United States v. Scheinberg
Encyclopedia
United States v. Scheinberg, 10 Cr. 336 (2011), is a United States federal criminal case against the founders of the three largest online poker
companies, PokerStars
, Full Tilt Poker
and Cereus (Absolute Poker/Ultimatebet), and a handful of their associates, which alleges that the defendants violated the Unlawful Internet Gambling Enforcement Act (UIGEA) and engaged in bank fraud
and money laundering
in order to process transfers to and from their customers. A companion civil case, United States v. PokerStars, et al., 11 Civ. 2564 (2011), includes Full Tilt and Cereus as defendants and seeks the forfeiture of approximately $3 billion in assets belonging to the companies. After the indictment was unsealed on April 15, 2011, a date quickly dubbed Black Friday by the online poker community, PokerStars and Full Tilt stopped offering real money play to their United States customers.
Three years after the start of the poker boom
, the U.S. Congress
passed UIGEA in order to extend existing gambling laws into cyberspace. The law made processing online gambling payments a crime; however, the defendant companies remained in the U.S. market in the belief that the law did not cover poker
. Preet Bharara
, the U.S. Attorney for the Southern District of New York, who brought the case, bases it upon a New York state anti-gambling statute. A former payment processor for the companies turned state's evidence after initially being charged with violating UIGEA himself. On September 20, the civil suit was amended claiming individual fraud by Messrs. Howard Lederer
, Chris Ferguson
and Rafael Furst
.
The U.S. Department of Justice
seized the .com
internet addresses of the three online gambling
sites, replacing them with a takedown notice, but let Full Tilt and PokerStars use them again once they pledged to no longer serve the U.S. Seventy-six bank accounts in 14 countries were frozen, including an unknown amount of player funds. The prosecutors are seeking jail sentences for the 11 criminal defendants including site founders and executives, U.S. payment processors, and an executive of a small Utah bank, who prosecutors maintain were engaged in an elaborate criminal fraud scheme, using the bank in Utah to mis-code transactions with other banks to bypass UIGEA restrictions.
Antigua and Barbuda
officials considered action in the World Trade Organization
. The companies ceased their U.S.-facing ad campaigns, resulting in cancellations of poker-themed television
shows. In June, Full Tilt had its eGambling license suspended, which halted all of its remaining online play in the United States. The Alderney Gambling Control Commission on the British Channel Islands revoked its license on September 29 for play abroad.
expanded its coverage of the World Series of Poker
. Between 2003
and 2006
the number of contestants in the $10,000 No Limit Texas hold'em Main Event grew from 839 to 8773.
passed Unlawful Internet Gambling Enforcement Act of 2006
, which makes it a federal offense, punishable by up to five years in prison, for a gambling business to "knowingly accept" payments "in connection with the participation of another person in unlawful Internet gambling." However, the law did not define
or alter the definition of unlawful gambling, which under Federal law only applies to sports betting
via the Wire Act.
Nevertheless, Party Poker, at the time the largest provider for U.S. demand, decided to withdraw from servicing the United States poker market. The United States Department of Justice
later indicted them for services provided prior to 2006 in violation of the Wire Act, a case they settled out of court
in the hopes of being allowed to serve the U.S. market at a later date. Also in 2006, several other online poker service providers withdrew from the market, including Sportingbet
's Paradise Poker, 888 Holdings' Pacific Poker, and the iPoker Network's CD Poker.
Several other sites continued facilitate the demand for online poker in the U.S., which had been growing about 20% per year.
A 2006 law passed in Washington State that made it a felony to play online poker was upheld as constitutional by the Washington Supreme Court
in September 2010. PokerStars immediately withdrew from Washington's market, and Full Tilt soon followed suit, but both sites continued to provide services to players in the other 49 U.S. states.
about online poker, or any gambling other than sports betting, Preet Bharara
, the U.S. Attorney for the Southern District of New York, bases his case on a New York law that makes it a Class A misdemeanor
, punishable by up to a year in prison, to run a game of chance where bets are placed within the state. Although none of the sites are actually run out of
New York (PokerStars is based on the Isle of Man
, Full Tilt Poker is in Ireland
and Absolute Poker is from Costa Rica
), he was able to obtain a felony
indictment for UIGEA violations. In addition to the 2006 UIGEA, the defendants were charged with violating the Illegal Gambling Business Act of 1955.http://www.law.cornell.edu/uscode/html/uscode18/usc_sec_18_00001955----000-.html
Additionally, in April 2010, the former head of Intabill, a defunct payment processor in Australia
, Daniel Tzvetkoff
, was arrested in Las Vegas
by the FBI
. He was charged with money laundering, bank fraud, and wire fraud. PokerStars and Full Tilt had previously claimed that Tzvetkoff cheated them out of at least 100 million dollars. However, he was quietly let go a few months later in August 2010. He reportedly turned state's evidence
after being threatened with a 75 year prison sentence for alleged UIGEA violations.
The indictment also reveals that the executive officers of the sites had sought investment in SunFirst Bank in Utah
, which they were using to obtain and pay out player funds by allegedly mis-coding transactions. Although no one was actually being defrauded per se, and money from an otherwise legal operation can not be "laundered", these actions form the basis for the fraud and money laundering charges. This case marks only the second time that the Department of Justice has alleged violations of the 2006 UIGEA, (after the indictment of Daniel Tzvetkoff
).
A secret grand jury
handed down a sealed indictment on March 10, 2011.
seized the .com
internet addresses of the three online gambling
sites, a total of five URLs: Pokerstars.com, Fulltiltpoker.com, Absolutepoker.com, Ultimatebet.com and UB.com.
On April 20, 2011, use of two of the domain names were returned to PokerStars and Full Tilt by the U.S. Attorney's office, "to facilitate the withdrawal of U.S. players' funds held in account with the companies"; in exchange the companies agreed to continue prohibiting United States residents from playing until the case was resolved. Ultimate control of the domains remains in the hands of US Attorney's office.
Because the charges against Absolute Poker and UltimateBet represent a much larger percentage of its revenues, their survival is in jeopardy. However, Cereus did eventually reach an agreement by which funds could be returned to United States players.
