View: Supporting California's Timeout For PokerStars

The Battle Over Online Poker In California And The Impact Of UIGEA

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Ed. note: The author of this op-ed, David Fried, is a California gaming lawyer.

There are many people, including me, who want to see online poker legalized in California.

Some wish the possible remaining stumbling block would just go away: how the legislation addresses suitability and tainted assets derived from illegal activity. They view these issues as arguments about the past.

Moreover, they argue that every online poker supplier and operator violated some law at some point, so the legislation should not have any restrictions on licenses or the use of assets.

Let the regulators make the “nuanced” decisions about the applicants on a case by case basis; but don’t put those decisions in legislation. Doing so might be unconstitutional.

While I understand the impatience, these arguments present a simplistic and convenient view, often confusing the legal and policy issues. These arguments also minimize the Legislature’s role in setting policy in legislation, and disregard the factual history of online poker about which there should be little debate.

Today’s amendments to the California online poker legislation, AB 2863, directly address the issues of suitability and tainted assets. The amendments are similar to Nevada law and constitutionally valid.

They exclude until 2022 persons who took wagers from US players after 2006, as well as delaying the use of any associated assets or brands. Amaya/PokerStars and its few business partners will oppose this, preferring no bill and no consumer protection to a bill that restricts them.

But if Chairman Adam Gray has the support of his Democratic Caucus and some of the Republicans, this bill will pass the Assembly Monday.

How we got here

Before October 2006, some (not all) of the early online poker operators took US customers openly and without regard to whether some state laws may have prohibited online poker.

Few state laws explicitly anticipated online poker, but many have always listed what gambling is permitted and by whom, and online poker was not on those lists.

In California, only licensed card rooms and tribes can operate commercial poker. Federal law was less clear. One federal court held that the federal Wire Act applied to sports wagering, not other forms of gambling. Thompson v. MasterCard Int’l Inc., 313 F.3d 257, 262 (5th Cir. 2002) (the Wire Act applies to “betting or wagering on sporting events or contests only.”).

In October 2006, Congress adopted the Unlawful Internet Gambling Enforcement Act (UIGEA) to prohibit certain financial transactions for gambling if the underlying gambling violated another federal or state law.

While other companies stopped taking US customers after UIGEA, PokerStars and Full Tilt continued. PokerStars used its untaxed and outsized US revenues to hammer its competition and grow its global market share from 10.6 percent before UIGEA to more than 55 percent by 2011.

In April 2011, the federal government unsealed a civil forfeiture complaint against PokerStars, and a criminal indictment against some of PokerStars’ senior executives and various bank executives.

The allegations used the UIGEA date, alleging that from at least November 2006 through March 2011 the PokerStars entities and the identified individuals violated UIGEA and the Illegal Gambling Business Act (IGBA), which is based on violations of state gambling laws.

The indictment states that the defendants conspired to commit money laundering and bank and wire fraud. According to the complaint and indictment, PokerStars and its agents attempted to disguise transactions using phony websites or companies, so that money from players would appear to be consumer payments to non-gambling businesses.

PokerStars’ former director of payments, Nelson Burtnick, pled guilty to conspiracy to commit unlawful internet gambling, bank fraud, money laundering and related gambling offenses.

Mr. Burtnick testified under penalty of perjury that he, PokerStars and Full Tilt employees, “and company executives worked with . . . third party payment companies to provide U.S. payment solutions that misled or deceived their U.S. banking partners by disguising the nature of the transactions to appear to be something other than the proceeds of poker.” Other companies did the same in order to transact with US customers after 2006.

On July 31, 2012, PokerStars settled the civil forfeiture action by paying $731 million to the federal government without admitting liability, and acquiring Full Tilt at the same time.

The settlement did not sanctify PokerStars’ participation in future legalized online poker nor did it suggest to state governments that PokerStars must be allowed to participate in state-regulated online poker. It is up to each state to set its acceptable standards for licensure and for the use of any assets developed from illegal activity.

In addition, after the State of Washington amended its laws to explicitly bar online poker PokerStars is reported to have continued operating in Washington for another four years.

In Australia, the Federal Interactive Gambling Act of 2001 prohibits “interactive gambling”, i.e. online casino and poker games. But PokerStars continued to take customers from Australia through PokerStars’ website. In several other jurisdictions, the laws bar online poker even if there is no active prosecution.

PokerStars’ share of the global market is now 70 percent, with the other 500 global operators dividing the rest. PokerStars’ dominant global market share is unarguably based on its continuing to take US customers after UIGEA.

With its US revenues, PokerStars developed and funded the most game and tournament options, and the largest prize tournaments and promotions. PokerStars has spent hundreds of millions of dollars on marketing and promotion in the US.

Through 2011, PokerStars also built a list of the names, addresses and email addresses of hundreds of thousands of California residents who have already played online poker for real money, and most people now keep their email addresses for several years.

