Saturday, May 16, 2015

The Wire Act, the UIGEA and other silliness (Part 2)

In Part 1 of this post, I traced the history of anti-Internet gaming laws up through passage of the Unlawful Internet Gaming Enforcement Act in the fall of 2006. The UIGEA was essentially a toothless law - it made financial transactions for the purpose of "unlawful Internet gambling" illegal, but since it relied on existing laws to define what was illegal, it really didn't change anything. However, the perception, particularly among banks and the media, was that the UIGEA made online poker and other forms of online gambling illegal.

This perception was so pervasive that it was accepted as fact, even by media outlets that are usually known for diligently checking facts. Example: the New York Times called me for some background on an article on Internet gambling in early September 2006, just before the UIGEA passed. The article never ran, but the reporter called me just after then-President George W. Bush signed the UIGEA, and had only one question: "What are you going to do now that your company's business is illegal in the US?"

As I mentioned in Part 1 of this post, the Department of Justice, along with the overzealous New York State Attorney General's office (then headed by Eliot Spitzer), used subterfuge to support their campaigns against Internet gambling. This included informal briefings and briefing documents that either intimated or stated explicitly that all forms of online gambling were illegal in the US, and therefore any online gambling transactions could be prosecuted under the UIGEA. This was the same tactic that the DOJ used in the 2003 June Letter (also discussed in Part 1) - while they had no legal support for their contentions, merely raising them was enough to persuade the traditionally conservative banking industry to stay away.

This chicanery chilled the Internet gambling market from late 2006 through 2008. The UIGEA contained a provision requiring regulations to be drafted within nine months of its passage into law, but everyone in the industry knew this was unrealistic. Regulators were quite surprised to discover that banks were among the most strident critics of the regulations, mostly because even the most conservative estimates pegged the cost at $1 billion, all of which would be borne, without relief, by the banks.

The Treasury Department and the Federal Reserve adopted final regulations in November, 2008, and were implemented in January, 2009, nearly 30 months after passage of the law. By that time, the online poker companies that chose to remain in the US, including PokerStars, Full Tilt Poker, UltimateBet, AbsolutePoker and a few more, were once again firmly established. And while processing credit card transactions was still very difficult in the US, each of these companies had means to accept deposits via the Automated Clearing House (ACH) system, meaning they could accept virtual checks from their players.

And so it was, pretty much, until April 2011. There were no significant indictments or prosecutions, and exactly zero prosecutions under the UIGEA. Despite this, the publicly-traded companies that withdrew from the US market saw their shares languish, having lost close to $20 billion in market value, mostly equity belonging to US investors.

And then, out of nowhere, and with not even a vague hint that it was coming, the DOJ took its most draconian action. On March 10, 2011, a secret grand jury handed down sealed indictments, charging the principals of PokerStars, Full Tilt Poker and Cereus (owners of UltimateBet and Absolute Poker) with bank fraud, UIGEA violations and violations related to the obscure Illegal Gambling Business Act of 1955 (a bill passed largely to control illegal casinos). On April 15, 2011, the indictments were unsealed and, court orders in hand, the DOJ seized the web domains and financial assets of these companies and effectively shut down their US operations. Overnight, an estimated 9 million US players no longer had anywhere to play online (sort of - more on that in a future column). Within a few days, poker players had dubbed the day "Black Friday."

Once the indictments were unsealed, PokerStars immediately began efforts to fully reimburse players for funds on deposit. Within four weeks, all PokerStars players in the US had access to their accounts and were able to withdraw. In a shocking development, Full Tilt Poker players learned within a few days of Black Friday that they weren't nearly so lucky. 

While they were experiencing constant growth, Full Tilt was able to process cashouts from new player deposits, the online poker version of a Ponzi scheme. It was later revealed that many of the founders of Full Tilt Poker, several of whom were household names in poker (Howard Lederer and Chris Ferguson, among others), had paid themselves outsized bonuses totaling hundreds of millions of dollars. Ultimately PokerStars bought their largest rival for $731 million and reimbursed all player deposits, an amount totaling nearly $400 million.