The prosecutors are seeking jail sentences for the indicted executives and $3 billion from the poker companies. When the U.S. Department of Justice pursued Party Poker in 2006, it led to a $300 million plea agreement by PartyGaming co-founder Anurag Dikshit
and a $105 million settlement with the company itself in 2009. In the criminal case, "The maximum penalty for violation of the UIGEA and operating a gambling business is 5 years in prison and a fine of $250,000 or twice the gross gain or loss for each charge, for conspiracy to commit wire fraud is 30 years in prison and a fine of $1 million or twice the gross gain or loss, and for money laundering conspiracy is 20 years in prison and a fine of $500,000 or twice the amount laundered."
, the United States Attorney for the Southern District of New York, expressed his view when the indictment was unsealed:
FBI Assistant Director-in-Charge Janice K. Fedarcyk added: "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 they could continue their scheme, and they lost."
In the amended complaint the government alleged that "Full Tilt Poker did not maintain funds sufficient to repay all players, and in addition, the company used player funds to pay board members and other owners more than $440 million since April 2007."
Furthermore, the amended complaint uses the term ponzi scheme
prominently, including in its title.
A lawyer for Ferguson has denied the allegations, suggesting that the issues may have been the result of mismanagement not malice. A lawyer for some of the defendants issued a press release stating that the phrase ponzi scheme was inaccurate, unfair and disingenuous and that its use was counterproductive. On November 1, 2011, Groupe Bernard Tapie (GBT) reached a deal in principal with the United States Department of Justice that if the shareholders of Full Tilt Poker approve the company's acquisition by GBT, GBT will pay all $300 million of outstanding player debts by Full Tilt.
, a poker professional who has appeared in televised tournaments on NBC
and ESPN. "The expectation was that there would be warning signs. These sites went from multibillion-dollar enterprises to on the ropes overnight." He added: "Some players have literally millions of dollars in their online poker accounts."
The Poker Players Alliance
called upon poker players affected by the shutdown to contact their Congressional representatives.
Poker player and current U.S. Congressman
Barney Frank
, in an interview with The Hill
, lamented that the Justice Department is more focused on prosecuting online poker sites than those responsible for the mortgage crisis
and financial meltdown
.
In an editorial in the Washington Post, poker player and former U.S. Senator
Alfonse D'Amato wrote: "This is an attack on Internet poker and American poker players like me. Through these strong-arm tactics, prosecutors think they can ban Internet poker. Instead, they are making millions of Americans victims in an attempt to make online poker illegal without the support of legislators or the public." He called on President
Barack Obama
to rein in the prosecuting attorneys in the Southern District of New York.
officials considered action in the World Trade Organization
(WTO) saying that the United States violated global trade law by shutting down Internet gambling sites. Antigua and Barbuda have previously brought suit against the United States successfully with the WTO when it awarded monetary damages for violating international agreements on trade in services by prosecuting the operators of offshore internet gambling sites. Online poker is the second largest industry in Antigua's economy. Mark Mendel, the Caribbean
government's legal adviser, told Reuters: "I don't think there's another country in the world that puts people in jail for engaging in trade that's lawful under international law
. It's as if Antigua would put Americans in jail for selling pineapples."
On June 29, the Alderney Gambling Control Commission (AGCC) suspended Full Tilt's license as a result of an investigation that arose after earlier federal indictments in New York, accusing company executives and associates of bank fraud, money laundering and other crimes. The license is suspended pending a July 26 hearing in London. Immediately following the suspension, the companies real money completely ceased operations. The actions by the AGCC mandated the cessation of the following:
Various sources report that this opened the way for Jack Binion
to buy Full Tilt and ensure all Full Tilt Poker players get refunded in the process. On June 30, European investors agreed to provide capital to repay Full Tilt Players in exchange for a majority stake in the company. On July 26, the hearing revealed that Full Tilt owed in overdue licensing fees to the AGCC, which Full Tilt paid within seven days as promised clearing the way for approval of a refinancing deal. The hearing was suspended until no later than September 15 as a result of the revelation. The delay until September 15 offers Full Tilt a chance to complete its negotiated settlement. On September 29, the AGCC stripped Full Tilt of its license. The AGCC's statement said that Full Tilt had misrepresented its financial situation, while Full Tilt said the action would jeopardize its ability to repay its customers. However, on September 30, Full Tilt was acquired by Bernard Tapie
, who promised to repay its customers on the condition that Full Tilt settle its legal issues.
cites a source that says the three companies had a 95% market share
in online poker in the United States. Following the shut down of play in the United States, traffic was down 24%, 49%, and 45% at PokerStars, Full Tilt and Absolute, respectively. Meanwhile companies not affected by the indictment saw traffic spike.
The companies combined for an estimated US$200 million in advertising and marketing in the United States and their withdrawal from the U.S. market left network shows such as Poker After Dark
and The Big Game
without advertising sponsors. On cable television, ESPN's contract with PokerStars was for $22 million. ESPN withdrew its Pokerstars advertising. On Sunday April 17, ESPN2
cancelled its scheduled broadcast of 2011 North American Poker Tour
presented by PokerStars.net. On Game Show Network, prepaid episodes of High Stakes Poker
continued to air for several months after the event, but the show was in danger of not returning.
The companies accounted for a large proportion of World Series of Poker qualifiers via online satellites. Additionally, other players lost access to the funds they could use to play in the events. As a result, the 2011 World Series of Poker
main event had the highest percentage of foreign players (and lowest percentage of American players) in history with 2,265 foreign players.
Wynn Resorts
allied with PokerStars on March 25 to seek the legalization of Internet gambling in the U.S., but terminated the accord on April 15.
Countless U.S. citizens who play online poker for a living effectively lost their livelihoods due to the DOJ action. Pokernews pointed out a thread on the Two Plus Two forums where the PPA
asked players to share their stories. Among the poker networks seen as potential destinations for U.S. Poker players looking for a new online home are Carbon Poker
, Cake Poker, Bodog
, and DoylesRoom.
According to Brandon Adams
, live poker gambling at casinos might be a short-term beneficiary of the crackdown, but often online and live poker are not competitive but complementary, with players honing their skills in cheap, fast games online before gaining the nerve to play for higher stakes at a casino.
According to Time
, the opposition to legalized domestic online gambling is depriving the United States economy from a huge potential source of tax revenues. One political action committee
that received approximately $300,000 from PokerStars returned the money.
