talked about the founding of Service Games and a few of the many entities that were related to it. Today, we discuss their many run-ins with the government.

Service Games was initially founded in Honolulu to distribute slot machines and other coin-operated amusement devices to US military bases in Hawaii. As I mentioned last time, there were probably few, if any, distributors serving the Hawaiian market at the time, so Service Games likely had the market to themselves. The good times came to an end, however, in 1951 when Congress passed the Gambling Devices Transportation Act of 1951 (a.k.a. the Johnson Act), which made it a crime to transport gambling devices across state lines except to states where the devices were legal. This meant that slot machines were now illegal on military bases in the continental US and (likely) in the territories of Alaska and Hawaii, leaving Service Games with an abundance of them (Steven Kent reports that the government actually confiscated their machines and that the Brombergs bought them back, but I didn’t see any mention of that in the senate report, which merely reports that they had an abundance of machines).

In any event, the Johnson Act did not apply to US military bases in foreign counties, providing Service Games with an opportunity. In February 1952, Marty Bromley sent Richard Stewart and Raymond Lemaire to Japan to distribute Service Games machines to US military bases in the Far East. Initially they appear to have merely distributed slot machines made by Mills (and maybe Jennings) to PXs and servicemen’s clubs. In the 1960s, however, they began to manufacture Sega-branded slots. In They also distributed other kinds of coin-op amusement machines and sold things like pizza ovens, snacks, rotisseries and other goods.

