mpethypoker.com

Immediately after Black Friday, I estimated the chances that we would get our money back from Full Tilt eventually as 9 on a scale of 10. I think it is time to revise that estimate.

A variety of factors inform my reluctant reappraisal of our chances of seeing our money again. They are:

1. DOJ knows with certainty that it has seized player funds, and is refusing to release them.

DOJ’s initial statement says that “no individual player accounts” were seized on Black Friday. Read carefully, this is a tacit admission by DOJ that it knows that it has seized player funds in accounts other than players’ individual bank accounts.

Moreover, in its first response to Black Friday, Full Tilt told us that it had told DOJ that player funds had been seized, and that DOJ had not agreed to release them.

DOJ might be refusing to release the funds as a pressure tactic. By refusing the release the funds, DOJ is forcing Full Tilt to either stiff players or reimburse players out of pocket. Either course of action would necessarily harm Full Tilt financially. DOJ has evidently decided to sacrifice the little guy by using our money as leverage against Full Tilt. The fact that this is probably of dubious legality, and is clearly unethical, seems not to bother Preet Bharara at all.

An alternative explanation of DOJ’s refusal to release the funds that is more favorable to the DOJ is that FT has not yet demonstrated to DOJ’s satisfaction that any specific seized account contains player funds. This would also be bad news, as it would suggest the possibility that FT was commingling player funds with operational funds before Black Friday, and/or that FT was so badly managed that it cannot produce sufficient documentation to prove to DOJ which accounts held player funds.

In either of these scenarios, though, it does not appear likely that the seized funds will be available to reimburse players.

2. New Depositors on Full Tilt Were Playing on Credit.

This has been so widely reported on 2+2 that I won’t bother to source it. The figure being bandied about is that FT basically extended $60 million in credit to players who attempted a deposit and were allowed to play on the deposit, even though the funds were never debited from the players’ accounts.

This is $60 million worth of money that, even in the Absence of Black Friday, should have been, but was not, available to offset the liabilities to players.

3. Phil Ivey’s Lawsuit Against tiltware.

Ivey’s lawsuit is bad news for two reasons, one major, and one minor. The major reason it is bad news is because Ivey appears to be the first rat to jump the sinking ship. The minor reason is because Ivey is suing for a huge amount of money, and any recovery he achieves by way of trial or settlement is money that becomes unavailable to pay players.

4. Slow Pace of European Player Withdrawals.

This fact, again, widely reported in the 2+2 zoo and elsewhere, indicates that FT is forced to ration its pay outs.

5. Declining Traffic on Full Tilt.

Traffic on FT is down about 30% since Black Friday. Ominously, traffic has declined every week since then. Fewer players means less rake which means less profit from which to reimburse players.

6. Full Tilt’s Admission that it is Seeking to Raise Capital.

This is basically an admission that Full Tilt can’t afford to pay US players, and that to do so without the seized funds, it will have to borrow the money or sell a piece of the business.

This list of indicators probably is not complete. But it is sufficient to seriously call into question my original appraisal of our chances of being refunded our money as 9 chances in 10. I don’t know to what extent fear is informing my current appraisal of the situation, but, right now, our chances of being repaid our money seem no better than a coin flip to me.

I hope to hell I’m wrong.

Last week I posted about the inaccuracy in Relentless Defense’s blog post on the Black Friday Poker Indictments. This week, it appears that the blog post has been corrected, and it looks pretty solid.

Props to the firm for fixing it up.

If you’ve been reading this page, there isn’t really anything new to earn by reading it. RD reaches the same conclusions I did, more or less, but exhibits either more confidence or outrage on the bank fraud charge. It’s hard to tell where their scorn for this charge comes from, but I think it is unwarranted. Of all the charges, this is simply the one that is most likely to stick.

