Are The Feds Cracking Down On Internet Poker?

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Nathan Vardi, Forbes.com

At 76 Doyle Brunson is a revered figure in the game of poker and is known variously as Tex Dolly and the Godfather of Poker. Over the years he has twice won the main event at the World Series of Poker, where he has also collected ten bracelets, the second most of all time, in events like seven-card stud. He's written a bestselling how-to book, and fans crowd around him in Las Vegas for his autograph.

But now Brunson may be making the biggest bet of his career, facing not other poker players but possibly law enforcement officials. Brunson partnered with investors in 2004 to found DoylesRoom, a Costa Rican Web site that for the last year has hosted for-money poker games for U.S. players. Brunson has spent countless hours promoting it at poker tables, conferences and televised events--his face and voice greet visitors to the site.

All of that is at risk now, as well as possibly the entire U.S. online poker industry, where 2.5 million Americans play and bet $30 billion annually. A 2006 law, set to go into full effect in June, expanded the Justice Department's authority to shut down online gambling operations by going after the companies that process their financial transactions. The feds have already stopped some financial firms from being part of the business, using some old antigambling and bank fraud laws on the books. The public comments of federal law enforcement officials suggest that they view firms like DoylesRoom as just plain illegal.

Now the bet is on whether or not Justice is gearing up to go directly after firms like DoylesRoom and the two biggest online poker sites still taking U.S. play: PokerStars and Full Tilt Poker. Together they account for maybe 70% of the $1.4 billion in revenue the U.S. industry brought in last year. Revenues here are known as the rake--the slice of the betting amount that online firms get for hosting games. Players also pay flat fees to enter tournaments.

For their part the firms almost seem to be daring Justice to come after them. Brunson says he believes online poker is legal in the U.S. "I don't have a problem with the Justice Department, and I hope they don't have a problem with me," he says. "At my age I really don't care if they are going to cast the gauntlet." Brunson says that while he has some stock in DoylesRoom, he's not an owner.

PokerStars, situated on the Isle of Man, claims it has legal opinions from five U.S. law firms saying it is not violating any laws. The company has an estimated $1.4 billion of annual global revenue and some $500 million in profit. People close to the company say a primary owner of PokerStars, Isai Scheinberg, like many online gaming entrepreneurs, never enters the U.S., apparently spending much of his time in Canada.

Full Tilt, which we estimate generates some $100 million in profits on $500 million in annual revenue, did not respond to requests for comment. It has deep roots in the U.S. and close connections to famous American poker players who can be found in Las Vegas regularly. Chief among them are Howard Lederer, known by his fans as the Professor, and Christopher Ferguson, a poker champion who likes to wear black cowboy hats and is nicknamed Jesus.

Poker has grown into a hugely popular and lucrative national pastime in the last decade. Last year the global online poker market (its rake, mostly) grew by 24% to $4.8 billion, according to h2 Gambling Capital in the U.K. Poker generally started to take off in 2003 when an unknown accountant from Tennessee named (honestly) Christopher Moneymaker won the main event at the World Series and took home $2.5 million. The Travel Channel and, later, sports giant ESPN launched poker programming featuring a camera built into the table that revealed to viewers the cards of the players. (In 2006 FORBES featured on its cover then billionaire Calvin Ayre, who ran an illegal Web gambling site--mainly sports betting--from Costa Rica. The feds seized millions from the firm, which we last heard is being run on an Indian reservation in Canada.)

Online poker operates in the law's shadows. The Bush Administration's Justice Department took the position that facilitating for-money online poker violates U.S. law, making no distinction between sports betting--clearly illegal--and poker playing. These days the Justice Department still insists that "all forms of Internet gambling, including sports wagering, casino games and card games, are illegal."


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

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