Written by Jake Vaughn
For its far-reaching impact events April 1, 2011 is famous as Black Friday among the online poker playing community. Before the events of this day online poker was a major growing industry within US and was accounting for its largest revenue share worldwide of about 27%. The US Department of Justice temporarily shut down online poker sites of three of the major players in the country, namely PokerStars, Full Tilt Poker and Absolute Poker. These three together had a 95% market share in the U.S. online poker industry. Their websites were seized and displayed the FBI takedown notices. In addition to this 76 accounts linked with these companies and holding player funds in 14 different countries were frozen. The prosecutors claimed that the defendants had violated the Unlawful Internet Gambling Enforcement Act (UIGEA) and were involved in money laundering and bank fraud in the course of processing transfers between the customers and themselves. The civil complaint asserted that the players entrusted their gambling money to these companies to be kept in secure accounts however it was indeed being transferred and used by the owners and management for personal purposes. The companies were also charged for bribing the banks and conducting bank fraud by using miscoded transactions to bypass the law.
The Federal Wire Act of 1961 forms the basis of the issue of granting a legal status to online gambling and wager transactions in the United States, although the law itself was introduced in an attempt to give the Department of Justice more power in being able to stop trafficking and organized crime, over time it has been used in cases unrelated to the initial objective.
In 2005, the North Dakota House of Representatives sought to regulate and legalize online poker for companies that would establish their physical location within the state. Their effort failed to materialize as the Department of Justice established that such pending legislature could be in direct conflict with the federal Wire Act. This is despite the fact that the Fifth Circuit Court of appeals has ruled that this does not apply to online gambling types other than sports betting. The reason why this act is still being used as justification to target online poker companies and related legislation is that there has been no ruling as of yet by the Supreme Court on this matter.
In 2006 the Bush administration had passed SAFE Port Act, in order to strengthen security at the US ports. This act contained the UIGEA provision. Under the UIGEA, passed to keep in check the rapid progression of gambling towards the online arena in the United States, it was made a felony to process payments pertaining to illegal online gambling. All financial institutions within the United States were prohibited from engaging in transactions connected with online gambling sites. After this many poker sites halted their operations in the U.S. furthermore the act had adverse effects on the stock market value of these companies. As a result of this, many online gambling companies did indeed shut down themselves completely in a bid to avoid any illegal action. However, the three poker companies being discussed here, continued to operate under the pretense that the game poker did not fall under gambling. The logic for the assumption was that poker in its very nature is a game of skill and therefore cannot be considered as gambling. The only state that did in fact put a law that would explicitly outlaw the game of poker being played online was Washington. By September 2010, the Washington Supreme Court upheld the law and it was declared a crime to play poker online in the state of Washington.
Handling the case against these three specific companies, Preet Bharara, U.S. Attorney for the Southern District of New York pressed charges against these for violating the New York law rather than federal law as these companies conducted their operations from Isle of Man (PokerStars), Ireland (Full Tilt Poker) and Costa Rica (Absolute Poker) and were not based in the United States. The defendants were charged with UIGEA and Illegal Gambling Business Act of 1955.
During this action by the Southern District of New York, five banks in the US were ordered to freeze accounts of the companies that were worth more than 30 million dollars and effected more than 27,000 poker players. One of the criticism of the action also was that the government had seized not the money that the online gambling companies had made but the assets of the players.
As the case proceeded, Full Tilt Poker’s license was revoked and online gambling activity came to a halt. Full Tilt was a subsidiary of Blanca Gaming based in Antigua. After the shutdown, Antigua and Barbuda government officials sought to turn the events into an international matter and brought them to the attention of the World Trade Organization claiming that the United States had violated global trade laws. However their attempts were unsuccessful and the Alderney Gambling Control Commission (AGCC) found Full Tilt to be guilty of misrepresenting financial information.
Individuals now had to go to nearby countries to play online or go to a physical casino and join poker tables for real. Poker players that had major endorsements were hurt by this. The media was affected as well as a large sum of money was spent on marketing and advertising campaigns which involved televised shows and competitions which were no more. ESPN regularly covered World Series of Poker and had a $22 million deal with the PokerStars, which came to an end. It was a major concern for the millions of people who had gambled their money at these virtual poker clubs. Despite scandals that followed these companies they had managed to pay back their players timely before.