A lot of misinformation is beginning to circulate about the charges in the poker indictments (Hunter Bick is mainly wrong on all of the legal issues he addresses here–no shame, since he is not a lawyer, and this lawyer is way off base). So it seems like it is time for me to take a break from taking stack sized bad beats at the Venetian and put some more solid information out about the various charges that the site owners are facing.

First, as an aside, let me say that I have become convinced over the last few days that none of the site owners will ever stand trial for these charges. There are complicated reasons why I think this is so, and it probably merits its own post. For now, just take it as a given that I consider this discussion of the charges largely academic.

First, let me explicitly correct some of the mistakes in the links, since they are what prompted me to write this post in the first place.

The Site Owners are not Charged with Wire Act Violations

Mahoney’s blog post has a detailed analysis about why the site owners cannot be convicted of Wire Act violations. His legal analysis is ok on this subject, but he missed the primary reason why they can’t be convicted of Wire Act violations: because they were not charged with violating the Wire Act.

I’m not sure why he goes on at great length about the Wire Act; presumably it is because he simply didn’t read the indictment.

Unlawful Internet Gambling IS Defined in the UIGEA

Bick makes an understandable mistake for a non-lawyer when he says that UIGEA never defines what is unlawful internet gambling. From a lay person’s perspective, he is right: you can’t look at the text of UIGEA and say, “oh, ok, this type of gambling is allowed and this type is prohibited.” But that doesn’t mean that there isn’t a definition, it just means that the definition isn’t simple.

In fact, the UIGEA definition of unlawful internet gambling is right where you’d expect it to be, in section 5362, entitled, “definitions.”

(A) In general.— The term “unlawful Internet gambling” means to place, receive, or otherwise knowingly transmit a bet or wager by any means which involves the use, at least in part, of the Internet where such bet or wager is unlawful under any applicable Federal or State law in the State or Tribal lands in which the bet or wager is initiated, received, or otherwise made.

Now you see what I mean. The definition is right there in the statute, but just from reading it, you can’t tell whether poker is legal and roulette is illegal, or what.

This type of statute is what we cynically referred to in the practice of law as a “lawyers’ relief act.” It takes a skilled legal professional to even have a shot of parsing this definition. A (good) lawyer will instantly recognize that this definition requires the attorney to look elsewhere in state and federal law for the laws that might make certain types of gambling illegal, or even the same type of gambling legal in one place but illegal in another.

But at bottom, the definition is pretty simple: if a wager is illegal if made in some other form, making it on the internet is “unlawful internet gambling.”

As I said–there’s no shame in Bick having gotten this wrong; he’s not a lawyer.

The Sites Did Not Use Processors to Insulate Themselves from Criminal Liability Under UIGEA

Bick makes this claim expressly, and he is simply 100% wrong when he says:

The benefit to the poker sites to using a processor is pretty straightforward. UIGEA targets the financial handling of gambling transactions, so the sites use payment processors as 3rd parties between them and the players, so that the sites would not handle their own processing and thus, would not be UIGEA targets.

While it sounds superficially plausible, this statement is absurd, and any lawyer reading it would (as I did), laugh his ass off.

The easy answer to this is: The law of conspiracy. In short, conspiracy law says that if several people develop a scheme to, say, defraud banks into thinking that gambling transactions are actually the sale of golf clubs, all of the people involved in the plan are as guilty as the one who actually tells the lies to the banks. The payment processors being the ones to tell the hypothetical lies does not in any way insulate the gambling sites for whom they are telling them from criminal liability. The clue that this is the case that Bick should have picked up on was that the site owners were indicted for acts performed by the payment processors under the conspiracy to commit bank fraud count of the indictment (Count 8).

This Case is an Attack on the Legality of Online Poker; it is Not Primarily a Money Laundering Case in which the Gambling Charges were Added as Leverage

Here is the crux of Bick’s argument:

So to my non-lawyer eyes, it looks like the UIGEA and gambling charges were added to the indictment because the DOJ wanted more leverage, when really this is all about money laundering and bank fraud.