As you might guess, not everyone liked the idea of the military having slot machines on its bases. During a 1971 senate investigation of fraud and corruption in military clubs in Vietnam, Senator Abraham Ribicoff said, "the sooner the military kicks out all the slots the better." In January 1951, Army brass directed that slot machines be removed from Army installations in the continental US, Alaksa, Hawaii, and the Panama Canal Zone. In February 1952, however, the Army Chief of Staff ruled that in US bases in foreign countries, it was up to each base commander to determine whether or not to allow the games. The Navy banned slot machines from all of its installations in 1951 but changed its mind in early 1959, after the Commander of the US Naval Forces, Japan recommended that slots be allowed in messes and PXs in his command. In July the Chief of Naval Personnel ruled that they could be. During the 1971 senate investigation, Marty Bromley claimed that there were 10,000 slot machines being operated by the combined armed forces. While it might seem odd that the military would allow slot machines at all, they felt that doing so would keep soldiers and sailors on base and out of local bars (and trouble). They also felt that the games would raise morale and that the money taken in by the machines, since at least part of it would go back to the facility owners, would directly benefit military personnel by keeping down the cost of food and other items. The machines were governed by strict rules, however. They had to be purchased from American manufacturers, they had to be owned and maintained by the PX or mess (renting was not allowed), and they had to pay back at least 93-94% of money to the players.
While the military, for the most part, did not have a problem with the slot machines themselves, they did have a problem with Service Games and the illegal activities that it was allegedly engaged in. In 1954, an informant sent a letter to the Office of Naval Intelligence saying that the company was illegally importing slots into Guam using phony release forms. In 1958, the IRS began investigating Bromley at the instigation of an employee of Service Games Hawaii. The investigation soon became a matter of public controversy and political interest and the IRS expanded its investigation into every aspect of every business in which Bromley was engaged. In the 1971 senate investigation, the military claimed they had reports of over 100 instances of violations of law by Service Games, including bribery, illegal use of military and sea transport, illegal imports, customs violations, fraud and forged documents, kickbacks, collusion in bidding, circumvention of the "Buy American" program  illegal gratuities, coercion, and intimidation. Alleged offenses by individuals associated with Service Games included theft, assault, intimidation, coercion, bribery, rape, assault with a deadly weapon, and others. In the fall of 1959, the eighth army blacklisted Service Games. In December 1959, the Navy banned Service Games and all of its officers, employees, and affiliates from its installations in Japan. When Service Games later began to offer machines on behalf of Utamatic and Nihon Goraku Bussan, the Navy banned those companies as well. In 1960, the Navy permanently banned Service Games from its installations in the Philippines. In 1961, the US Civil Administration of Okinawa fined Service Games $300,000 for smuggling, fraud, bribery, and tax evasion. The day before Christmas 1963, the Air Force debarred Service Games from its installations (the ban lasted until April 1967).
What, in particular, were some of the crimes Service Games was accused of? One was avoiding payment of required duties. Because Service Games' machines were imported for use on military bases, they were exempt from the normal import duties or commodities taxes. The company was accused of importing the games duty free, sometimes with counterfeit importation or customs clearance documents,  then diverting them to storage facilities and selling them on the Japanese market (slot machines were illegal in Japan). Service Games was also accused of manufacturing their machines outside of the US, sending them to Nevada for final assembly, then falsely claiming they had been made in the US as required by military regulations. Even when Service Games did place the machines in PXs, there were problems. While regulations required that clubs own any machines they operated, Service Games was accused of applying the club's take to the purchase price so that all they got was the machine itself with no benefit to the personnel. They were also accused of skimming profits from the machines  Marty Bromley was accused of using phony names to open Service Games accounts in Japan-based branches of US banks. The accusations continued after Service games “merged” with Sega Enterprises. In April 1969, a source who was allegedly “closely connected with the Service Games complex” began corresponding with federal authorities, claiming that Sega was shredding tons of documents relating to military coin machines. The source also claimed that Sega Enterprises, through David Rosen, had attempted to write off as tax deductible, bribes of 30 members of the US military. When Japanese tax authorities refused to allow it, Sega wrote them off as “business expenses.” In October 1969, the government claimed, Marty Bromley met with General Earl F. Cole at the Frankfurt airport and offered him a $50,000 bribe to take the fifth and not appear before the senate subcommittee investigating Service Games and Sega. Cole denied that he had met with Bromley and Bromley claimed he was in Madrid at the time.
For all the accusations, the government did not seem to have had much luck making any charges stick. In fall 1960, Service Games was tried by the Japanese Criminal Affairs Division in Yokohama but ended up only paying a small fine. In 1964, the IRS charged Marty Bromley and his wife with failure to pay $4.7 million in taxes between 1962 and 1964. They were only able to collect $47,145.26 and about $10,000 in interest, $15,000 of which was returned to the Bromleys. In December 1964, the US Tax Court found that there had been no fraud of any kind on the part of Bromley or anyone associated with Service Games.
So where does that leave us? Was Service Games guilty of the crimes it was accused of or was it the victim of an overzealous government investigation? From the information in the report, it’s hard to say. During the Vietnam conflict, there was so much graft and corruption in the military club system that it is difficult to determine to what degree Sega was involved, if at all. While Sega and Service Games were certainly discussed during the 1971 senate investigation, during which all of their principal officers were called to testify, it was only as part of a much larger investigation of the club system in general. The clubs were run by NCOs (non-commissioned officers), who often operated with little or no supervision. It is perhaps unsurprising, then, that some turned to graft and corruption. In 1965, a group of seven sergeants, led by William Wooldridge, who was appointed Sergeant Major of the Army in 1966, began to exploit the system for their own personal gain, something for which it seems Sega cannot be blamed. On the other hand, the sheer number of subsidiaries, the number and timing of corporate name changes, the admitted use of aliases, and the fact that Service Games had set up its controlling corporation in Panama, a well-known tax haven , do arouse one’s suspicions – or at least mine. On the other hand, it is not uncommon for companies to set up multiple subsidiaries in the countries in which they operate (though perhaps not as many and not with so many different names), not is it unheard of for a company to establish its headquarters in a tax haven. Still, while i' do not think they were guilty of some of the more egregious crimes they were accused of, I am nonetheless suspicious. Of course, that’s entirely subjective and it is entirely possible the Service Games was innocent of any wrongdoing. 

1 comment:

  1. Where do you get all this material from? some of the information sounds a little suspiocus, from your content and wording and seeming to be condascending as if David Rosen is the little guy with little or no power in the buy out and turn around that became Sega..