I. Nelson Rose — Black Friday: a step too far

As Black Friday‘s dust settles, Prof. I. Nelson Rose‘s latest Gambling And The Law® blog post surveys the landscape and tries to determine the ultimate winners and the losers.

I-Nelson-RoseCan a government be charged with war crimes, if the war is only one of intimidation?

The U.S. federal Department of Justice isn’t blowing up buses. No one has died. But while Palestinian terrorists can only close down Israeli pizza parlors; the DoJ stopped online poker sites from doing business anywhere in the world – including where poker is 100% legal.

On Friday, April 15, 2011, the DoJ seized the .com names of five of the biggest poker sites. It is not even clear that online poker is illegal in every state and territory of the U.S. But players in countries like England, where it is indisputably legal, also found themselves unable to access their favorite sites.

This is a door the U.S. should never have opened. The next to step through could be an Islamic country, which outlaws alcohol, seizing the worldwide domain names of every retailer and restaurant that advertises beer or wine.

And the DoJ also effectively froze the money deposited by hundreds of thousands of American players, who had done nothing wrong. There is no federal law against merely playing poker. Half the states do have mostly ancient laws on the books making it a crime, sometimes, to make a bet. But in the other half, it is not a crime to even bet with an illegal operation.

This is true of New York, where the DoJ’s legal actions were filed. The criminal indictments charged the online operators under a statute, 18 U.S.C. §1955, which makes it a federal felony to be a large business in violation of state anti-gambling laws. The only state laws cited are New York’s Penal Law 225 and 225.05, which clearly do not apply to mere poker players.

Black Friday saw widespread panic among players, and the threat of a worldwide bank run on online gaming operators. By Wednesday, the DoJ appeared to realize it had way overstepped its power, and that it is losing the public relations war.

On April 20, Preet Bharara, the U.S. Attorney in Manhattan who had seized the domain names, announced that an agreement had been reached with PokerStars and Full Tilt Poker. Technically, the .com names remain seized. But the DoJ will now permit the companies to operate money games outside of the U.S., which they always had the legal right to do anyway. American players can also go to the .com sites and get their deposits back.

Bharara issued the following statement: “No individual player accounts were ever frozen or restrained, and each implicated poker company has at all times been free to reimburse any player’s deposited funds.”

Technically true, but misleading. Exactly how were players supposed to get their money, when they could not log on to the seized .com sites? Did Bharara tell the operators they could refund players’ deposits, and how they were suppose to do that? Even today the DoJ has not worked out all the details on what it will allow.

Notice that the announced agreement is only with PokerStars and Full-Tilt. Those companies have licenses and approvals by foreign jurisdictions, including France, Italy and Alderney, which they want to protect. They also would like to someday return to the U.S., once the laws are changed. Absolute is licensed by the Kahnawake tribe in Canada and has always taken the position that it does not have to be overly concerned with the laws of Canada, the U.S., or any other jurisdiction. So it is standing tough. In fact, it is still accepting money players from the U.S.

Traffic on the seized sites seems to be down, but not precipitously. Americans must have quickly discovered that they can sign up to the same operators through .eu and .uk sites.

Hit as hard have been media outlets which depend on poker ads. No reason to spend money on PokerStars.net commercials if players can’t be converted onto PokerStars.com. That is probably the real reason for ESPN cancelling so many poker TV shows.

Traffic on rival sites that continue to take bets from the U.S. have increased, but not spectacularly. Players do have their favorites, and don’t necessarily trust the other sites. Plus, their money is still tied up.

Purely European companies, like Playtech, and the not-quite Internet poker sites are also doing well. PurePlay.com, a subscription poker site with free alternative means of entry, based in San Francisco, received $2.8 million in new funding after Black Friday. And Atlantis Internet Group Corporation, which is setting up legal closed-circuit computer linked poker on Indian land, saw its stock rise 400% in the last few days.

Brick and mortar card clubs and casino cardrooms have seen modest increases in the number of poker players. The first weekend after the online players’ funds are freed up will show whether the crackdown on Internet competition can help save Atlantic City.

In the long run it will probably be the largest landbased operators, like Caesars, and online sites which had already pulled out of the U.S., led by Bwin-Party and 888, that will be the biggest winners. The indictments reinforce proponents’ arguments that the states should legalize intra-state poker, so that the operators and their computers and payments processors will be physically here to be taxed and regulated.

The major obstacle is political. The same political and economic forces that allow us to even talk about legalizing Internet poker also stand in its way. There is so much legal gambling in the U.S. that allowing one more form is no big deal. But that also means there are well-established local operators who will fight to prevent outsiders from coming in to create new competition.

Each state will create its own formula for extracting as much money as possible without alienating existing local operators. Atlantic City casinos companies have enough money that there is no reason to open New Jersey online gambling to foreign bidders. In California there will be at least three licenses: one for a consortium of the state’s card clubs, the same for its gaming tribes, and at least one for an outside operator who can bring $200 million cash up front to the table.

Nevada casinos may want a federal law to prevent them having to compete against politically powerful local operators in 50 different states; 51 counting the District of Columbia. But the recent indictments and stalemates in Congress prove that the states are where the action is, and is going to be, until well after the 2012 election.

© Copyright 2011, I. Nelson Rose, Encino, California. All rights reserved worldwide. Gambling and the Law® is a registered trademark of Professor I. Nelson Rose, www.GAMBLINGANDTHELAW.com.