The impact of Black Friday is nearly impossible to estimate. There is no question that it cost US broadcast companies over $200 million a year in television advertising revenue. PokerStars and Full Tilt both underwrote television shows for the US market, costing an estimated $40 million a year. The episodes that had been shot were aired, but production on these shows came to a screeching halt. And both companies had US employees, as well as US players on their sponsorship teams. The vast majority of US employees left the companies in the days following Black Friday, and many of the sponsored players were either let go or saw their sponsorship money dramatically reduced.

And so the online poker industry was decimated a second time by the United States, first by legislation, then by law enforcement. But the story didn't even end there - it then took a turn that many would describe as incredible, but for many in the industry it was simply another head-shaking turn in online poker's turbulent seventeen year history.

On December 23, 2011, just eight months after Black Friday, the Department of Justice's Office of Legal Counsel issued an opinion letter regarding the Wire Act that changed the landscape of online poker once again. The letter essentially admitted that the DOJ's prior interpretations of the Wire Act's applicability to online gaming were incorrect. The key line in the letter from US Deputy Attorney General James Cole:
“The Department’s Office of Legal Counsel (“OLC”) has analyzed the scope of the Wire Act, 18 U.S.c  § 1084, and concluded that it is limited only to sports betting.”
This letter represented a sea change in the thinking of the DOJ. Ever since online gaming first took hold during the Clinton Administration, the DOJ had use the Wire Act as its legal justification for its pursuit of online gaming. It even quoted the Wire Act in its 2003 June Letter (see Part 1 of this article for more on this). And suddenly, or so it seemed, all that had changed.

The real story is that this wasn't all that sudden. The first rumblings that something might change happened on July 14, 2011, when two odd bedfellows, Senate Majority Leader Harry Reid (D-NV) and Senator Jon Kyl (R-AZ) sent a joint letter to US Attorney General Eric Holder

While the letter itself appears to ask the DOJ to take a harder line regarding online gaming prosecutions, the odd tone of the letter led many to believe that Reid and Kyl had made a deal. Both knew that the DOJ's reliance on the Wire Act was weak and was unlikely to withstand a serious legal challenge. Reid's primary campaign contributors (Las Vegas casinos) supported online gaming in general, but were willing to settle for online poker as a start. Kyl, a longtime opponent of online gaming, had announced his retirement, and observers speculated that his cooperation with Reid in writing this letter was political payback (although no one knew for what).

On September 20, 2011, the DOJ issued a 13-page legal opinion regarding a years-old request by New York and Illinois for clarification regarding the legality of selling lottery tickets online using out-of-state payment processors. The letter, which was not publicly released until December, did away with the Wire Act's applicability to Internet gaming in two sentences:
"Interstate transmissions of wire communications that do not relate to a 'sporting event or contest' fall outside the reach of the Wire Act. Because the proposed New York and Illinois lottery proposals do not involve wagering on sporting events or contests, the Wire Act does not prohibit them."
With this opinion, the DOJ formalized what online gaming supporters had contended for fifteen years - the language of the Wire Act was only intended to deal with sports betting. The opinion was released on December 23, 2011, the same day that Ron Weich, Assistant Attorney General, sent letters to both Reid and Kyl, stating unconditionally that the Wire Act did not in fact make Internet gambling illegal, opening the door for states to enact intrastate online gambling at their option.

Many believed that this would start a gold rush, with many states passing laws to regulate Internet gaming. But through this writing, only three states have done so - Nevada, New Jersey and Delaware. And it is clear that until a few key states legalize and regulate online gaming, particularly California, New York and Florida, online poker won't flourish - it needs the liquidity (players) that these big states can provide.

And this brings us to 2015. A number of states have online gaming bills up for consideration, although few (if any) will pass this year. The latest cloud on the horizon of online gaming: Sheldon Adelson, chairman and CEO of Las Vegas Sands, who has taken on the industry with almost religious fervor, pledging to spend "$100 million, $500 million, whatever it takes," to make online gaming illegal at the Federal level. I'll take Sheldon on in a future column.

2 comments:

  1. It pains me to say this. A brilliant explanation of UIGEA, definitive reference material for future generations when they go WTF was that about.

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  2. I'd really like to know one day what the total economic impact of UIGEA really was. You mention the $1B minimum figure on banking regulations, and the languishing share prices of Party et al. The total number must be in the 8 figures, especially when you consider it drastically slowed the popularity of poker in the US and worldwide.

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