Online Poker D-Day

UPDATED: changed a few things since some was obsolete with the new legislation and all

The Department of Justice Moved today to indict several of the top online poker sites including FullTilt, Pokerstars and AbsolutePoker.  Chops has a simple summary of the situation, and you can also read the DOJ’s complaint.  I immediately tried to log into Pokerstars and was able to log-in with no problems. But when I try to sit down at a table, I get a message that real money gambling is not allowed in my area!    From the DOJ complaint:

“PREET BHARARA, the United States Attorney for the Southern District of New York, and JANICE FEDARCYK, the Assistant-Director-in-Charge of the New York Field Office of the Federal Bureau of Investigation (“FBI”), announced the unsealing of an Indictment today charging eleven defendants, including the founders of the three largest Internet poker companies doing business in the United States – PokerStars, Full Tilt Poker, and Absolute Poker (the “Poker Companies”)- with bank fraud, money laundering, and illegal gambling offenses. The United States also filed a civil money laundering and in rem forfeiture complaint (the “Civil Complaint”) against the Poker Companies, their assets, and the assets of several payment processors for the Poker Companies. In addition, restraining orders were issued against more than 75 bank accounts utilized by the Poker Companies and their payment processors, and five Internet domain names used by the Poker Companies to host their illegal poker games were seized.”

I actually almost thought that the whole thing was a joke when I read the inane gambling/cards puns a few paragraphs later (emphasis mine):

“FBI Assistant Director-in-Charge JANICE K. FEDARCYK said: “These defendants, knowing full well that their business with U.S. customers and U.S. banks was illegal, tried to stack the deck. They lied to banks about the true nature of their business. Then, some of the defendants found banks willing to flout the law for a fee. The defendants bet the house that theycould continue their scheme, and they lost.”

I wasn’t aware that the poker companies had to lie to banks about their business – I thought that they just thought that they were untouchable.  However, the complaint notes:

“Because U.S. banks and credit card issuers were largely unwilling to process their payments, the Poker Companies allegedly used fraudulent methods to circumvent federal law and trick these institutions into processing payments on their behalf. For example, defendants ISAI SCHEINBERG and PAUL TATE of PokerStars, RAYMOND BITAR and NELSON BURTNICK of Full Tilt Poker, and SCOTT TOM and BRENT BECKLEY of Absolute Poker, arranged for the money received from U.S. gamblers to be disguised as payments to hundreds of non-existent online merchants purporting to sell merchandise such as jewelry and golf balls.”

And the financial crisis helped the poker companies, who came to the rescue of some troubled banks in exchange for payment processing services:

“By late 2009, after U.S. banks and financial institutions detected and shut down multiple fraudulent bank accounts used by the Poker Companies, SCHEINBERG and BITAR developed a new processing strategy that would not involve lying to banks. PokerStars, FullTilt Poker, and their payment processors persuaded the principals of a few small, local banks facing financial difficulties to engage in such processing in return for multi-million dollar investments in the banks. For example, in September 2009, ELIE and others approached defendant JOHN CAMPOS, the Vice Chairman of the Board and part-owner of SunFirst Bank, a small, private bank based in Saint George, Utah, about processing Internet poker transactions. While expressing “trepidations,” CAMPOS allegedly agreed to process gambling transactions in return for a $10 million investment in SunFirst by ELIE and an associate, which would give them a more than 30% ownership stake in the bank. CAMPOS also requested and received a $20,000 “bonus” for his assistance. In an e-mail, one of ELIE’s associates boasted that they had “purchased” SunFirst and that they “were looking to purchase” “a grand total of 3 or 4 banks” to process payments.”

Now, what’s the end game here?  The obvious answer is that the US wants their cut. But that’s not what the UIGEA asked for – the UIGEA banned online gambling – it didn’t try to tax and regulate it.  Now, as budgetary situations grow more dire, there are a number of regulate & tax bills in the works here in the US.  It was just a handful of weeks ago that Wynn announced a partnership with Pokerstars.

“We are convinced that the lack of regulation of Internet gaming within the US must change,” said Wynn, chief executive of Las Vegas casino company Wynn Resorts, in a statement. “We must recognize that this activity is occurring and that law enforcement does not have the tools to stop it.”

PokerStars and Wynn Resorts plan to work together to secure the passage of federal legislation that will regulate online poker in the U.S. with an eye toward setting up a joint venture,, that will offer for-money online poker play in the U.S.”

Hmmm… so, either Steve Wynn is a total buffoon or – scratch that – I know that Steve Wynn is not a total buffoon.  However, he’s a self admitted internet-noob, so maybe he didn’t realize that these online guys weren’t as untouchable as they thought they were.  Or, maybe he knows that he can use his influence to get the sector legalized.  We’ll have to wait and see what develops.  The irony of the statement “We must recognize that this activity is occurring and that law enforcement does not have the tools to stop it,”  is pretty searing though.  Let’s take one more look at an excerpt from the DOJ complaint related to this point:

“On October 13, 2006, the United States enacted the Unlawful Internet Gambling Enforcement Act (“UIGEA”), making it a federal crime for gambling businesses to “knowingly accept” most forms of payment “in connection with the participation of another person in unlawful Internet gambling.” Despite the passage of UIGEA, the Poker Companies, located offshore, continued operating in the United States. In a press release dated October 16, 2006, Absolute Poker announced that the company would continue its U.S. operations because “the U.S. Congress has no control over” the company’s payment transactions.”

I think it’s safe to say that the DOJ doesn’t like being told that they have no control over companies evading U.S. laws.

Now, I’ve owned stock in PartyGaming for many years – since before the UIGEA.  Online poker is an extremely lucrative business for the service providers.  It’s a massively scalable money machine (just see how blooming their affiliates still are!), and I had hoped that at some point the situation would get settled and Party would end up back in business and printing money again.   Party cooperated with the U.S. authorities, shut down to U.S. players, and paid a huge fine.  Even several years ago (this was probably 2007) it looked like they were laying the foundation to gain some sort of “favored” status in any sort of re-legalization as a result of their cooperation.  However, instead they just saw PokerStars and FullTilt absolutely annihilate their business and take all of their customers.  Party recently merged with BWin to form a London-based online gambling conglomerate, but they are an odd-lot in the poker scene.  Party-Bwin ran into more trouble this week when Germany took steps to tax their business.    I bought more stock (PYGMF US pink sheet) this afternoon with the hope that Party will finally reap some sort of goodwill from their past cooperation.  Of course, that thesis depends on the DOJ and the US Government being serious about shutting down the dominant players (Stars, Tilt, Absolute) who have ignored the current laws.

If any of my Legal Eagles have a view on the DOJ’s endgame here, do make yourself heard in the comments.




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