Until Black Friday, April 15, Americans had about $16 billion per annum in action on PokerStars, Full Tilt, Absolute Poker, and a few smaller Internet sites. Moms, cops, doctors, pizza deliverers, soldiers from Korea to Afghanistan — more than 2 million citizens all told — were playing our national card game online. Most played for fun, losing or winning a few hundred bucks a year. Maybe four or five thousand made a living at it, depending on what you mean by "a living." The most successful pros were also paid long money — as much as $10 million a year — to rock the logo of one online site or another, though everyone was careful to use the .net of the play-money sister sites, not the .com, where real money would be at stake. Online poker had been in legal limbo since October 2006, when the Unlawful Internet Gambling Enforcement Act was signed by President Bush, so people were hedging their bets.
Meanwhile, NBC and ESPN continued to broadcast in prime time multi-million-dollar tournaments, including the World Series each summer. The tougher, more sophisticated cash games of High Stakes Poker also scored decent ratings for GSN. All of these programs were sponsored at least in part by the online sites, with some pros regularly appearing on both the shows and in the commercials. Tom "durrrr" Dwan, Daniel Negreanu, Phil Ivey, Antonio Esfandiari, and Doyle Brunson couldn't walk through a mall or down a concourse without being asked to stop for pictures and autographs. Brunson's craggy visage, always topped by a Stetson, was the one-headed Rushmore of poker. The impish, outspoken Negreanu was more famous both here and in his native Canada than all but a few NHL studs.
On Black Friday, our government shut down the three most popular online poker sites. Instead of access to their favorite tables, American players were confronted by the seals of the FBI and Department of Justice: "This domain name has been seized by the Federal Bureau of Investigation." Not just the domain name, either, but access to each player's account balance, some of which reached well into mid-seven figures.
In New York's Southern District court in Manhattan, U.S. Attorney Preet Bharara called a press conference to announce a nine-count criminal indictment.
- 1. Unlawful Internet Gambling Enforcement Act Conspiracy
2. Unlawful Internet Gambling Enforcement Act: PokerStars
3. Unlawful Internet Gambling Enforcement Act: Full Tilt Poker
4. Unlawful Internet Gambling Enforcement Act: Absolute Poker
5. Operation of an illegal gambling business: PokerStars
6. Operation of an illegal gambling business: Full Tilt Poker
7. Operation of an illegal gambling business: Absolute Poker
8. Conspiracy to commit bank and wire fraud
9. Money laundering conspiracy
The three companies allegedly arranged for the money received from U.S. players "to be disguised as payments to hundreds of non-existent online merchants purporting to sell merchandise such as jewelry and golf balls." The case is United States v. Scheinberg, after Isai Scheinberg, the Israeli-Canadian founder of PokerStars. Also indicted were Ray Bitar and Nelson Burtnick of Full Tilt, Scott Tom and Brent Beckley of Absolute/UltimateBet, and six others who allegedly ran the payment processors. All face years in federal prison if convicted.
Full disclosure, I'm hardly unbiased about the UIGEA. I've been playing poker since my mother's parents taught me the game in the cottage they were building near Lake Mahopac, 40 miles north of their Bronx apartment. In the summer of 1960, the cottage had a roof and a floor but no solid walls yet. While my grandfather and uncles cut Sheetrock, they polished off their fair share of 16-ounce flat tops of Schlitz. After dinner, by the light of two lanterns, we played five-card draw and listened to Red Barber calling Yankee games on a little transistor. I was going into fourth grade as unworldly as altar boys get, though I did dare to spit my watermelon seeds directly outside through the joists.
The chips were red, white, and blue plastic, with TMN in the middle for Thomas N. Madden. A grand total of seven bucks might be at stake in the game. The first few times, the grown-ups let me use a cheat sheet listing the ranks of the hands, but soon I was insisting I'd never needed it. The rules were set down by that ultimate authority, Edmond Hoyle, or in Grandpa Tom's argument-settling citations, "Dat's accawdin' to Hurl." Each player was dealt five cards face-down, and you needed a pair of jacks or better to open, though when someone else bet, you could raise and reraise them with anything. I loved drawing two to a flush or standing pat and raising with nothing. Raking in a pot on a bluff was the first wicked thrill of my life, plus I'd done it while playing by the rules. What a game! Even losing could have its advantages. Once Uncle Thomas began to "let Jimmy drown his sorrows" with sips of Irish or Schlitz, my days in a cassock were numbered.
