Shocking raid roils Vegas nightclub world

This week has proven the first huge shake-up of the nightclub industry in Vegas since its emergence as the signature business in the new Vegas. Most of the press coverage is going to the dramatic IRS raid yesterday at the offices of Pure Management Group and Pure nightclub at Caesars. Reports have 10 to 20 agents confiscating computers. Pure has issued the following statement: "Pure Management Group is fully cooperating with this IRS investigation and looks forward to a quick and satisfactory resolution. Until that time, we will have no further comment on this matter."

The more under-the-radar story involves the Light Group. Reuters is reporting that Sheikh Hamdan bin Mohammed al-Maktoum of Dubai bought 50% of the company yesterday. I have yet to be able to reach anyone at Light for comment.

The Las Vegas nightclub scene has exploded over the last few years with the kind of growth that even celebrity chef restaurants and high-end retail in Vegas have not equaled. Though these nightclubs reside in casinos, the resorts do not own them.

The nightclubs in Vegas are mostly private companies renting space in a casino. The biggest, Pure Management Group, operates about 10 restaurants, lounges and nightclubs in resorts in Vegas. Light Group, one of the first nightclub companies to arrive in Vegas, operates Bank at the Bellagio and Jet at the Mirage, as well as other properties, with more in the pipeline. In fact, I am talking to one of their publicists later today about a sushi restaurant they plan to open this summer at the Bellagio. Similarly, top nightspot Tao is not owned by the Venetian. And Planet Hollywood does not own Prive.

But since 2000 these nightclubs have been opening at a rate of about 3 to 5 a year and have turned into a largely cash business worth by some estimates in the "hundreds of millions in revenue." No surprise the IRS would pay attention. But the IRS may discover that the numbers may not be what they seem.

Of course, money numbers are a funny thing in Las Vegas. Large numbers are generally believed to impress people. They have a promotional value more than a fact value. I tend not to trust them, and I never take them at face value. The opening of a $40-million nightclub means the next club to open will certainly claim to have invested $50 million.

Then there is the matter of paying a celebrity to host. When Pure was said to have paid Britney Spears to host one New Year's Eve, the published reports on her fee ranged from the low six figures to a few million. The truth is that no one knows the real numbers involved in the nightclub industry beyond that its expansion and presence in resorts bespeak huge success. This is the sort of success in Vegas that usually means hundreds of millions. But no one can be sure of the real number. These are private companies.

And there are plenty of fuzzy edges on numbers even on the front end. How much do you have to bribe -- I mean tip -- a doorman at Pure to get inside? Well, the last time I faced that issue the number being bandied about was $100. But then other people claim the number is $800-$1,000. That seems exaggerated to me, and not something I have ever seen. Tourists will exaggerate how much they were fleeced, and nightclubs like to bump numbers up because it makes people more comfortable spending in that range.

Here is an example: LAX sent me a press release last week with the following: "A customer in the club spotted Paris (Hilton) and, knowing her birthday is this coming weekend, proceeded to purchase four white-gold-plated 3-liter bottles of 1995 Dom Perignon at $40,000 per bottle."

I do not believe that customer really spent $160,000, no matter what the press release says. The bottles may cost that much on the bottle menu, but the customer probably got a substantial discount for buying four. And that is the point with nightclub cash numbers: No one knows except the actual club.

When it comes to nightclubs, the numbers that are out there are nothing but a mix of rumor, conscious promotion by the clubs and glib summaries by the press. No one really knows the full picture. Even nightclubs probably don't know everything, as PMG and Light Group aren't likely to share that kind of information with each other.

I have watched Robert Frey and Steve Davidovici build Pure Management Group starting with Coyote Ugly (and then partner Jennifer Worthington) at New York New York in 2001. They and their team have worked with an extraordinary intensity and speed and savvy to overtake Light and establish Pure as the premier nightclub company in Vegas. This IRS investigation looks to be the most serious challenge the nightclub industry in Vegas has faced. But the business is also a fairly new one here, and I am sure there is plenty of room for disagreement over the arcane details of tax law. I plan to be careful about sensationalizing this, in case it is the IRS that turns out to be blundering. The IRS has a contentious history when it comes to tipped workers in Vegas. As we wait for more information, I am also trying to reach frontline workers and others from Pure to find out how this is affecting them. Expect the Buffet to keep track of this story in the days and weeks ahead.

But with major changes in Light Group's ownership and Pure Management Group being raided by the IRS, it is clear that this week marks the moment when Vegas nightclubs are going to start being under a different sort of spotlight.

(Photo of Fergie at Pure by Sarah Gerke)