On April 26, PokerStars began processing cashouts. On May 4, Blanca Gaming of Antigua, the parent company to UB and Absolute Poker who had already laid off 95% of its employees, decided that it would have to pursue bankruptcy
. On May 6, Pokerstars augmented their cashout policies to allow players to cashout frequent player points and pro-rata portions of partially earned VIP rewards bonuses.
On May 27, the Department of Justice unfroze an Irish account containing more than one-third of the more than $100 million that was owed to players. The account belonged to Full Tilt and its co-founder, Raymond Bitar. This was one of nine frozen Irish accounts. Full Tilt Poker
had failed to uphold its promise to return U.S. Poker players by May 15, following the April 15th events. As a result, Full Tilt Pro Phil Ivey
announced he would not be playing the 2011 World Series of Poker
and suing Full Tilt. Ivey voluntarily withdrew the suit on June 30.
Bradley Franzen made a court appearance in Manhattan on Monday April 18, entering a plea of ‘not guilty’ to the nine counts listed on his indictment, including bank fraud and money laundering charges. Franzen’s bail was set at $200,000, for which his parents’ house was used as collateral. Franzen pled guilty in a New York court on May 23, 2011. It is not known when he will be sentenced, however, it appears that Franzen struck a plea agreement with prosecutors, in which he agreed to cooperate in the probe, in return for which prosecutors would recommend leniency. Most of the other named defendants were out of the country. Ira Rubin, indicted on illegal gambling, fraud, and money laundering charges was arrested on Monday, April 25, 2011, in Guatemala. He made his initial court appearance in Miami on April 27, and was remanded in custody to his next appearance on April 29.
Online poker
Online poker is the game of poker played over the Internet. It has been partly responsible for a dramatic increase in the number of poker players worldwide...
companies, PokerStars
PokerStars
PokerStars is the largest online poker cardroom in the world. PokerStars' satellite tournaments produced the 2003 World Series of Poker champion, Chris Moneymaker. 1983 champion Tom McEvoy, 2005 champion Joe Hachem, 2009 champion Joe Cada and 2010 champion Jonathan Duhamel and others also represent...
, Full Tilt Poker
Full Tilt Poker
Full Tilt Poker is an online poker card room that opened in June 2004 with the involvement of poker professionals Howard Lederer, Phil Ivey, Andy Bloch, Mike Matusow, Jennifer Harman and Chris Ferguson...
and Cereus (Absolute Poker/Ultimatebet), and a handful of their associates, which alleges that the defendants violated the Unlawful Internet Gambling Enforcement Act (UIGEA) and engaged in bank fraud
Bank fraud
Bank fraud is the use of fraudulent means to obtain money, assets, or other property owned or held by a financial institution, or to obtain money from depositors by fraudulently representing to be a bank or financial institution. In many instances, bank fraud is a criminal offense...
and money laundering
Money laundering
Money laundering is the process of disguising illegal sources of money so that it looks like it came from legal sources. The methods by which money may be laundered are varied and can range in sophistication. Many regulatory and governmental authorities quote estimates each year for the amount...
in order to process transfers to and from their customers. A companion civil case, United States v. PokerStars, et al., 11 Civ. 2564 (2011), includes Full Tilt and Cereus as defendants and seeks the forfeiture of approximately $3 billion in assets belonging to the companies. After the indictment was unsealed on April 15, 2011, a date quickly dubbed Black Friday by the online poker community, PokerStars and Full Tilt stopped offering real money play to their United States customers.
Three years after the start of the poker boom
Poker boom
The poker boom was a period between 2003 and 2006, during which poker, primarily no limit Texas hold 'em, but also other variations, became considerably more popular around the world...
, the U.S. Congress
United States Congress
The United States Congress is the bicameral legislature of the federal government of the United States, consisting of the Senate and the House of Representatives. The Congress meets in the United States Capitol in Washington, D.C....
passed UIGEA in order to extend existing gambling laws into cyberspace. The law made processing online gambling payments a crime; however, the defendant companies remained in the U.S. market in the belief that the law did not cover poker
Poker
Poker is a family of card games that share betting rules and usually hand rankings. Poker games differ in how the cards are dealt, how hands may be formed, whether the high or low hand wins the pot in a showdown , limits on bet sizes, and how many rounds of betting are allowed.In most modern poker...
. Preet Bharara
Preet Bharara
Preetinder S. Bharara , commonly known as Preet Bharara, is U.S. Attorney for the Southern District of New York.-Early life and education:Bharara was born in 1968 in Firozpur, Punjab, India, to a Sikh father and Hindu mother...
, the U.S. Attorney for the Southern District of New York, who brought the case, bases it upon a New York state anti-gambling statute. A former payment processor for the companies turned state's evidence after initially being charged with violating UIGEA himself. On September 20, the civil suit was amended claiming individual fraud by Messrs. Howard Lederer
Howard Lederer
Howard Henry Lederer is an American professional poker player and brother of poker professional Annie Duke, and author and poet Katy Lederer. On September 20, 2011, the U.S...
, Chris Ferguson
Chris Ferguson
Christopher Philip Ferguson is an American professional poker player. He has won five World Series of Poker events, including the 2000 WSOP Main Event, and the 2008 NBC National Heads-Up Poker Championship. On September 20, 2011, the U.S...
and Rafael Furst
Rafe Furst
Rafe Furst is an entrepreneur, angel investor, cancer awareness advocate and part time professional poker player. Furst currently works on and advises many projects that involve technology and social entrepreneurship. He regularly blogs about complex systems on EmergentFool...
.
The U.S. Department of Justice
United States Department of Justice
The United States Department of Justice , is the United States federal executive department responsible for the enforcement of the law and administration of justice, equivalent to the justice or interior ministries of other countries.The Department is led by the Attorney General, who is nominated...
seized the .com
.com
The domain name com is a generic top-level domain in the Domain Name System of the Internet. Its name is derived from commercial, indicating its original intended purpose for domains registered by commercial organizations...
internet addresses of the three online gambling
Online gambling
Online gambling, also known as Internet gambling and iGambling, is a general term for gambling using the Internet.-Online poker:Online poker tables commonly offer Texas hold 'em, Omaha, Seven-card stud, razz, HORSE and other game types in both tournament and ring game structures...
sites, replacing them with a takedown notice, but let Full Tilt and PokerStars use them again once they pledged to no longer serve the U.S. Seventy-six bank accounts in 14 countries were frozen, including an unknown amount of player funds. The prosecutors are seeking jail sentences for the 11 criminal defendants including site founders and executives, U.S. payment processors, and an executive of a small Utah bank, who prosecutors maintain were engaged in an elaborate criminal fraud scheme, using the bank in Utah to mis-code transactions with other banks to bypass UIGEA restrictions.