Forty years later, on assignment to cover the WSOP for Harper's, I used my advance to enter a one-table satellite. I won a seat in the Main Event and, getting even luckier, finished fifth for $247,760. I played against and later interviewed the winner, Chris Ferguson, whom I featured in both the Harper's piece and the book-length version, Positively Fifth Street. By the time that came out in 2003, I'd also met Howard Lederer, Ivey, and others who were planning Full Tilt.
But the first site I was invited to represent — because of my standing as a writer, not as a player — was Stars. The problem was that I'd become the poker columnist of the New York Times, which has a policy that prohibits receiving even small gifts from anyone involved in the industry being covered. Which job to keep wasn't quite Sophie's Choice, but it bent my mind nevertheless. By 2005, I was deep into researching Cowboys Full. My urge to write poker's history clashed with my Times editors' insistence that I write about strategy, an area in which — as my opponents will corroborate — I am less than Harringtonian. (Not exactly the phrase they typed in the chat boxes, though. Usually it was more along the lines of "smfd mcAnus u spewtard!!!!!!!!!!") I wound up choosing to represent Stars while working full-time on the history. But as Action Dan Harrington himself will tell you, poker is hardest when your timing is off. My last column for the Times appeared a few months before the UIGEA prompted Stars to let go most of their sponsored pros, so I lost both those jobs in '06.
Which is why I felt so fortunate to be asked by Howard and Chris in '07 to work as a Friend of Full Tilt Poker. I was given no tournament backing, and of course had no ownership stake. I was paid by the hour to chat with opponents in micro-stakes games. My family was depending on this money when the government shut down my job and froze the $19,578.58 in my account.
Bluenosed Republicans had been trying to ban online poker since 1998 but had failed to garner anything resembling majority support. In October 2006, as the 109th Congress was preparing to leave town to campaign for the November 7 election, a small crew of die-hards threw together the UIGEA and sneakily attached it to the SAFE (Security and Accountability For Every) Port Act. Five years out from 9/11, who would vote against safer ports? The tally in the House was 421-2. Without getting a chance to even read the attachment, frazzled senators voted 98-0 to protect the country from dirty bombs hidden in shipping containers. No one was trying to ban online poker.
No one but the usual suspects: Moralizers pushing what they called an "American Values Agenda," principally Representatives Bob Goodlatte (R-Va.) and Jim Leach (R-Iowa), and Senators Jon Kyl (R-Az.) and Bill Frist (R-Tenn.). After President Bush signed it into law, the UIGEA was widely viewed as the latest instance of him and his cronies using fear of terrorism to pass unrelated parts of their agenda that appeased their fundamentalist base.
The UIGEA made it a federal offense, punishable by up to five years in prison, for a business to accept payments "in connection with the participation of another person in unlawful Internet gambling." Among its abundant deficiencies, it failed to define "unlawful gambling." Most jurisdictions apply the Dominant Factor Test to determine if a contest is a lawful game of skill or unlawful game of chance. If skill determines the outcome more than 50 percent of the time, the contest is legal.
A lot of the confusion about this stems from the fact that it does take some gamble to play poker well. What folks need to remember is that this is also true of baseball, football, hockey, bridge, Scrabble, investing, and most life decisions, yet no one brands them games of chance. Like general managers, fantasy leaguers, and sabermetricians, strong poker players use math, money management, pattern recognition, acting, psychology, deductive logic, and strategic aggression to outmaneuver less skillful players, who nonetheless line up around the block to compete with them. Why? Because the luck factor — the variance — is high enough to let them win just often enough to keep them coming back. In the medium and long run, the best players win most of the money.
Freakonomics Guy, a.k.a. the William B. Ogden Distinguished Service Professor of Economics at the University of Chicago Steven Levitt, recently demonstrated that the success rate of strong poker-tournament players (54.9 percent) roughly matches that of the top baseball teams (55.7). No one denies baseball is a game of skill. Nor has anyone met a professional craps or roulette player, but we all know a poker pro or two. Levitt also shows that the difference between good and bad poker players is "highly statistically significant and far larger in magnitude than those observed in financial markets." To lump poker together with suckers' games like blackjack and craps, lotteries and bingo is to simply betray your ignorance of how these games work — of who wins, by how much, and why.