To a certain extent, this is a matter of opinion, and I hesitate to say that he is “wrong,” as i was comfortable saying for the two points above. But his reasoning seems flawed to me. If you assume, as Bick does, that the bank fraud and money laundering charges are strong, and that the gambling charges are weak, then you have a situation where the government has a strong case on two charges totaling potential punishment of 50 years, but they decide they need to add leverage by adding additional charges totaling 10-35 years’ potential punishment. That’s not additional leverage. That’s similar to saying, “yeah, we have this murder charge against you, but we’ll get additional leverage by adding this 5 year charge for use of a firearm in the commission of a felony.”

It just doesn’t make sense. It really doesn’t make sense if you assume, as Bick does, that the gambling charges are weak. So now we have an analogy where the use of a firearm charge is added when the firearm wasn’t even used in the killing, in Bick’s judgment.

In fact, this case is all about shutting down the internet poker market in the US by strong arm prosecutorial tactics. The “leverage” charge in this case, is, in fact, not the gambling charges, but the money laundering charge (count 9). Unlike the bank fraud charge, it IS predicated on the illegality of offering internet poker (another mistake in Bick’s post). And whereas the internet gambling charges come with 5 year penalties, the money laundering charge comes with a stiff 20 year penalty. It ups the stakes on the gambling charges. So as not to delve into the complexity of the federal sentencing guidelines, just pay attention to the raw numbers of the maximum sentences–the money laundering charge triples most of the defendants’ exposure to prison time. You might consider rolling the dice and going to trial when facing 2 gambling charges with a maximum punishment of 5 years each (because they are likely to run concurrently); but by adding a separate act that a judge would likely decide should run consecutively to the gambling time, you effectively at least triple the prison time the defendants face if convicted (I haven’t tried to calculate it, but the effect in the sentencing guidelines is probably far more dramatic than a mere tripling of the defendants’ exposure to maximum prison times that will not be imposed). With this real and effective additional leverage, the prosecutors greatly reduced the probability that they will ever have to actually try this case in front of a jury.

Those are the big mistakes I found in the two blog posts that prompted me to write. Now, here is some actual good information on the charged offenses:

Count 1: Conspiracy to Violate UIGEA, 31 US Code 5363 (maximum 5 years in prison) Allegations common to all defendants.

Count 2: Conspiracy to Violate UIGEA, 31 US Code 5363, charging the Poker Stars related conduct. (5 years)

Count 3: Conspiracy to Violate UIGEA, 31 S Code 5363, charging the Full Tilt conduct. (5 years)

Count 4: Conspiracy to violate UIGEA, 31 US Code 5363, charging the Absolute Poker conduct. (5 years)

Count 5: Operation of an Illegal Gambling Business (Poker Stars) in Violation of 18 US Code 1955 and 2. (5 years)

Count 6: Operation of an Illegal Gambling Business (Full Tilt) in violation of 18 US Code 1955 and 2. (5 years)

Count 7: Operation of an illegal Gambling Business (Absolute) in violation of US Code 1955 and 2. (5 years)

Count 8: Conspiracy to Commit Bank and Wire Fraud (all sites) in violation of  18 US Code 1343 and 1344. (30 years)

Count 9: Conspiracy to Commit Money Laundering in violation of 18 USC 1956 and 1957. (20 years)

As you can see from this list of the charges, most of the site owners are facing a UIGEA charge, an illegal gambling business charge, a money laundering charge and a bank/wire fraud charge, for a total maximum exposure of 80 years, if count one is, in fact, being charged separately.

UIGEA violations (Counts 1-4):

§ 5363. Prohibition on acceptance of any financial instrument for unlawful Internet gambling

No person engaged in the business of betting or wagering may knowingly accept, in connection with the participation of another person in unlawful Internet gambling

(1) credit, or the proceeds of credit, extended to or on behalf of such other person (including credit extended through the use of a credit card);

(2) an electronic fund transfer, or funds transmitted by or through a money transmitting business, or the proceeds of an electronic fund transfer or money transmitting service, from or on behalf of such other person;

(3) any check, draft, or similar instrument which is drawn by or on behalf of such other person and is drawn on or payable at or through any financial institution; or

(4) the proceeds of any other form of financial transaction, as the Secretary and the Board of Governors of the Federal Reserve System may jointly prescribe by regulation, which involves a financial institution as a payor or financial intermediary on behalf of or for the benefit of such other person.