Antigua and Barbuda
Antigua and Barbuda
Antigua and Barbuda is a twin-island nation lying between the Caribbean Sea and the Atlantic Ocean. It consists of two major inhabited islands, Antigua and Barbuda, and a number of smaller islands...
officials considered action in the World Trade Organization
World Trade Organization
The World Trade Organization is an organization that intends to supervise and liberalize international trade. The organization officially commenced on January 1, 1995 under the Marrakech Agreement, replacing the General Agreement on Tariffs and Trade , which commenced in 1948...
. The companies ceased their U.S.-facing ad campaigns, resulting in cancellations of poker-themed television
Poker on television
Poker television programs had been extremely popular, especially in North America and Europe, following the poker boom. However, viewership has been declining dramatically in recent years...
shows. In June, Full Tilt had its eGambling license suspended, which halted all of its remaining online play in the United States. The Alderney Gambling Control Commission on the British Channel Islands revoked its license on September 29 for play abroad.
Growth of poker
In 2003, ESPNESPN
Entertainment and Sports Programming Network, commonly known as ESPN, is an American global cable television network focusing on sports-related programming including live and pre-taped event telecasts, sports talk shows, and other original programming....
expanded its coverage of the World Series of Poker
World Series of Poker
The World Series of Poker is a world-renowned series of poker tournaments held annually in Las Vegas and, since 2005, sponsored by Harrah's Entertainment...
. Between 2003
2003 World Series of Poker
-Preliminary events:-Main Event:There were 839 entrants to the main event. Each paid $10,000 to enter what was the largest poker tournament ever played in a brick and mortar casino at the time...
and 2006
2006 World Series of Poker
The 2006 World Series of Poker began on June 25, 2006 with "satellite" events, with regular play commencing on June 26 with the annual Casino Employee event, and the Tournament of Champions held on June 28 and 29...
the number of contestants in the $10,000 No Limit Texas hold'em Main Event grew from 839 to 8773.
Changes in gambling laws
On October 13, 2006, the United States CongressUnited States Congress
The United States Congress is the bicameral legislature of the federal government of the United States, consisting of the Senate and the House of Representatives. The Congress meets in the United States Capitol in Washington, D.C....
passed Unlawful Internet Gambling Enforcement Act of 2006
Unlawful Internet Gambling Enforcement Act of 2006
The Unlawful Internet Gambling Enforcement Act of 2006 is United States legislation regulating online gambling. It was added as Title VIII to the SAFE Port Act which otherwise regulated port security...
, which makes it a federal offense, punishable by up to five years in prison, for a gambling business to "knowingly accept" payments "in connection with the participation of another person in unlawful Internet gambling." However, the law did not define
Void for vagueness
Void for vagueness is a legal concept in American constitutional law that states that a given statute is void and unenforceable if it is too vague for the average citizen to understand. There are several ways, senses or reasons a statute might be considered vague...
or alter the definition of unlawful gambling, which under Federal law only applies to sports betting
Sports betting
Sports betting is the activity of predicting sports results and placing a wager on the outcome.-United States of America:Aside from simple wagers such as betting a friend that one's favorite baseball team will win its division or buying a football "square" for the Super Bowl, sports betting is...
via the Wire Act.
Nevertheless, Party Poker, at the time the largest provider for U.S. demand, decided to withdraw from servicing the United States poker market. The United States Department of Justice
United States Department of Justice
The United States Department of Justice , is the United States federal executive department responsible for the enforcement of the law and administration of justice, equivalent to the justice or interior ministries of other countries.The Department is led by the Attorney General, who is nominated...
later indicted them for services provided prior to 2006 in violation of the Wire Act, a case they settled out of court
Settled Out of Court
Settled Out of Court is a 1925 British silent drama film directed by George A. Cooper and starring Fay Compton, Jack Buchanan and Jeanne De Casalis...
in the hopes of being allowed to serve the U.S. market at a later date. Also in 2006, several other online poker service providers withdrew from the market, including Sportingbet
Sportingbet
Sportingbet plc is a British e-gaming operator. It is listed on the London Stock Exchange and is a constituent of the FTSE SmallCap Index.-History:The Company was founded by Mark Blandford in 1997. Sportingbet acquired Paradise Poker in October 2004...
's Paradise Poker, 888 Holdings' Pacific Poker, and the iPoker Network's CD Poker.
Several other sites continued facilitate the demand for online poker in the U.S., which had been growing about 20% per year.
A 2006 law passed in Washington State that made it a felony to play online poker was upheld as constitutional by the Washington Supreme Court
Washington Supreme Court
The Washington Supreme Court is the highest court in the judiciary of the U.S. state of Washington. The Court is composed of a Chief Justice and eight Justices. of the Court are elected to six-year terms...
in September 2010. PokerStars immediately withdrew from Washington's market, and Full Tilt soon followed suit, but both sites continued to provide services to players in the other 49 U.S. states.
Basis for the case
Since Federal law says nothing specificallyOverbreadth doctrine
In American jurisprudence, the overbreadth doctrine is primarily concerned with facial challenges to laws under the First Amendment. American courts have recognized several exceptions to the speech protected by the First Amendment , and states therefore have some latitude to regulate unprotected...
about online poker, or any gambling other than sports betting, Preet Bharara
Preet Bharara
Preetinder S. Bharara , commonly known as Preet Bharara, is U.S. Attorney for the Southern District of New York.-Early life and education:Bharara was born in 1968 in Firozpur, Punjab, India, to a Sikh father and Hindu mother...
, the U.S. Attorney for the Southern District of New York, bases his case on a New York law that makes it a Class A misdemeanor
Misdemeanor
A misdemeanor is a "lesser" criminal act in many common law legal systems. Misdemeanors are generally punished much less severely than felonies, but theoretically more so than administrative infractions and regulatory offences...
, punishable by up to a year in prison, to run a game of chance where bets are placed within the state. Although none of the sites are actually run out of
Jurisdiction
Jurisdiction is the practical authority granted to a formally constituted legal body or to a political leader to deal with and make pronouncements on legal matters and, by implication, to administer justice within a defined area of responsibility...
