April 17, 2011

The Intersection of Law & Online Poker: Part 3—In Rem, Quasi-Criminal, and Criminal Jurisdiction

Earlier this year, I began a series of posts looking at jurisdictional issues related to online poker (Part 1—Personal Jurisdiction; Part 2—Subject Matter Jurisdiction in Civil Cases). Before I could move on to the meatiest jurisdictional topic—criminal jurisdiction—I was sidetracked by life (new job, vacation, vacation-induced illness, and the sort of general malaise that only the genius possess and the insane lament). At the time, I figured, what will it hurt if I put off completing this series in April or May, well before the WSOP?

Unfortunately, as the entire poker world now knows, the U.S. Attorney for the Southern District of New York ("DOJ" for ease of reference), has been hard at work, targeting PokerStars, Full Tilt Poker, and Absolute Poker / Ultimate Bet (collectively "The Big Three") for alleged illegal gaming operations, UIGEA violations, money laundering, and bank fraud associated with their online poker operations and the related processing of funds into and out of their sites (a fairly comprehensive set of relevant links has been compiled by poker media heavyweight Kevmath on the TwoPlusTwo poker forums, while the folks at Pokerati.com have been working overtime to post breaking updates). In short, the criminal jurisdictional issues related to online poker have suddenly come into play in a very real and immediate manner.

My friend and fellow attorney/poker degenerate BWoP has begun a series of excellent, in-depth analyses of various legal issues related to the indictment. I would direct you to her blog for her initial thoughts on the indictment, a more detailed breakdown of the charges and related issues, and her thorough analysis of the New York state gaming laws which underpin the federal indictment (as the relevant federal statutes are predicated on violations of state gaming laws). Also, BWoP will be posting additional analyses of other laws implicated in the indictment in the upcoming days, so bookmark her blog if the legal nitty-gritty interests you (and if you support online poker, knowing the applicable law should be a paramount interest).

One of the primary defenses many observers anticipate the Big Three will raise is that, because their online poker sites are located overseas in jurisdictions where online poker is legal, they are not violating U.S. federal or state gaming laws. In other words, the Big Three will be raising a defense that neither the U.S. federal nor state governments have jurisdiction to prosecute them for offering online poker which might be illegal in the U.S., but is legal in the country where they are based and licensed. Let's take a look at what legal principles related to jurisdiction might come into play as these cases move forward in the court system.


In rem Jurisdiction

There were two legal documents (pleadings) filed Friday which have combined to cause the effective shutdown of the Big Three Poker Sites in the United States—the criminal indictment and the civil forfeiture complaint. Each of these pleadings is the formal first step for initiating court action in criminal and civil proceedings, respectively. Now each pleading references many of the same facts and legal authorities, but their purposes are very different. Compare the captions—the information about the parties and the court at the top of the very first page of each pleading—for the two legal proceedings. The indictment caption lists only eleven individuals and no companies as defendants, even though numerous businesses (including payment processors, poker sites, and banks) are discussed in the remainder of the indictment. By contrast, the civil forfeiture complaint caption lists quite a number of businesses as "defendants", and then continues to a second list of "defendants-in rem".

The "defendants-in rem" in the civil complaint are listed as "All right, title and interest in the assets of PokerStars; Full Tilt Poker; Absolute Poker; Ultimate Bet; ... including but not limited to the properties listed in Schedule A, such as but not limited to the Domain Names PokerStars.com; FullTiltPoker.com; AbsolutePoker.com; UltimateBet.com; and UB.com; and all right, title and interest in the properties listed in Schedule B". Why is this caption so much longer and full of legal jargon than the criminal indictment, if the underlying actions at issue (alleged violations of gaming laws, money laundering, and bank fraud laws) are essentially the same?

The simple answer is that the civil complaint is an in rem action—a civil action taken against property rather than a person. crAKKer readers might remember in rem actions from my post last fall about the the Pokerhaus lawsuit:
Civil forfeiture actions permit the government (state or federal) to seize and confiscate property used in the commission of a crime, or that represent the proceeds of illegal activity. These types of actions usually arise in the vice crimes—prostitution, drugs, gambling—but can be predicated on a wide variety of criminal offenses. The action is actually brought against the property itself (an in rem action), so you wind up with some weird case names like United States v. $100,000 Cash & a 2009 Cadillac Escalade, or People v. Two Roulette Wheels. But the insidious legal hook for these actions is that the government need not ever actually prosecute or prove the underlying crime. Instead, they merely need to prove a link between the property and a criminal act or conspiracy by a preponderance of the evidence (far easier than convicting the alleged criminal by a reasonable doubt standard of proof). Needless to say, civil forfeiture actions are ripe for abuse by police departments and prosecutors, who typically get to keep a portion of the proceeds of forfeited property.