If skill games are lawful, it's reasonable to argue that payments to or from an online poker site are lawful as well. At the very least, online poker's legality needs clarification before anyone goes to jail over it. Playing poker online isn't prohibited by federal law. To defend the UIGEA by saying it doesn't keep freedom-lovin' Amurican individuals from playing it online ignores the large fact that making it impossible for poker sites to operate, and for winners to be paid, amounts to the same darn thing.
"I can't believe the underhanded way this new bill was passed," drawled Mount Brunson. "What does Internet poker have to do with the SAFE Port bill? We Texans don't like this kind of trickery. Texas is a state where you can see an enemy coming, a friend is a friend, and you look someone straight in the eyes." Ethan Ruby is a young Californian unable to play in casinos since being paralyzed in a car accident. "Internet poker is a great source of enjoyment and allows me to compete on an equal playing field with people from around the world," he said. "I can't understand how President Bush would take this game away from me and millions of other Americans."
There's so much bipartisan support for licensing and taxing online poker, it's hard to know where to begin. Writing together for The Hill, Louis Freeh (a federal judge appointed by George H. W. Bush, later appointed FBI director by Bill Clinton) and Tom Ridge (a Republican who served as secretary of Homeland Security and governor of Pennsylvania) called the UIGEA "the 21st-century version of the Volstead Act." Freeh and Ridge recognize poker as "a game of skill" that "millions of Americans already play with family and friends or just to have fun." Instead of banning it, they recommend "a strict regulatory framework for licensing and enforcement of online poker [to] provide a safe, legal environment for this activity to continue."
What about bad, reckless players who might lose more than they can afford? Well, as former House Financial Services Committee chair Barney Frank (D-Mass.) drily notes, there's "a practice around today that causes a lot of problems, damages families, people lose their jobs, they get in debt. They do it in excess. It's called drinking. Prohibition didn't work for alcohol; it doesn't work for gambling."
As far back as 1840, Abraham Lincoln weighed in on a bill proposing to ban the consumption of alcohol. Prohibition, said the lanky Republican, "goes beyond the bounds of reason in that it attempts to control a man's appetite by legislation and makes crimes out of things that are not crimes. A Prohibition law strikes a blow at the very principles upon which our government was founded."
Many Republicans today are Lincoln's polar opposite. They contend that gambling destroys the moral fiber of society, only to cynically carve out exemptions for online betting on sports, dog racing, or horse racing, the stock market (in which trillions are wagered), or lotteries — the worst bet of all, often made by those who can least afford it. A Bloomberg editorial noted the odds of winning the Powerball grand prize are 1 in 195,249,054, calling it a "monopolistic enterprise [that] randomly rewards a very few people with a very large amount of money for doing very little. Oddly, most states, and the federal government, consider wagering online on a card game — in a fair fight, against other players of varying skill — a moral outrage." Oddly here being a courteous word for "bleeping hypocritically."
The Bloomberg editors remind us that the UIGEA is "an unclear and hurriedly assembled framework that for years left many players under the impression that online gambling was illegal but tolerated. It prevented businesses from knowingly accepting payments for 'unlawful' gambling, but didn't clearly define what was unlawful, or specifically address poker." They estimated that taxing online poker would yield a windfall of $41.8 billion over 10 years for the federal government, $30 billion for states.
By early 2010, as popular and congressional support continued to gather for defining "unlawful gambling" more clearly or replacing the UIGEA with something more sensible, Senator Kyl decided to block six Obama appointments to the Department of Treasury, positions critical in helping to avoid a second recession, unless the UIGEA was enforced, flaws and all. Put that in your juice box and suck it. Want safer ports? Ban online poker. Need a full team at Treasury during the biggest financial crisis since the '30s? Ban online poker. Democracy in action, Jon Kyl-style. A sanctimonious liar on Planned Parenthood, the effects of gambling, and other issues, Kyl once had a spokesman say, "Jon Kyl's remark was not intended to be a factual statement." Even conservative commentators ripped Kyl for blocking appointments crucial to the country in favor of a pet issue affecting one smallish industry. Fox Business columnist John Stossel accused him of promoting a "Nanny-State" and being "hysterical about gambling." Another economist called Kyl's blocking maneuvers "disgraceful and insane."