PokerStars knows which 20 percent of those customers generated 50 percent of the revenues. So while competitors can advertise promotions through mass media to the general public at a high cost per customer, PokerStars can target even better offers to the most valuable players using emails that cost fractions of a penny.

The brand, software and a usable customer list derived from PokerStars post UIGEA activity provide it with a huge competitive advantage.

Suitability and phantom constitutional issues

The test for gambling license suitability is clearly more than just whether you have already been convicted of a criminal offense.

Suitability asks whether an entity or person is qualified to hold a gambling license based upon their compliance with laws, honesty, integrity and associations so that there is no danger of unsuitable, unfair or illegal practices, methods or activities. Gambling licensing statutes often contain categorical grounds for denying gambling licenses that go well beyond just a criminal conviction.

So the argument, “we have not been convicted of anything,” and “our settlement does not admit guilt,” does not determine suitability. In addition, those companies that continued to take US customers post-UIGEA fall into their own category.

While some would argue that any violation of gambling laws even in 2002 is just as relevant, unarguably those companies that after 2006 continued to take US customers operated with impunity in also violating UIGEA and US banking laws.

They operated with a higher level of culpability which merits more serious consequences. This is hardly an arbitrary or “lazy” distinction. The law frequently assigns greater consequences to a person’s second (and even larger) bite at the apple.

Individual determinations may be left to regulators, but legislation can always draw categorical distinctions and give guidance to regulators beyond mere qualitative terms. Using conduct after 2006, especially conduct that escalated in its severity, to draw distinctions in legislation addressing suitability and the use of tainted assets reflects a permissible and well considered legislative judgment.

That is why Nevada in legalizing online poker also used the 2006 date of UIGEA in its legislation, and without legal challenge.

The State’s police powers permit the state to deny gambling licenses to applicants or condition their participation on non-arbitrary state requirements, so the amendments are constitutional and within state police powers.

This is also the legal conclusion of Professor Nelson Rose, who published his legal analysis in July 2014 demonstrating that PokerStars’ legal arguments are wrong. He wrote:

“The common law and public policy of every state hold that gambling is an illegal activity. State-licensed gaming is an exception to the general rule. Like any other exception to common law, gaming, including Internet poker, is strictly construed in favor of limiting the activity. This allows the state to deny licenses to applicants who do not comply with the state’s requirements. … Statutes and regulations controlling gaming licenses often expressly go beyond criminal convictions as reasons for denying gaming licenses. … I am not aware of any authority that has questioned or overturned these standards … Prof. Tribe was pulled into the fight over legalizing online poker by PokerStars, which wanted him to declare the latest bills unconstitutional. So Prof. Tribe’s role was more as a lobbyist than a lawyer. Because the problem with all online gambling proposals is much more political, than legal. Prof. Tribe’s press release, declaring that a court would find the “bad actor” provisions unconstitutional, is an attempt by PokerStars to convince legislators to take out those restrictions, or vote against the proposed online poker bills. Prof. Tribe’s statement provides cover for legislators who have been lobbied to vote against the bills as they are now written.”

Tainted assets

Another way legislation can and should address these issues is by separately considering the use of assets developed from illegal activity, or tainted assets.

The proposed amendments to AB 2863 now do that. California gambling operators refrained from offering games over the internet and did not develop similar tainted assets.

Allowing tainted assets now to be used against them or any other legitimate operators is unfair and anti-competitive. Permitting tainted assets to be used also provides an incentive for illegal activity.

People can develop assets illegally and sell them for an enormous gain if the “buyer” can be licensed and use the assets in regulated markets. Allowing the use of brand names associated with past illegal activity too would send the message that compliance with gambling laws is optional.

Why these issues should be addressed in legislation

There are forceful policy reasons why these issues should be addressed in the legislation rather than entirely punted to regulators.

California businesses will not spend tens of millions of dollars each before launch on capital investment if market competition is a pretense from the outset or there is uncertainty over the use of tainted assets.

This will cost California hundreds of millions of dollars in economic investment and tens of millions of dollars in fees and tax payments. Instead of a robust market with 6-8 competitors, we will have far fewer license applicants and less money for the state.

The notion that these judgments are too “nuanced” for California legislators is also insulting. The issues were not too nuanced for Nevada legislators, and regulators cannot act without policy direction from the Legislature.

Appropriate legislation can and should make categorical distinctions, lay out policy objectives, and provide the regulators with the powers they need to carry out the Legislature’s objectives.

If PokerStars or any other company wants to balk at elected legislators making these decisions, then they will be the ones obstructing the legislative regulation and protection for players they have been saying is desperately needed.

They may calculate that if online poker markets open in other states, California will have to follow suit, but they are wrong. California does not have to legalize online poker based on what is best for the companies that flouted the law.

- David Fried attended the University of California at Berkeley, receiving his JD in 1988. He represents card rooms and gaming suppliers in California. He appears before the California Gambling Control Commission in licensing and regulatory matters and has processed gaming license applications in the United Kingdom, Canada and many several US states.
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