After these drastic events however a deal was struck with the prosecutors to fund back and repay all the money that was owed to the players. To assist with the repayment process, the domain names for the websites of PokerStars and Full Tilt were returned back to them partially. Online poker had definitely attracted some high rollers and had player with millions of dollars in their online accounts with these companies. On one hand it came as a shock and a major concern for many players while on the other it turned quite a few famous such as Chris Ferguson who had major winnings and was owed around $60 million.
Only PokerStars managed to fully payback its American players.Absolute Poker and Full Tilt Poker’s reimbursements were not well managed and stopped after a while. It was evident that the owners had used these accounts for benefiting themselves, further justifying the initial reasoning employed by Preet Bharara. He is also known for having had previously cracked an insider trading ring, claimed that the websites had been set up a Ponzi scheme and that they were also rigging the game in a manner that the players were being left empty handed. This could indeed be further corroborated by the fact that there was a hole worth about $350 million in the books of the companies.
What made the above action more interesting was the fact that the gambling companies reimbursed the players money that the government took from them. In this way the reason for the players to press the case against the actions of the government in the courts became weaker and the companies chose not to challenge the government on this. Due to these events, in future cases it will not be clear if this forms a valid precedent as there has been no deliberations on this matter in any court of law to determine if the actions taken by the government were indeed in line with the law or was a case of abuse of power.
Following this the complaint was directed towards the individuals rather than the companies and the case would thereafter be known as United States vs Scheinberg. The case came to an end on July 31, 2012 where the government dismissed with prejudice the civil complaints against PokerStars and Full Tilt. As a part of the settlement PokerStars bought and took over Full Tilt. Both the companies were cleared off, however criminal indictments against owners and individuals involved remain to be resolved.
The event highlighted the need for a regulation to be in place for online poker and gambling. Many players and individuals held the government accountable for their failure to bring necessary regulations into place. Gambling law experts criticized the government’s efforts. U.S. Senator Alfonse D’Amato deemed the actions of the department of Justice as an attack on Internet poker and stressed on the fact that they were causing much harm to the poker player’s economic status as they had gambled all their money and savings on these sites and had trusted them with it. Absence of legal online gambling also keeps the government form earning additional tax revenues.
One of the federal laws that could have cleared the stage for the online poker industry was the Internet Gambling Regulation, Consumer Protection, and Enforcement Act which was proposed in the year 2009. This bill eventually got 70 cosponsors however the last major action related to this bill was in 2010 when it was placed on the Union Calendar. The presence of such a law would have removed the prospect of online poker from being considered in a legal grey area and would have made it clear that it was excluded from the ambit of UIGEA 2006 law. However, as this law failed to be enacted, the actions earlier discussed came to pass.
The situation for online poker took a better turn by August 2012, as the New York court declared that poker was not gambling as it was a game based on player skill rather than pure chance, although this is in line with what the three companies were claiming to being with, for them this pronouncement came a bit too late. Poker fans who had been pushing for legalization of the game online were delighted all over by end April 2013 when Nevada embraced the online game legally for people over twenty-one years of age and located within the state. Delaware and New Jersey soon followed and brought in a legalized and a regulated online gambling market. Despite all of this, there still has been no action on this from the federal legislature and therefore the chance of inter-state legal dispute of when players from one state are gambling on a legal online establishment of another state still remain and it would be advisable for players to make a thorough check of the legal state of their specific case before they begin to engage in any such activity.
From the side of the players, there is an alliance by the name of Poker Players Alliance which is registered as a non-profit organization consisting of both online as well as offline players. One of the activities of the alliance has been to lobby and try to legalize online gambling and they had a role to play in the promotion of the Internet Gambling Regulation, Consumer Protection, and Enforcement Act as well. In addition to that they also lobby against laws that are being suggested to be enacted which would outlaw online gambling. One such law that has been proposed by U.S. Senator Lindsey Graham (S. 2159) & U.S. Representative Jason Chaffetz (H.R. 4301) and would prohibit online poker is being fought off by the alliance with their call to action across the nation. On their website they have set up a system in which members of the alliance as well as other visitors can find easy information on how to email, tweet to or call their respective congressional representatives in an attempt to have the voices of their constituencies be heard. If the law does end up being enacted, this could be a deathblow to the online poker community as well move the subject out of the grey area for good. However the counter efforts would make it likely that it would at least take some time before, if at all, the law would be enacted.
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