Under the UIGEA,

(1) Bet or wager.— The term “bet or wager”—

(A) means the staking or risking by any person of something of value upon the outcome of a contest of others, a sporting event, or a game subject to chance, upon an agreement or understanding that the person or another person will receive something of value in the event of a certain outcome;

and

(D) includes any instructions or information pertaining to the establishment or movement of funds by the bettor or customer in, to, or from an account with the business of betting or wagering…

As previously noted, unlawful internet gambling is:

(A) In general.— The term “unlawful Internet gambling” means to place, receive, or otherwise knowingly transmit a bet or wager by any means which involves the use, at least in part, of the Internet where such bet or wager is unlawful under any applicable Federal or State law in the State or Tribal lands in which the bet or wager is initiated, received, or otherwise made.

The government will have to prove that the sites are:

1. In the business of betting or wagering

2. That they knowingly accepted a financial instrument (credit card, electronic funds transfer, check or the proceeds of any other financial transaction)

3. in connection with the participation of another person in unlawful internet gambling.

Factual Defense Available on Counts 1-4:

The Full Tilt and Poker Stars site owners have an excellent argument that they are not in the business of betting or wagering.

The site owners do not risk money based on the outcome of a contest of others. They charge a hosting fee, “the rake,” for providing a venue in which others can compete against one another.

Similarly, the players in the game are not betting or wagering on the outcome of an event competed in by others, they are competing themselves.

It appears to be the case that simply offering a poker game does not meet the statutory definition of being in the business of betting or wagering.

The sites have other defenses available as I outlined in my original post.

Illegal gambling business (counts 5-7):

§ 1955. Prohibition of illegal gambling businesses

(a) Whoever conducts, finances, manages, supervises, directs, or owns all or part of an illegal gambling business shall be fined under this title or imprisoned not more than five years, or both.
(1) “illegal gambling business” means a gambling business which—
(i) is a violation of the law of a State or political subdivision in which it is conducted;
(ii) involves five or more persons who conduct, finance, manage, supervise, direct, or own all or part of such business; and
(iii) has been or remains in substantially continuous operation for a period in excess of thirty days or has a gross revenue of $2,000 in any single day.
(2) “gambling” includes but is not limited to pool-selling, bookmaking, maintaining slot machines, roulette wheels or dice tables, and conducting lotteries, policy, bolita or numbers games, or selling chances therein.
(3) “State” means any State of the United States, the District of Columbia, the Commonwealth of Puerto Rico, and any territory or possession of the United States.

Available Defenses:

There are two defenses that arise from the statutory text (and others as outlined in my original post).

The first of these defenses is highly technical and relies on two judge made rules for interpreting the language of a statute. The first rule is that criminal statutes are construed (interpreted) in favor of the defendant. In other words, if there is doubt that a statute makes a defendant’s conduct illegal, then the doubt is resolved in favor of the defendant, and the defendant’s conduct is deemed legal. This rule derives from our belief in a presumption of innocence and our belief that you should have clear notice of what conduct is illegal.

The second rule is that when a statute contains a list of things that are prohibited, and then says “including, but not limited to,” then things that are like the things in the list are included, and things that are unlike the things in the list are excluded.

This is vital to the defense of the sites in this case. The list of prohibited gambling in the statute are all games that are where the actions of the bettor do not affect the outcome of the contest, and the bet is played against the house. Poker is neither a game where the actions of the bettor cannot affect the outcome nor is your poker bet played against the house. Thus, it cannot be included as “illegal gambling” by a list that defines illegal gambling with examples that are all games where the actions of the wagerer cannot affect the outcome of the game and the bet is played against the house.