Now it feels a little odd for the government to be listing property as a defendant in a case. But the purpose of a civil forfeiture action is to seize the named property because it is an instrument used in or the proceeds of a criminal act or enterprise. The jurisdictional advantage of a civil forfeiture proceeding is that the government need not have personal jurisdiction over the criminal(s); rather, they need have only jurisdiction over the property being seized. Generally, physical location of the property is necessary and sufficient to establish in rem jurisdiction, though in some cases laws or treaties will place constructive possession of the property within the jurisdiction of the state or federal government bringing the civil forfeiture action. So, when faced with companies like the Big Three who are located overseas, the government often finds it more convenient to simply pursue civil forfeiture actions against their property located within the United States. In the present case, this would include primarily the Big Three's domain names and cash they keep in United States bank accounts. Some foreign defendants facing civil forfeiture actions choose not to contest the forfeiture, as doing so may require highly placed individuals in the organization to travel to the United States for depositions and court proceedings—placing them at risk for arrest for criminal charges for which they might otherwise be able to fight extradition if they remain overseas.

The important takeaway from the civil forfeiture complaint is that the DOJ could dismiss or even lose the criminal indictment, yet still prevail on the civil forfeiture proceeding. The reason for this superficially illogical situation is that the government in the civil forfeiture proceeding needs to prove the allegations of criminal conduct only by a preponderance of the evidence ("more likely than not") rather than by a "beyond a reasonable doubt" criminal court standard. Further, rules of evidence and procedure are less rigid in civil court, and civil cases permit discovery that might be precluded in criminal proceedings. In other words, the Big Three might well beat the rap in criminal court, yet wind up billions of dollars poorer after the criminal forfeiture proceedings are concluded.


Quasi-criminal Jurisdiction

Closely related to in rem civil forfeiture proceedings are what I'll refer to as quasi-criminal legal proceedings. These actions are brought in civil court—much like a claim for breach of contract, negligence, family law dispute, etc.—but actually have a purpose of regulating allegedly illegal conduct much like a criminal proceeding. Classic examples of quasi-criminal actions include proceedings for injunctions and damages for violations of consumer protection, consumer fraud, and civil racketeering (RICO) statutes.

As discussed previously, issues of personal jurisdiction often arise in the context of attorneys general attempting to enforce a civil remedy, such as an injunction pursuant to consumer protection statute. For example, the Minnesota courts have affirmed a finding of personal jurisdiction against a Nevada online sports betting company (based out of Belize) when the state attorney general sought an injunction barring the company from soliciting business from Minnesota residents through ads which deceptively claimed that such wagering was legal in Minnesota:
Appellants [Granite Gate Resorts, et. al], through their Internet advertising, have demonstrated a clear intent to solicit business from markets that include Minnesota and, as a result, have had multiple contacts with Minnesota residents, including at least one successful solicitation. The cause of action here arises from the same advertisements that constitute appellants' contacts with the state and implicates Minnesota's strong interest in maintaining the enforceability of its consumer protection laws. Appellants have not demonstrated that submission to personal jurisdiction in Minnesota would subject them to any undue inconvenience. For these reasons, we hold that appellants are subject to personal jurisdiction in Minnesota because, through their Internet activities, they purposefully availed themselves of the privilege of doing business in Minnesota to the extent that the maintenance of an action based on consumer protection statutes does not offend traditional notions of fair play and substantial justice.

State of Minnesota v. Granite Gate Resorts, Inc., 568 N.W.2d 715 (Minn. Ct. App. 1997).

In other words, because these quasi-criminal proceedings are brought in civil court, civil law principles of personal jurisdiction apply. Thus, for quasi-criminal proceedings, the courts will look at whether the accused individual or business "purposely availed" itself of the state or country at issue. Generally speaking, actively soliciting business and engaging in commerce with residents of the state or country will be sufficient to establish personal jurisdiction. Online poker sites likely meet that test with ease.

With respect to subject matter jurisdiction in a quasi-criminal proceeding, the courts will generally look at whether the alleged conduct has an effect within the state that violates state law, regardless of where the offender might physically be located:
Respondents argue that the Court lacks subject matter jurisdiction, and that Internet gambling falls outside the scope of New York state gambling prohibitions, because the gambling occurs outside of New York state. However, under New York Penal Law, if the person engaged in gambling is located in New York, then New York is the location where the gambling occurred [See, Penal Law § 225.00(2)]. Here, some or all of those funds in an Antiguan bank account are staked every time the New York user enters betting information into the computer. It is irrelevant that Internet gambling is legal in Antigua. The act of entering the bet and transmitting the information from New York via the Internet is adequate to constitute gambling activity within the New York state.

