Wednesday, September 21, 2011

Full Tilt Poker’s Alleged Ponzi Scheme & The Legal Basics

Online gambling is a multi-billion dollar business. Some estimates value the online gambling business at about $30 billion dollars, and it will grow to $177 billion by 2015.

On September 20, the U.S. government amended its claim in a civil lawsuit alleging that the owners of Full Tilt Poker engaged in a Ponzi Scheme to milk its customers out of over $300 million.

Since it “amended” its claim, this means that the lawsuit was already launched.

How did we get here and what is going on? Here’s the background.

The 2 Separate Streams: Civil & Criminal

The U.S. government started this off earlier this year by doing 2 things:

(1) The U.S. pressed criminal charges against the owners of a number of online gambling sites, including Full Tilt Poker and PokerStars alleging that these businesses had engaged in criminal activity contrary to U.S. law. The owners have been indicted. An indictment is a formal accusation that a person has committed a crime.

(2) The U.S. government also filed civil suits against a number of online gambling sites, including Full Tilt Poker, Pokerstars, Absolute Poker and Ultimate Bet. The government alleged that the sites “engaged in the operation of an unlawful gambling business, bank fraud, wire fraud, and money laundering”. In a civil suit, you sue for money (generally), while criminal involves jail.

The Legality of Online Gambling in the U.S.

On September 29, 2006, the U.S. passed a law call the Unlawful Internet Gambling Enforcement Act (UIGEA).

The law does not outlaw online gambling. However, it does make it illegal for financial institutions, such as banks and credit card companies, to transfer funds to online gambling sites. That’s the important point here.

This was a huge problem for online gaming sites because they would transfer funds between customers and their sites by using financial institutions. So this law effectively cut out a major market for these businesses. They were not happy.

Full Tilt & Other Online Gambling Business Try To Get Around Law

So why are Full Tilt Poker, AbsolutePoker and PokerStars businesses in trouble?

To get around the new law, prosecutors allege, Full Tilt and the others created phony companies, such as fake pet shops and flower stores, to process payments.

They lied to banks about the true nature of their businesses by disguising their ongoing transactions with cherished American clients as something it wasn't.

Civil Claim Is Updated on September 20

On September 20, the U.S. government amended its civil complaint alleging that Full Tilt Poker defrauded its own customers out of $300 plus million.

Here’s the allegation from the Court document:
… Full Tilt Poker, not only engaged in the operation of an unlawful gambling business, bank fraud, wire fraud, and money laundering as alleged in the Complaint, but also defrauded its poker players by misrepresenting to players that funds deposited into their online player accounts were secure and segregated from operating funds, while at the same time using player funds to pay out hundreds of millions of dollars to Full Tilt Poker owners.
The U.S. government called this a Ponzi scheme. Click here to readthe amended complaint.

According to the U.S. government, here are some more financials:

- as of March 31, 2011, Full Tilt Poker owed approximately $390 million to players around the world, including approximately $150 million owed to players in the U.S. At that time, it only had $60 million in the bank

- between April 2007 until April 2011, Full Tilt Poker distributed approximately $443,860,529.89 to themselves and other owners of the company.

Tough To Get These Businesses

A lot of the owners of these businesses are outside the reach of the U.S. governement. For example, the owner of PokerStars, Isai Scheinberg, lives the Isle of Man located in the Irish Sea. The island is 52 kilometres long. He’s outside the U.S. jurisdiction's reach. So for now, he’s a fugitive.

Legality of Online Gambling In Canada

You may be wondering (if you are Canadian or have a Canadian cousin) if online gambling is legal in Canada when it comes to private businesses.

Short answer – no.

Slightly longer answer - the Canadian Criminal Code covers gambling in Canada, including online gambling.

To conduct legal gambling and betting in Canada, a valid license must be obtained from the provincial government. Only the provincial governments can run online gaming operations. They are not permitted under the Code to issue licenses to run such operations.

The operation of an unlicensed or unlawful gambling is an indictable offence.

1 comment:

Alan said...

Hi Eric,

Just wanted to say how much I enjoy your written submissions and on-the-air contributions. The legal/business angles are very interesting and you certainly do a wonderful job with your explanations. Keep up the good work!