Kentucky Supreme Court's judgment includes almost $900 million in damages plus over $400 million in compound interest.

Flutter Denied Court Rehearing on $1.3 Billion Judgment in Kentucky, Considers Appeal

Flutter is feeling flustered. The online gambling behemoth announced yesterday it failed to have a $1.3 billion court judgment against it overturned.

Flutter comprises several brands including, in the US, FanDuel, PokerStars and Fox Bet.

The Kentucky Supreme Court denied Flutter Entertainment‘s petition for a rehearing of what the same court already decided on Dec. 17, 2020. As such, Flutter remains on the hook for the full $1.3 billion the state says it owes.

According to Kentucky.com, lawyers for the state have already begun their efforts to collect the first $100 million. This will be in the form of bonds posted by the company after in order to begin the appeals process in 2015.

The case stems from PokerStars’ illegal operations in the US prior to 2011, long before Flutter acquired the company. Kentucky sued PokerStars for illegally collecting wagers from online poker players. The state is known for the Kentucky Derby, which generates hundreds of millions in bets annually. Yet Kentucky has been slow to adopt more modern forms of gambling, including online poker.

Flutter seems to be hoping for a legal miracle

Flutter stated it strongly disagreed with the court and will confer with its legal advisors about appealing to the US Supreme Court, among other avenues of redress.

The Supreme Court hears between 100 and 150 of the more than 7,000 cases sent to it annually. While not impossible that the Supreme Court will accept the appeal, it’s extremely unlikely. The company would need to find some creative grounds on which to file the appeal, since ordinarily, a state Supreme Court’s ruling on a matter of state law would be final.

Ever since the Supreme court’s ruling in December, Flutter has been resigned to paying some amount. It feels that the amount the court has imposed is far too large, however, and thinks it should be reduced.

The company reiterated this opinion in Thursday’s announcement:

“Flutter remains confident that any amount ultimately paid to resolve this matter will be a limited portion of the reinstated judgment.”

The company’s Mar. 2 earnings report includes a figure of $100 million as the likely payout for the case, so Flutter is hoping for an order of magnitude reduction. It hasn’t gone into any specifics about how it hopes to achieve such a reduction, however.

Why is the judgment against Flutter so high?

By affirming the Franklin Circuit Court‘s decision in Kentucky vs. Stars Interactive, the Kentucky Supreme Court reinstated what was an $871 million judgment in 2015. To this, it added 12% annual interest to arrive at the $1.3 billion figure.

That lower court’s calculations hinge on the idea that Kentucky gamblers lost nearly $300 million playing on PokerStars. Most of that was lost to other players, not the site, and the amount includes money that a player won and then subsequently lost, not only their initial deposit. Nonetheless, the court insisted that PokerStars was liable for the full amount.

Applying Kentucky’s gambling loss recovery laws, the court tripled the amount of the losses to get to $871 million.

Now that the Kentucky Supreme Court has reiterated the finality of its decision, Flutter is in a bind. However the company may feel about the fairness of the decision, or lack thereof, Kentucky Governor Andy Beshear has promised that the state will take “aggressive steps” to collect.

PokerStars on the hook for more than just its profit

In arguing its side of the case, The Stars Group explained to the court that the rake it collected from Kentucky players during that period was just $18 million.

The court had no sympathy for this argument:

“PokerStars was a winner who took a percentage of the wagers in any given game. As such, it is liable for the entire amount lost.”

Online poker has always been illegal in Kentucky, as it was everywhere in the US in 2010. PokerStars was operating as an offshore entity at that time, even though it now holds licenses to operate legally in New Jersey, Pennsylvania and Michigan.

By the time the US Department of Justice froze deposits from US bettors in April 2011, PokerStars had been collecting wagers from Kentuckians for nearly five years.

PokerStars’ data showed more than 34,000 Kentucky players placed more than 246 million bets during that time.

PokerStars remains a good investment for Flutter

Flutter has also argued that what PokerStars did in Kentucky happened before they combined with Flutter. Flutter only merged with The Stars Group in May 2020. Even at that time, the company was a very different one from what it was before Black Friday, having parted ways with all its upper management when it went public in 2014.

In October 2019, Flutter opined that PokerStars would complement the US offerings of FanDuel and TVG:

“The Combination brings together a leading online sports betting operator in the United States (FanDuel) with a high profile national media partner in FOX. The Combined Group will benefit from a leading product ecosystem across free-to-play, daily fantasy sports, sports betting, horse racing, poker and casino to drive lower customer cost per acquisition and higher customer life time value.”

That synergy has been going well. In the March 2 report, Flutter CEO Peter Jackson stated the new group had more than 7.6 million monthly users in Q4 2020. During that same quarter, Flutter estimates it held 40% of the US online sports betting and 20% of the online gaming market.

Jackson also said that Flutter became “the first US online operator to reach over $1.1 [billion] in gross gaming revenue” in 2020.

However, that acquisition is now proving to have come with an additional cost, larger than Flutter evidently expected.

No panic from Flutter shareholders

While the US market is important to Dublin-based Flutter, it’s only a fraction of its overall business. Its 28% annual revenue increase in 2020 is measured in pounds sterling: £5.3 billion. It has 14 million customers worldwide and serves more than 100 markets.

That may be why even this large a penalty isn’t spooking its investors. News affecting just one component of the company has a diluted impact on the share price of the whole.

For instance, Flutter’s announcement on March 15 that it was considering spinning off FanDuel with an IPO only increased its stock price from $112.75 on March 12 to $119.40 on March 15. Now, it’s back where it started at $112.82 as of yesterday’s closing bell. Much of that loss came before the latest news on the Kentucky case.

It may also be the case that investors have already accounted for the possibility that Flutter will ultimately pay the full amount. The immediate reaction of share prices to the news in December was small, just a 4% dip from Dec. 17 to Dec. 18.

Over the following month, however, the price slid a further 6%, to a low of $93.39 on Jan. 27. If that indicates pessimism over the outcome of the case, then this week’s ruling may have been nothing new for investors.

- Heather Fletcher is the lead writer with OnlinePokerReport. She's a career journalist, with bylines in The New York Times, Adweek and other publications. Reach her at [email protected]
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