In the face of Kyl's hysteria, and with ads for the big three sites ubiquitous on TV and in magazines, Bharara may have had little choice but to fire a few shots across his bow; if they happened to demolish a bridge or crater a flight deck, them were the breaks. At the same time he seems committed — if not to protecting our right to play poker online, at least to making sure we got our money back from sites he shut down. On April 20, he entered into a domain-name agreement with all three, but only to let them refund the entire deposit of every U.S. customer.
Most of us were still mighty pissed that we couldn't play poker in our pajamas anymore, but few thought our bankroll was also in jeopardy. The WSOP wouldn't begin for six weeks, and we had little reason to doubt the promises that our money was "safe and secure," especially when Poker Stars began to reimburse its players on April 23. We felt even more sanguine when Dwan and Phil Galfond tweeted a pair of guarantees: $1 million each from their own pocket if Stars (represented by Galfond) or Tilt (which had recently signed Dwan) didn't reimburse us. Galfond set his payback date as Hanukkah 2012. Dwan promised his million if Tilt hadn't paid by late the same year — perhaps, because he was Catholic, on Christmas.
So it was extra good news for Galfond that by May 14 Stars had reimbursed all U.S. customers, earning the respect of the global poker community. Even so, it was hardly surprising. The two biggest sites obviously had to maintain their financial integrity if they wanted to stay in business in the rest of the world. The third site, Absolute/UB, had been considered squirrelly at best since one of its insiders, Russ Hamilton, was found to have cheated UB players, beginning in May 2004, with a "superuser" account that revealed his opponents' hole cards. The defrauded players were eventually reimbursed $22.1 million, but the site's reputation never really recovered. Few were shocked when Absolute and UB failed to reimburse U.S. customers. Blanca Games, which owns both, presented a liquidation proposal to Bharara before going belly-up.
But surely the owners of Tilt, which had never been accused of cheating or other chicanery, wouldn't risk their global rep by stiffing Americans out of $150 million, but don't call them Surely. Because instead of players' funds, Tilt kept releasing one blandly infuriating statement after another. "Full Tilt Poker would like to assure all players that their funds remain safe and secure. Processing of both deposit and withdrawal requests is proceeding as normal. Your money remains safe, secure and accessible at all times. Full Tilt Poker remains committed to the protection of our players' security and legal rights, and will continue to provide the best and safest online poker room available worldwide."
Accessible at all times? Withdrawal requests processing normally? When not a single dime had been reimbursed?
A variety of class-action lawsuits were filed, for sums ranging between $150 million and $900 million, in addition to the $1 billion or so Bharara was attempting to seize. Full Tilt went silent, often for weeks at a time. Yet many Tilt players, yours truly included, continued to hope against hope. The company had operated fairly and squarely for years. There might be no honor among thieves, but the last thing you'd expect poker players to do was steal from fellow players. They'd do their level best to rob you at the table, but not anywhere else. Even if they did have larceny in their hearts, what were they gonna do — let foreign players watch them screw us? Not paying us back would slaughter their platinum goose.
On May 31, Day 1 of the WSOP, as many of us were trying to cobble together a bankroll for the seven-week tournament, Phil Ivey sued Tilt, the company of which he was still the main face. "I am deeply disappointed and embarrassed that Full Tilt players have not been paid money they are owed. I am equally embarrassed that as a result many players cannot compete in tournaments and have suffered economic harm." He was thought to own 5 percent of the stock, more than any player with the possible exception of Lederer and Ferguson. Even more disturbing was the amount Ivey sued for, $150 million, which just happened to be what he claimed Tilt owed its players. He'd also be skipping the entire World Series. "I do not believe it is fair that I compete when others cannot. I am doing everything I can to seek a solution to the problem as quickly as possible."
Opinion in the poker world, particularly among Tiltheads, was split. Ivey was either leading the charge to get us repaid, as selflessly as if Michael Jordan had boycotted the '98 NBA Finals to bolster the players' union — OK, that would never happen, but still — or Ivey was a long-tailed rodent deserting a sinking ship from whose coffers he'd been lavishly compensated. (A million a month was the rumor. How else could he afford to throw dice and make prop bets for seven- and eight-figure sums?) Wouldn't the suit make it harder for Tilt to pay us back? "We all respect Phil as a player," one Stars rep schadenfreudistically told me, "but was it ever a good idea to make him, Bitar, and Howard your bankers?"