New York (PokerStars is based on the Isle of Man
Isle of Man
The Isle of Man , otherwise known simply as Mann , is a self-governing British Crown Dependency, located in the Irish Sea between the islands of Great Britain and Ireland, within the British Isles. The head of state is Queen Elizabeth II, who holds the title of Lord of Mann. The Lord of Mann is...
, Full Tilt Poker is in Ireland
Republic of Ireland
Ireland , described as the Republic of Ireland , is a sovereign state in Europe occupying approximately five-sixths of the island of the same name. Its capital is Dublin. Ireland, which had a population of 4.58 million in 2011, is a constitutional republic governed as a parliamentary democracy,...
and Absolute Poker is from Costa Rica
Costa Rica
Costa Rica , officially the Republic of Costa Rica is a multilingual, multiethnic and multicultural country in Central America, bordered by Nicaragua to the north, Panama to the southeast, the Pacific Ocean to the west and the Caribbean Sea to the east....
), he was able to obtain a felony
Felony
A felony is a serious crime in the common law countries. The term originates from English common law where felonies were originally crimes which involved the confiscation of a convicted person's land and goods; other crimes were called misdemeanors...
indictment for UIGEA violations. In addition to the 2006 UIGEA, the defendants were charged with violating the Illegal Gambling Business Act of 1955.http://www.law.cornell.edu/uscode/html/uscode18/usc_sec_18_00001955----000-.html
Additionally, in April 2010, the former head of Intabill, a defunct payment processor in Australia
Australia
Australia , officially the Commonwealth of Australia, is a country in the Southern Hemisphere comprising the mainland of the Australian continent, the island of Tasmania, and numerous smaller islands in the Indian and Pacific Oceans. It is the world's sixth-largest country by total area...
, Daniel Tzvetkoff
Daniel Tzvetkoff
Daniel Kim Tzvetkoff is the founder of Intabill. He is currently in witness protection in New York.-Early life:...
, was arrested in Las Vegas
Las Vegas metropolitan area
The Las Vegas Valley is the heart of the Las Vegas-Paradise, NV MSA also known as the Las Vegas–Paradise–Henderson MSA which includes all of Clark County, Nevada, and is a metropolitan area in the southern part of the U.S. state of Nevada. The Valley is defined by the Las Vegas Valley landform, a ...
by the FBI
Federal Bureau of Investigation
The Federal Bureau of Investigation is an agency of the United States Department of Justice that serves as both a federal criminal investigative body and an internal intelligence agency . The FBI has investigative jurisdiction over violations of more than 200 categories of federal crime...
. He was charged with money laundering, bank fraud, and wire fraud. PokerStars and Full Tilt had previously claimed that Tzvetkoff cheated them out of at least 100 million dollars. However, he was quietly let go a few months later in August 2010. He reportedly turned state's evidence
Turn state's evidence
To turn state's evidence is when an accused or convicted criminal testifies as a witness for the state against his associates or accomplices. Turning state's evidence is occasionally a result of a change of heart or feelings of guilt, but more often is done in response to a generous offer from the...
after being threatened with a 75 year prison sentence for alleged UIGEA violations.
The indictment also reveals that the executive officers of the sites had sought investment in SunFirst Bank in Utah
Utah
Utah is a state in the Western United States. It was the 45th state to join the Union, on January 4, 1896. Approximately 80% of Utah's 2,763,885 people live along the Wasatch Front, centering on Salt Lake City. This leaves vast expanses of the state nearly uninhabited, making the population the...
, which they were using to obtain and pay out player funds by allegedly mis-coding transactions. Although no one was actually being defrauded per se, and money from an otherwise legal operation can not be "laundered", these actions form the basis for the fraud and money laundering charges. This case marks only the second time that the Department of Justice has alleged violations of the 2006 UIGEA, (after the indictment of Daniel Tzvetkoff
Daniel Tzvetkoff
Daniel Kim Tzvetkoff is the founder of Intabill. He is currently in witness protection in New York.-Early life:...
).
A secret grand jury
Grand jury
A grand jury is a type of jury that determines whether a criminal indictment will issue. Currently, only the United States retains grand juries, although some other common law jurisdictions formerly employed them, and most other jurisdictions employ some other type of preliminary hearing...
handed down a sealed indictment on March 10, 2011.
Domain name seizure
On April 15, the Department of JusticeUnited States Department of Justice
The United States Department of Justice , is the United States federal executive department responsible for the enforcement of the law and administration of justice, equivalent to the justice or interior ministries of other countries.The Department is led by the Attorney General, who is nominated...
seized the .com
.com
The domain name com is a generic top-level domain in the Domain Name System of the Internet. Its name is derived from commercial, indicating its original intended purpose for domains registered by commercial organizations...
internet addresses of the three online gambling
Online gambling
Online gambling, also known as Internet gambling and iGambling, is a general term for gambling using the Internet.-Online poker:Online poker tables commonly offer Texas hold 'em, Omaha, Seven-card stud, razz, HORSE and other game types in both tournament and ring game structures...
sites, a total of five URLs: Pokerstars.com, Fulltiltpoker.com, Absolutepoker.com, Ultimatebet.com and UB.com.
On April 20, 2011, use of two of the domain names were returned to PokerStars and Full Tilt by the U.S. Attorney's office, "to facilitate the withdrawal of U.S. players' funds held in account with the companies"; in exchange the companies agreed to continue prohibiting United States residents from playing until the case was resolved. Ultimate control of the domains remains in the hands of US Attorney's office.
Because the charges against Absolute Poker and UltimateBet represent a much larger percentage of its revenues, their survival is in jeopardy. However, Cereus did eventually reach an agreement by which funds could be returned to United States players.
Accounts seized
About 76 bank accounts in 14 countries were then frozen, preventing players from accessing balances held by the companies, according to the FBI's New York office. That the accounts hold a total of $500 million in total player deposits is a conservative estimate.Persons indicted
The indictment named eleven individuals who were each charged with four crimes. The persons named in the indictment are:- Isai ScheinbergIsai ScheinbergIsai Scheinberg is the Israeli-Canadian founder of the Pokerstars online poker site, which generates an estimated $1.4 billion annually in revenue. Scheinberg previously had been a senior programmer for IBM Canada.-References:...
