Friday, February 12, 2010

Are the Feds Cracking Down on Online Poker? - 11th February 2010

The biggest stars of poker are playing the ultimate bluffing game with the U.S. government. At stake is the future of online poker and $30 billion of betting.

But it wasn't until 2006 that federal legislators started moving against online operators. That year Congress passed the Unlawful Internet Gambling Enforcement Act, which was aimed at preventing credit card companies and banks from processing fund transfers for unlawful Internet gambling but only loosely defined what constituted unlawful gambling.

Lawyers for the online firms interpret the law to exclude poker. But that certainly wasn't the view held by PartyGaming, a Gibraltar company that was once the world's largest online gaming company. In 2005 the firm, listed on the London Stock Exchange and included in the FTSE 100, reported earnings of $293 million on $977 million in revenue, a performance driven almost entirely by its dominance of the online U.S. poker market.

But on the September 2006 weekend in which Congress passed the anti-online-gambling bill, PartyGaming's then chief executive, Mitchell Garber, arranged a call with his U.S. lawyers. They advised the company's board of directors to cease its U.S. poker operations, which it did. The stock collapsed and remains at one-seventh of its peak. Other companies followed PartyGaming's lead out of the country.

Initiating the talks, PartyGaming last April struck a non-prosecution agreement with the U.S. Attorney in Manhattan, paying $105 million and admitting that its U.S. operations had for years violated U.S. criminal laws. By then Garber had moved to Montreal to run the online gaming unit of Harrah's Entertainment.

Unencumbered by public shareholders and skittish directors, Full Tilt and PokerStars stepped into the U.S. void created by PartyGaming's departure. These were companies driven by men who were used to making serious bets, like Chris Ferguson, a famous poker player with a computer science Ph.D. who, a few years ago, started tinkering with the software that now powers Full Tilt. Howard Lederer helped organize a group of famous poker players, like Phillip Ivey, to promote and play on the Full Tilt site. Full Tilt even sponsored a late-night program on NBC.

The financial connections between Lederer and Ferguson and Full Tilt are fuzzy. But the links are strong. The two men are listed in registration papers of an online software company called Tiltware, in Pacific Palisades, Calif., which claims it is the exclusive software provider and consultant to Full Tilt. Details of civil cases, including Tiltware's own filings, suggest that Tiltware and Full Tilt are nearly indistinguishable and driven largely by Lederer and Raymond Bitar, who has been Tiltware's chief executive and got to know Ferguson when the two traded securities together at the Los Angeles office of a stockbroker.

For Full Tilt, which eventually moved operations to Dublin, the decision to keep taking U.S. play and promote the site with famous players has so far paid off. Like PokerStars, Full Tilt has used the cash generated by the U.S. market, which as recently as three years ago represented nearly half of global online poker revenue, to expand worldwide. But there are constant reminders that Full Tilt is on dangerous ground with the U.S. government. "There is a guerrilla war going on," says Ian Imrich, a lawyer for Lederer, Ferguson and Bitar, in brief comments.

Indeed, last summer federal prosecutors in New York froze $34 million owed to at least 14,000 players from companies that processed payments for poker games hosted by Full Tilt and PokerStars. The two poker companies reimbursed the players. But the feds made it clear they were playing tough: After one of the payment processors, Douglas Rennick of Canada, tried to contest the seizures in federal court in San Diego, he was indicted for bank fraud conspiracy. Rennick has not come to the U.S. to confront the charges.

The Justice Department is also using three older laws, most importantly the Wire Act, to go after online poker operators. The most significant precedent: In December 2008 Anurag Dikshit, an Indian-born founder of PartyGaming, pleaded guilty to violating the Wire Act for helping direct PartyGaming's online U.S. poker operations. Dikshit, who had reached out to the feds, agreed to pay $300 million and faces up to two years in jail when he is sentenced in December 2010. His fellow cofounders, including Americans Ruth Parasol DeLeon and Russell DeLeon, who, like Dikshit, live overseas, have neither settled nor been charged.

The online poker firms have at least one important card up their sleeves--Representative Barney Frank (D--Mass.). He is backing a bill that would make online poker legal and taxed. In the meantime he has played a role in getting implementation of the 2006 law delayed, most recently in November, when he helped convince the Federal Reserve and the Treasury Department to put off implementation for financial firms until June.

Why hasn't the government yet cracked down on the poker firms? One possible explanation is that prosecutors figure they are better off bluffing than having to show their hands before a jury. "The federal government is not going to take any action against them because they would stand a chance of losing it," says Frank Catania, who used to run New Jersey's Division of Gaming Enforcement and now advises online gaming firms.

The case law on online poker is mixed. The Wire Act was enacted in 1961 to suppress interstate gambling and bookmaking. It clearly makes online sports betting illegal. But for online poker the Wire Act's wording is less clear. Another law the feds have used, the Illegal Gambling Business Act, requires a violation of an underlying state law--and many state laws say gambling is only illegal if the outcome rests largely on chance, as opposed to skill. Poker is, to some degree, a game of skill. "In poker the skill elements of the betting and folding usually determine the winner," Lederer argued in an article published online.

In the end what the government usually cares about most is whether gambling is providing a mechanism for other criminal activity, like money laundering, underage gambling or cheating. If it isn't, maybe there are bigger things for the police to worry about. For his part Doyle Brunson insists: "The poker industry as a whole is ready to have a fight."

By The Numbers: The Big Bluff

The owners of PokerStars and Full Tilt are betting that they can keep dominating the online U.S. poker market.

$4.8 bil Size of online global poker market
$1.4 bil Size of U.S. poker market
70%Estimated U.S. market share of PokerStars and Full Tilt

Source: H2 Gambling Capital.

(Credit: Forbes)


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