Tilt countersued. "Contrary to his sanctimonious public statements, Phil Ivey's meritless lawsuit is about helping just one player — himself. In an effort to further enrich himself at the expense of others, Mr. Ivey appears to have timed his lawsuit to thwart pending deals with several parties that would put money back in players' pockets. In fact, Mr. Ivey has been invited — and has declined — to take actions that could assist the company in these efforts, including paying back a large sum of money he owes the site. [The] company looks forward to presenting facts demonstrating that Mr. Ivey is putting his own narrow financial interests ahead of the players he professes to help."
It was sort of like watching Berkshire Hathaway and Warren Buffett sue each other, or your dad sue your mom for the exact amount of your college fund, or whatever it was like, it was Kodiak bearish news for all Tilters.
Ivey sat out the whole Series, as did Lederer and Ferguson, but most of the rest of Team Tilt showed up at the Rio and played. Dwan, Phil Gordon, Erik Seidel, John Juanda, Jennifer Harman, Allen Cunningham, et al. were counting on people to understand they weren't part of any mismanagement their sponsor was guilty of — just as you wouldn't blame Derrick Rose if adidas were late on its Oregon tax bill. From what I could tell, most players got that. Not all. Juanda was called a "thieving prick," "a fake and disgusting human being," and physically threatened by a hefty, bearded Brit until Rio security arrived, though it wasn't entirely clear the beef had anything to do with Juanda's place on Team Tilt. Outside the Rio, Gordon obtained a dismissal from a class-action RICO lawsuit filed against "individuals associated with Full Tilt" when his lawyer was able to show he never participated in any operational decisions. Nor was WSOP action hurt very much by the shutdown. More than 80,000 entrants from 105 countries put up $205,540,933 (the most ever) to compete for the 61 bracelets.
On September 20, Bharara raised the stakes even higher. He amended his original complaint to allege that Tilt's board of directors defrauded players by misrepresenting that their funds were available for withdrawal at any time. Then came the kicker: They'd used those funds to pay themselves $443,860,529.89. "Full Tilt was not a legitimate poker company, but a global Ponzi scheme," he said. "Insiders lined their own pockets with funds picked from the pockets of their most loyal customers while blithely lying to both players and the public alike about the safety and security of the money deposited with the company."
He alleged that between April 2007 and April 2011, Bitar received about $41 million, Lederer $42.8 million, Furst $11.7 million. Ferguson was allocated $87,486,182.87 in distributions, of which he'd received about $25 million. The other $260 million had been dispersed among owners with fewer shares. Most of the money had allegedly been transferred to accounts in Switzerland and other overseas banks, and Bharara released the account numbers. He said the company had faced a growing shortfall in 2010 because it was unable to collect funds from U.S. players. To maintain its "safe and secure" image, it credited players with about $130 million it had never actually received. When players put the phantom funds into action and inevitably lost part of them to opponents in other countries, a massive shortfall developed. Bharara claimed the practice continued even after April 15, and that in June, Lederer and Bitar reported to fellow owners that there was only $6 million on hand, with global liabilities of more than $300 million.
Assuming the allegations are true, did that make Full Tilt a Ponzi scheme or a badly run company? Ponzi schemers solicit new investors by promising to invest their funds in activities they claim will generate high returns with little or no risk. They operate a pyramid scheme, relying exclusively on false promises and fraudulent accounting to make money instead of engaging in any legitimate activity. Is that really what Tilt's founders did?
Bankers and CEOs pay themselves eight-figure sums even when investments tank and companies fail, without being charged with a crime, let alone equated with Bernie Madoff. Poker players also couldn't help noting the difference in scale: between $130 million and $294 million lost by Full Tilt versus hundreds of billions by the Too Big To Fail banks. Yet our financial services industry got bailed out by taxpayers and continues to operate full speed ahead, while Internet poker got droned. If no federal statute outlaws playing poker online, why did the entire industry have to be shut down to prosecute a dozen alleged bad guys?
In future columns, I'll follow the resolution of the indictments, the sale to GBT, the DOJ's mechanism for reimbursing U.S. players. If the UIGEA is overturned, what law will replace it? Which brick-and-mortar casinos will obtain licenses to serve what may well become, when legal, a $100 billion online-poker market? When might Americans, who invented the freakin' game in the first place, be able to play it again on the Internet?
James McManus is the author of Positively Fifth Street, Cowboys Full, the novel Going to the Sun, and seven other books. He has written for the New York Times, the New Yorker, Foreign Policy, Harper's, The Believer, and espn.com. Counterintuitively, perhaps, he is @jimbosweetness.
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