, founder of PokerStars - Paul Tate, Director of Payments for PokerStars
- Raymond Bitar, CEO of TiltWare - software company for Full Tilt Poker
- Nelson Burtwick, Directory of Payments TiltWare (current)- software company for Full Tilt Poker. Past Director of Payments for PokerStars
- Scott Tom, part owner of Absolute Poker
- Brent Beckley, Director of Payments and Risk Management at Absolute Poker (as of 2007)
- Ryan Lang, payment processor
- Ira Rubin, payment processor
- Bradley Franzen, payment processor
- Chad Elie, payment processor
- John Campos, Vice Chairman of the Board and part-owner of SunFirst Bank
The prosecutors are seeking jail sentences for the indicted executives and $3 billion from the poker companies. When the U.S. Department of Justice pursued Party Poker in 2006, it led to a $300 million plea agreement by PartyGaming co-founder Anurag Dikshit
Anurag Dikshit
Anurag Dikshit , is an Indian businessman and philanthropist. Previously the richest man in Gibraltar and the 701st richest man in the world Anurag has given away the vast majority of his wealth through his charitable organisation The Kusuma Trust...
and a $105 million settlement with the company itself in 2009. In the criminal case, "The maximum penalty for violation of the UIGEA and operating a gambling business is 5 years in prison and a fine of $250,000 or twice the gross gain or loss for each charge, for conspiracy to commit wire fraud is 30 years in prison and a fine of $1 million or twice the gross gain or loss, and for money laundering conspiracy is 20 years in prison and a fine of $500,000 or twice the amount laundered."
Government position
Preet BhararaPreet Bharara
Preetinder S. Bharara , commonly known as Preet Bharara, is U.S. Attorney for the Southern District of New York.-Early life and education:Bharara was born in 1968 in Firozpur, Punjab, India, to a Sikh father and Hindu mother...
, the United States Attorney for the Southern District of New York, expressed his view when the indictment was unsealed:
- "As charged, these defendants concocted an elaborate criminal fraud scheme, alternately tricking some U.S. banks and effectively bribing others to assure the continued flow of billions in illegal gambling profits. Moreover, as we allege, in their zeal to circumvent the gambling laws, the defendants also engaged in massive money laundering and bank fraud. Foreign firms that choose to operate in the United States are not free to flout the laws they don’t like simply because they can’t bear to be parted from their profits."
FBI Assistant Director-in-Charge Janice K. Fedarcyk added: "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 they could continue their scheme, and they lost."
In the amended complaint the government alleged that "Full Tilt Poker did not maintain funds sufficient to repay all players, and in addition, the company used player funds to pay board members and other owners more than $440 million since April 2007."
Furthermore, the amended complaint uses the term ponzi scheme
Ponzi scheme
A Ponzi scheme is a fraudulent investment operation that pays returns to its investors from their own money or the money paid by subsequent investors, rather than from any actual profit earned by the individual or organization running the operation...
prominently, including in its title.
A lawyer for Ferguson has denied the allegations, suggesting that the issues may have been the result of mismanagement not malice. A lawyer for some of the defendants issued a press release stating that the phrase ponzi scheme was inaccurate, unfair and disingenuous and that its use was counterproductive. On November 1, 2011, Groupe Bernard Tapie (GBT) reached a deal in principal with the United States Department of Justice that if the shareholders of Full Tilt Poker approve the company's acquisition by GBT, GBT will pay all $300 million of outstanding player debts by Full Tilt.
Player response
"Along with everyone else in the poker world, I'm shocked," said Brandon AdamsBrandon Adams (poker player)
Brandon Adams is an American university teaching fellow, author, and poker player.-Career:Originally from New Orleans, Louisiana, he now lives in Boston, Massachusetts...
, a poker professional who has appeared in televised tournaments on NBC
NBC
The National Broadcasting Company is an American commercial broadcasting television network and former radio network headquartered in the GE Building in New York City's Rockefeller Center with additional major offices near Los Angeles and in Chicago...
and ESPN. "The expectation was that there would be warning signs. These sites went from multibillion-dollar enterprises to on the ropes overnight." He added: "Some players have literally millions of dollars in their online poker accounts."
The Poker Players Alliance
Poker Players Alliance
The Poker Players Alliance is an American nonprofit Interest group formed "to speak with one voice to promote poker, and to protect the players' rights." The PPA formed to serve as an advocacy group to Washington to establish rights and protections for U.S. poker players. Within the first year of...
called upon poker players affected by the shutdown to contact their Congressional representatives.
Poker player and current U.S. Congressman
United States House of Representatives
The United States House of Representatives is one of the two Houses of the United States Congress, the bicameral legislature which also includes the Senate.The composition and powers of the House are established in Article One of the Constitution...
Barney Frank
Barney Frank
Barney Frank is the U.S. Representative for . A member of the Democratic Party, he is the former chairman of the House Financial Services Committee and is considered the most prominent gay politician in the United States.Born and raised in New Jersey, Frank graduated from Harvard College and...
, in an interview with The Hill
The Hill (newspaper)
The Hill, a subsidiary of News Communications Inc., is a newspaper published in Washington, D.C. since 1994.Its first editor was Martin Tolchin, a veteran correspondent in the Washington bureau of The New York Times....
, lamented that the Justice Department is more focused on prosecuting online poker sites than those responsible for the mortgage crisis
Subprime mortgage crisis
The U.S. subprime mortgage crisis was one of the first indicators of the late-2000s financial crisis, characterized by a rise in subprime mortgage delinquencies and foreclosures, and the resulting decline of securities backed by said mortgages....
and financial meltdown
Late-2000s financial crisis
The late-2000s financial crisis is considered by many economists to be the worst financial crisis since the Great Depression of the 1930s...
.
In an editorial in the Washington Post, poker player and former U.S. Senator
United States Senate
The United States Senate is the upper house of the bicameral legislature of the United States, and together with the United States House of Representatives comprises the United States Congress. The composition and powers of the Senate are established in Article One of the U.S. Constitution. Each...
Alfonse D'Amato wrote: "This is an attack on Internet poker and American poker players like me. Through these strong-arm tactics, prosecutors think they can ban Internet poker. Instead, they are making millions of Americans victims in an attempt to make online poker illegal without the support of legislators or the public." He called on President
President of the United States
The President of the United States of America is the head of state and head of government of the United States. The president leads the executive branch of the federal government and is the commander-in-chief of the United States Armed Forces....