The rule of construction requiring that any doubt here should be resolved in favor of the defendant site owners actually makes this defense very close to a slam dunk. It probably would not even go to trial, but, rather, would be dismissed as a result of a pretrial motion.

The second defense arises out of the factual and legal issue of where the sites conducted their gambling business. the government says that they operated in NY in violation of NY law, but it is not clear, for the purposes of this statute, that the sites can be said to have operated in NY (it is also not clear that the cited NY law prohibits offering poker, although this seems to be the case).

Bank and Wire Fraud (count 8 )

§ 1344. Bank fraud

Whoever knowingly executes, or attempts to execute, a scheme or artifice—

(1) to defraud a financial institution; or

(2) to obtain any of the moneys, funds, credits, assets, securities, or other property owned by, or under the custody or control of, a financial institution, by means of false or fraudulent pretenses, representations, or promises;

§ 1343. Fraud by wire, radio, or television

Whoever, having devised or intending to devise any scheme or artifice to defraud, or for obtaining money or property by means of false or fraudulent pretenses, representations, or promises, transmits or causes to be transmitted by means of wire, radio, or television communication in interstate or foreign commerce, any writings, signs, signals, pictures, or sounds for the purpose of executing such scheme or artifice, shall be fined under this title or imprisoned not more than 20 years, or both. If the violation occurs in relation to, or involving any benefit authorized, transported, transmitted, transferred, disbursed, or paid in connection with, a presidentially declared major disaster or emergency (as those terms are defined in section 102 of the Robert T. Stafford Disaster Relief and Emergency Assistance Act (42 U.S.C. 5122)), or affects a financial institution, such person shall be fined not more than $1,000,000 or imprisoned not more than 30 years, or both.

Available Defenses

It is important to note again that the bank and wire fraud count is independent of the gambling counts; that is to say, the sites cannot necessarily defend these charges simply by showing that online poker is legal.

I have argued on 2+2 that the site owners may have a defense to these charges that stems from the fact that, if online poker is legal, then the only money they ever obtained access to was money they were legally entitled to receive from players who wanted to send their money to the poker sites. In other words, they may be able to say that they had no intent to obtain anything they were not legally entitled to. This may or may not be a legitimate defense. The case law I have seen practicing attorneys post on 2+2 does not clearly indicate whether it will be or will not be, but leans toward suggesting that this defense will not fly.

If the law really is as simple as “it is a felony to lie to a bank,” then the site owners are nailed on this one, as far as I can see.

Money Laundering (Count 9)

§ 1956. Laundering of monetary instruments

(1) Whoever, knowing that the property involved in a financial transaction represents the proceeds of some form of unlawful activity, conducts or attempts to conduct such a financial transaction which in fact involves the proceeds of specified unlawful activity—

(i) with the intent to promote the carrying on of specified unlawful activity; or

(ii) with intent to engage in conduct constituting a violation of section 7201 or 7206 of the Internal Revenue Code of 1986; or

(B) knowing that the transaction is designed in whole or in part—

(i) to conceal or disguise the nature, the location, the source, the ownership, or the control of the proceeds of specified unlawful activity; or

(ii) to avoid a transaction reporting requirement under State or Federal law,

shall be sentenced to a fine of not more than $500,000 or twice the value of the property involved in the transaction, whichever is greater, or imprisonment for not more than twenty years, or both.

Available defenses:

The key here is that the the transactions must be moving proceeds of illegal activity. Thus, the money laundering case is dependent on the gambling charges. If the sites’ business was legal, then they can’t be convicted of money laundering.

I’m going to spend some time thinking about whether he bank and wire fraud charges can serve as the underlying illegal activity for the money laundering count, and I may revise this paragraph based on that. But off the top of my head, I don’t think that flies.

Hope this clears up some of the confusion that others are out there causing.

