Las Vegas Sands' (NYSE:LVS) success in the past decade has come in part from the ruthless competitiveness of CEO Sheldon Adelson, who brought his empire to the forefront of the Macau market in only a few short years, beating out rivals to become the top resort company on the island. Of course, Adelson didn't do it alone, and now his one-time right-hand man in Macau, Steven Jacobs, is suing the company, claiming wrongful termination.
But the real threat of this lawsuit is far more than a typical wrongful-termination case that could involve a penalty awarded to the plaintiff. What's really at stake is that Jacobs is claiming Las Vegas Sands was operating illegally during his tenure. If the courts agree with him, that could cause serious consequences for Las Vegas Sands both in China and the United States.
Jacobs was the Sands China CEO from August 2009 to July 2010. His lawsuit alleges that he was fired in 2010 because he tried to end illegal actions he says LVS was involved in during the company's development in Macau, including, he alleges, bribes to Chinese officials and ties to organized crime in China. His case includes tales of backroom deals and prostitution for business clients.
Adelson spent the first part of May testifying in pre-trial hearings, defending his actions and those of his company in terminating Jacobs, saying that Jacobs was fired for incompetence. Adelson continues to stand firm that his company has always sought to keep itself as far from illegal actions as possible. According to The Guardian, Adelson has been bold in his defense so far in this case, going so far as to strike a sarcastic tone, mocking the plaintiff and his lawyers, during the hearings.
Adelson has said before that he will "never settle" this lawsuit, because he doesn't believe the company did anything wrong. "We do everything we can to stay away from the bad guys, and we're constantly on the lookout for any direct or indirect connection," Adelson said during the pre-trial.
By not settling, Sands is going all-in, with a lot more at stake that just a possible court award to Jacobs.
What's really at stake
These pre-trial hearings will decide where the case is to be heard, either Macau or Nevada. Jacobs' lawyers prefer Nevada, where they would have a better chance of using evidence supporting U.S. legislators' current investigation into LVS for organized-crime links. However, the plaintiff will need to prove the U.S. has jurisdiction over this case, as Sands China operates independently of Las Vegas Sands' U.S. operations. It's incorporated in the Cayman Islands and listed separately on the Hong Kong stock exchange.
Sands prefers the case to be heard in China, though either option looks as if it could still hold the same major risks for Sands. It's not that one or the other country would give the best chance for Sands to refute the claims. Rather, it's the negative publicity among Chinese and U.S. officials that could make Sands' current ills in each place even worse.
And there's more than reputation at stake.
If Sands is found to be connected to illicit activity, especially organized crime, the U.S. government has the power to pull Sands' gambling license to operate casinos domestically. And that's the smaller risk, as the U.S. makes up barely more than 10% of Sands' revenue. Poor publicity in Macau could really hurt Sands' ties with the Chinese government, especially as China's president has already taken a stance to try to curtail the gambling industry, particularly as it relates to illicit activity.
A high-profile case like this could give the president and local authorities plenty of reason to make life much harder for LVS's Macau operations. They could even deny Sands China the right to operate its casinos there. As Macau makes up about two-thirds of Sands' revenue, and the company has a nearly $3 billion resort there that's nearly finished being constructed, this case could lead to a lethal blow to the company.
Even if Sands were to settle this now very public case with Jacobs, investigators would still be on high alert about LVS's actions, and a settlement could be viewed as a sign of guilt by regulators who might take a dim view of LVS.
Las Vegas Sands' best hope, then, is that it can fight this case and win. That certainly seems to be the path Adelson is pursuing.
Bradley Seth McNew owns shares of Apple and Las Vegas Sands. The Motley Fool recommends Apple. The Motley Fool owns shares of Apple. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.