Barack Obama
Barack Obama
Barack Hussein Obama II is the 44th and current President of the United States. He is the first African American to hold the office. Obama previously served as a United States Senator from Illinois, from January 2005 until he resigned following his victory in the 2008 presidential election.Born in...
to rein in the prosecuting attorneys in the Southern District of New York.
International response
Antigua and BarbudaAntigua and Barbuda
Antigua and Barbuda is a twin-island nation lying between the Caribbean Sea and the Atlantic Ocean. It consists of two major inhabited islands, Antigua and Barbuda, and a number of smaller islands...
officials considered action in the World Trade Organization
World Trade Organization
The World Trade Organization is an organization that intends to supervise and liberalize international trade. The organization officially commenced on January 1, 1995 under the Marrakech Agreement, replacing the General Agreement on Tariffs and Trade , which commenced in 1948...
(WTO) saying that the United States violated global trade law by shutting down Internet gambling sites. Antigua and Barbuda have previously brought suit against the United States successfully with the WTO when it awarded monetary damages for violating international agreements on trade in services by prosecuting the operators of offshore internet gambling sites. Online poker is the second largest industry in Antigua's economy. Mark Mendel, the Caribbean
Caribbean
The Caribbean is a crescent-shaped group of islands more than 2,000 miles long separating the Gulf of Mexico and the Caribbean Sea, to the west and south, from the Atlantic Ocean, to the east and north...
government's legal adviser, told Reuters: "I don't think there's another country in the world that puts people in jail for engaging in trade that's lawful under international law
International law
Public international law concerns the structure and conduct of sovereign states; analogous entities, such as the Holy See; and intergovernmental organizations. To a lesser degree, international law also may affect multinational corporations and individuals, an impact increasingly evolving beyond...
. It's as if Antigua would put Americans in jail for selling pineapples."
On June 29, the Alderney Gambling Control Commission (AGCC) suspended Full Tilt's license as a result of an investigation that arose after earlier federal indictments in New York, accusing company executives and associates of bank fraud, money laundering and other crimes. The license is suspended pending a July 26 hearing in London. Immediately following the suspension, the companies real money completely ceased operations. The actions by the AGCC mandated the cessation of the following:
- Registering new customers
- Accepting deposits from existing customers;
- Allowing existing customers to withdraw funds that are held in their accounts; and
- Permitting customers to participate in any form of poker game play or gambling transaction.
Various sources report that this opened the way for Jack Binion
Jack Binion
Jack Binion is an American casino operator. Jack is the son of casino magnate Benny Binion and worked for his father at Binion's Horseshoe, a casino and hotel in Las Vegas, Nevada.- Biography :...
to buy Full Tilt and ensure all Full Tilt Poker players get refunded in the process. On June 30, European investors agreed to provide capital to repay Full Tilt Players in exchange for a majority stake in the company. On July 26, the hearing revealed that Full Tilt owed in overdue licensing fees to the AGCC, which Full Tilt paid within seven days as promised clearing the way for approval of a refinancing deal. The hearing was suspended until no later than September 15 as a result of the revelation. The delay until September 15 offers Full Tilt a chance to complete its negotiated settlement. On September 29, the AGCC stripped Full Tilt of its license. The AGCC's statement said that Full Tilt had misrepresented its financial situation, while Full Tilt said the action would jeopardize its ability to repay its customers. However, on September 30, Full Tilt was acquired by Bernard Tapie
Bernard Tapie
Bernard Tapie is a French businessman, politician and occasional actor, singer, and TV host. He was Ministre de la Ville in the government of Pierre Bérégovoy, a businessman specializing in recovery for bankrupted companies, among which Adidas is the most famous ; and owner of sports teams...
, who promised to repay its customers on the condition that Full Tilt settle its legal issues.
Economic impact
Prior to the indictments, the United States accounted for 25—40% the poker business for these companies. For PokerStars the International business share was 70–75% and for Full Tilt it was 50–60%, according to one source. Darren RovellDarren Rovell
Darren Rovell is a sports business reporter who joined the financial news channel CNBC in 2006.- Education :Rovell graduated from Roslyn High School in Roslyn Heights, NY in 1996....
cites a source that says the three companies had a 95% market share
Market share
Market share is the percentage of a market accounted for by a specific entity. In a survey of nearly 200 senior marketing managers, 67 percent responded that they found the "dollar market share" metric very useful, while 61% found "unit market share" very useful.Marketers need to be able to...
in online poker in the United States. Following the shut down of play in the United States, traffic was down 24%, 49%, and 45% at PokerStars, Full Tilt and Absolute, respectively. Meanwhile companies not affected by the indictment saw traffic spike.
The companies combined for an estimated US$200 million in advertising and marketing in the United States and their withdrawal from the U.S. market left network shows such as Poker After Dark
Poker After Dark
Poker After Dark was an hour-long poker television program on NBC. The show made its debut on January 1, 2007, and was cancelled as another victim of the "Black Friday" criminal case due to the show's sponsorship by Full Tilt Poker, one of that case's defendants. on September 23, 2011 For its first...
and The Big Game
Big Game (poker)
The Big Game refers to a famous high-stakes poker ring game played in "Bobby's Room", a cardroom named after Bobby Baldwin, at the Bellagio casino in Las Vegas, Nevada. The table features no-limit and pot-limit games with wagers up to $100,000 per hand...
without advertising sponsors. On cable television, ESPN's contract with PokerStars was for $22 million. ESPN withdrew its Pokerstars advertising. On Sunday April 17, ESPN2
ESPN2
ESPN2 is an American sports cable television network owned by ESPN. The channel debuted on October 1, 1993.Originally nicknamed "the deuce," ESPN2 was initially branded as a network for a younger generation of sports fans featuring edgier graphics as well as extreme sports like motocross,...
cancelled its scheduled broadcast of 2011 North American Poker Tour
North American Poker Tour season 2
Below are the results for season 2 of the North American Poker Tour .- PokerStars Caribbean Adventure:* Casino: Atlantis Resort, Bahamas* Buy-in: $10,000 + $300* 7-Day Event: January 8, 2011 to January 15, 2011...
presented by PokerStars.net. On Game Show Network, prepaid episodes of High Stakes Poker
High Stakes Poker
High Stakes Poker is a cash game poker television program broadcast by the cable television network GSN in the United States. The poker variant played on the show is no limit Texas hold 'em. It premiered on January 16, 2006 and ended on December 17, 2007 and it returns back on March 1, 2009 and is...
continued to air for several months after the event, but the show was in danger of not returning.