Full Tilt’s agreement

Poker Stars’ Agreement

They appear identical.

Full Tilt’s new message on its website appears alarming:

Full Tilt Poker Message to US Players

Full Tilt Poker has always maintained the highest levels of integrity and compliance with the law. Due to recent events, Full Tilt Poker is unable to accept ‘Real Money’ play from customers residing in the United States. However, please know that your funds are safe and secure. We are working with the United States Attorney’s Office in order to get players their money back as soon as possible.

To further clarify any confusion, although the government did not seize individual players’ accounts, it did seize the bank accounts in which those funds are held. At this time, the government has refused to release the seized bank accounts.

Full Tilt Poker continues to believe that neither its affiliated companies nor its executives violated the law in the United States, and it plans to mount a vigorous defense.

Agreement between the DOJ, Stars and FTP that returns the domain names to the sites for use outside the US, and allows for the return for US player funds.

This agreement substantially shortens the time in which it is likely that Stars players will see a return of their money, but Stars customers can have a high degree of confidence that they will receive all of their money relatively quickly. Stars’ Press Release is very emphatic on this point.

Based on the language of the FTP Press release, FTP players still need to be a little nervous. FT seems to be saying that not all player funds were in segregated player accounts, and some were seized by the DOJ. I HOPE that FTP is just talking about player funds that were in transit and were seized while in processor accounts, but FT has not specified that this is the case.

Previously, because I was getting mainly spam comments, I have had comments disabled on this page. I’m going to enable comments on my substantive posts, and ask that you only post questions as comments. I’ll answer the questions in subsequent posts.

Interviewed by The Hill, Representative Barney Frank (D-Ma), had some amusing comments aimed at the Black Friday indictments. My favorite was that the Obama administration is wasting resources:

“protecting the public from the scourge of inside straights,”

when they should be spending more effort investigating the housing crisis in an attempt to

“Go after the people responsible for empty houses, not full houses.”

I’m all in favor of a little levity, but I hope that Rep. Frank is also taking serious action. As the ranking minority member of the Hose Financial services Committee, and a leading proponent of legalizing online gambling, Frank should be leading the response to the indictments–mainly by applying pressure to have player funds released.

_______________________

The only other news of the day relating to the indictments appears to be that one of the payment processor defendants, Bradley Franzen, was arraigned today in federal court in New York City and pled not guilty. Bloomberg’s coverage is the least bare bones report I saw in a quick Google News search.

FYI: An arraignment is a very pro forma legal proceeding in which the accused is brought to court to enter a plea of either guilty or not guilty. Sometimes, maybe even usually, the court also sets bail, as was done here. Franzen apparently posted a $200,000 bail with the help of family and was released.

I’m disappointed that he apparently used his parents’ home as collateral for his bail, as this reduces the probability that he will hightail it to some warm and sunny extradition-free haven.

I’ve been continuing my research. At this point that means that I read the entire 80 page civil complaint seeking forfeiture of the property of the poker defendants indicted on Friday.

For players, there is a bit of good news in the civil complaint: Earlier, I posted this:

So the big question is: have the sites consistently maintained player funds in bank accounts segregated from the sites’ own money, or have they commingled their funds with those of the players?

I don’t know the answer to this question, but it seems likely to me that, at least as an accounting matter, the sites have the ability to prove that player deposits are separately accounted for, and can be proved to be player funds.

I now know the answer to this question, at least as far as Poker Stars is concerned. The civil complaint quotes Poker Stars’ web site as saying that player funds are always kept segregated from operating expenses. If true (and I have no reason to doubt it, that’s just vestigial lawyerly weasling) that means that there is little (almost no) risk of player funds on Stars being accidentally swept up in a forfeiture of the defendants’ property.

I was pretty sure this was the case when I posted earlier, but it’s good to have confirmation, and it’s even better to see that the government is aware that this is how it works.

I’m continuing to look into the Full Tilt situation, and I will update as soon as I have additional information.