The companies accounted for a large proportion of World Series of Poker qualifiers via online satellites. Additionally, other players lost access to the funds they could use to play in the events. As a result, the 2011 World Series of Poker
2011 World Series of Poker
The 2011 World Series of Poker was the 42nd annual World Series of Poker . The WSOP is the most prestigious poker tournament in the world with the winner of the Main Event considered to be the World Champion. It was held at the Rio All Suite Hotel and Casino in Las Vegas, Nevada between May...
main event had the highest percentage of foreign players (and lowest percentage of American players) in history with 2,265 foreign players.
Wynn Resorts
Wynn Resorts
Wynn Resorts Limited is a publicly traded corporation based in Paradise, Nevada that is a developer and operator of high end hotels and casinos. It was formed on October 25, 2002 by former Mirage Resorts Chairman and CEO Stephen A...
allied with PokerStars on March 25 to seek the legalization of Internet gambling in the U.S., but terminated the accord on April 15.
Countless U.S. citizens who play online poker for a living effectively lost their livelihoods due to the DOJ action. Pokernews pointed out a thread on the Two Plus Two forums where the PPA
Poker Players Alliance
The Poker Players Alliance is an American nonprofit Interest group formed "to speak with one voice to promote poker, and to protect the players' rights." The PPA formed to serve as an advocacy group to Washington to establish rights and protections for U.S. poker players. Within the first year of...
asked players to share their stories. Among the poker networks seen as potential destinations for U.S. Poker players looking for a new online home are Carbon Poker
Carbon Poker
Carbon Poker is a major poker room that is part of the Australian based Merge Gaming Network. Carbon Poker was established in 2007 and its servers are based in Kahnawake, Canada and is regulated by the Kahnawake Gaming Commission. It offers online poker games to players from around the world and as...
, Cake Poker, Bodog
Bodog
Bodog is an online entertainment brand launched in 1994 by Calvin Ayre.Originally the company traded at but the brand was later divested and intellectual property rights were assigned to and consolidated in BodogBrand.com...
, and DoylesRoom.
According to Brandon Adams
Brandon Adams (poker player)
Brandon Adams is an American university teaching fellow, author, and poker player.-Career:Originally from New Orleans, Louisiana, he now lives in Boston, Massachusetts...
, live poker gambling at casinos might be a short-term beneficiary of the crackdown, but often online and live poker are not competitive but complementary, with players honing their skills in cheap, fast games online before gaining the nerve to play for higher stakes at a casino.
According to Time
Time (magazine)
Time is an American news magazine. A European edition is published from London. Time Europe covers the Middle East, Africa and, since 2003, Latin America. An Asian edition is based in Hong Kong...
, the opposition to legalized domestic online gambling is depriving the United States economy from a huge potential source of tax revenues. One political action committee
Political action committee
In the United States, a political action committee, or PAC, is the name commonly given to a private group, regardless of size, organized to elect political candidates or to advance the outcome of a political issue or legislation. Legally, what constitutes a "PAC" for purposes of regulation is a...
that received approximately $300,000 from PokerStars returned the money.
On April 26, PokerStars began processing cashouts. On May 4, Blanca Gaming of Antigua, the parent company to UB and Absolute Poker who had already laid off 95% of its employees, decided that it would have to pursue bankruptcy
Bankruptcy
Bankruptcy is a legal status of an insolvent person or an organisation, that is, one that cannot repay the debts owed to creditors. In most jurisdictions bankruptcy is imposed by a court order, often initiated by the debtor....
. On May 6, Pokerstars augmented their cashout policies to allow players to cashout frequent player points and pro-rata portions of partially earned VIP rewards bonuses.
On May 27, the Department of Justice unfroze an Irish account containing more than one-third of the more than $100 million that was owed to players. The account belonged to Full Tilt and its co-founder, Raymond Bitar. This was one of nine frozen Irish accounts. Full Tilt Poker
Full Tilt Poker
Full Tilt Poker is an online poker card room that opened in June 2004 with the involvement of poker professionals Howard Lederer, Phil Ivey, Andy Bloch, Mike Matusow, Jennifer Harman and Chris Ferguson...
had failed to uphold its promise to return U.S. Poker players by May 15, following the April 15th events. As a result, Full Tilt Pro Phil Ivey
Phil Ivey
Phillip Dennis "Phil" Ivey Jr. is an American professional poker player who has won eight World Series of Poker bracelets, one World Poker Tour title and appeared at nine World Poker Tour final tables...
announced he would not be playing the 2011 World Series of Poker
2011 World Series of Poker
The 2011 World Series of Poker was the 42nd annual World Series of Poker . The WSOP is the most prestigious poker tournament in the world with the winner of the Main Event considered to be the World Champion. It was held at the Rio All Suite Hotel and Casino in Las Vegas, Nevada between May...
and suing Full Tilt. Ivey voluntarily withdrew the suit on June 30.
Arrests
John Campos and Chad Elie were arrested on Black Friday. Campos is part-owner and vice chairman of the board of directors for SunFirst Bank. On Monday April 18, Campos, of St. George, Utah, appeared in a Utah court, but did not enter a plea. He was released on $25,000 bond, ordered to surrender his passport and to appear in a New York court for his next appearance. Chad Elie, of Las Vegas, made his first court appearance in Manhattan on Tuesday April 19. He was released on $250,000 bail.Bradley Franzen made a court appearance in Manhattan on Monday April 18, entering a plea of ‘not guilty’ to the nine counts listed on his indictment, including bank fraud and money laundering charges. Franzen’s bail was set at $200,000, for which his parents’ house was used as collateral. Franzen pled guilty in a New York court on May 23, 2011. It is not known when he will be sentenced, however, it appears that Franzen struck a plea agreement with prosecutors, in which he agreed to cooperate in the probe, in return for which prosecutors would recommend leniency. Most of the other named defendants were out of the country. Ira Rubin, indicted on illegal gambling, fraud, and money laundering charges was arrested on Monday, April 25, 2011, in Guatemala. He made his initial court appearance in Miami on April 27, and was remanded in custody to his next appearance on April 29.