Wide range implications would arise if this Court adopted respondents’ argument that activities or transactions which may be targeted at New York residents are beyond the state’s jurisdiction. Not only would such an approach severely undermine this state’s deep-rooted policy against unauthorized gambling, it also would immunize from liability anyone who engages in any activity over the Internet which is otherwise illegal in this state. A computer server cannot be permitted to function as a shield against liability, particularly in this case where respondents actively targeted New York as the location where they conducted many of their allegedly illegal activities. Even though gambling is legal where the bet was accepted, the activity was transmitted from New York. Contrary to respondents’ unsupported allegation of an Antiguan management company managing GCC, the evidence also indicates that the individuals who gave the computer commands operated from WIGC’s New York office. The respondents enticed Internet users, including New York residents, to play in their casino.

....

The evidence demonstrates that respondents have violated New York Penal Law which states that “a person is guilty of promoting gambling ... when he knowingly advances or profits from unlawful gambling activity” (Penal Law § 225.05). By having established the gambling enterprise, and advertised and solicited investors to buy its stock and to gamble through its on-line casino, respondents have “engage[d] in conduct which materially aids ... gambling activity”, in violation of New York law (Penal Law § 225.00(4) [which states “conduct includes but is not limited to conduct directed toward the creation or establishment of the particular game, contest, scheme, device ... [or] toward the solicitation or inducement of persons to participate therein”]). Moreover, this Court rejects respondents’ argument that it unknowingly accepted bets from New York residents. New York users can easily circumvent the casino software in order to play by the simple expedient of entering an out-of-state address. Respondents’ violation of the Penal Law is that they persisted in continuous illegal conduct directed toward the creation, establishment, and advancement of unauthorized gambling. The violation had occurred long before a New York resident ever staked a bet. Because all of respondents’ activities illegally advanced gambling, this Court finds that they have knowingly violated Penal Law § 225.05.

People ex rel. Vacco v. World Interactive Gaming Corp., 714 N.Y.S.2d 844 (N.Y. Sup. Ct. 1999) (emphasis added).


The Vacco case also is important in that it interprets New York Penal Law § 225.05, which is one of the statutes underpinning the current DOJ indictment of the Big Three. According to the Vacco court (whose decision is not necessarily a binding interpretation of New York law), an online gaming company based in another country can nonetheless violate New York anti-gaming laws by soliciting and accepting wagers from New York residents. If the federal courts adopt a similar interpretation of New York law, the Big Three will face an uphill battle in fighting the charges that are predicated on a finding that accepting online poker wagers is illegal under New York law.

In the current government actions against the Big Three, there are (as now) no quasi-criminal actions pending apart from the in rem forfeiture proceedings discussed above. Because an in rem action establishes jurisdiction based on the property in question, whether there is personal jurisdiction over the companies owning the property is irrelevant. However, these types of quasi-criminal actions are quite common in modern law enforcement [1], and now that the smell of blood—well, money—is in the water, it wouldn't surprise me to see one or more state attorneys general pile on with a state civil forfeiture and civil injunction lawsuit.


Criminal jurisdiction

Now we come to the central jurisdictional issue—Do the U.S. federal or state governments have criminal jurisdiction over online poker sites based and licensed to do business in foreign countries where online poker is perfectly legal?

To answer this question, we need to look at the nature of criminal jurisdiction. In civil law, the courts are concerned with personal and subject matter jurisdiction—i.e., whether they have authority to enter rulings binding a particular person or company with respect to a particular legal claim. In criminal law, the focus shifts to a different question—whether the state or federal government has the authority to regulate the conduct or activity at issue.

Historically, criminal jurisdiction was co-extensive with geographical jurisdiction; a state or country could only regulate conduct occurring within its boundaries. This bright line rule is easily applied to garden variety crimes such as murder or theft. But for some crimes—in particular inchoate crimes such as solicitation and conspiracy—a person could commit a crime directed at a resident or business in a state without ever setting foot inside that state's geographical domain. Also, as our country modernized, and interstate travel and commerce become commonplace, states found it more difficult to regulate conduct that occurred in whole or in part outside their geographical boundaries, yet had a definite impact within the state.

Enter the United States Supreme Court. In 1911, the Court was confronted with a question of criminal jurisdiction which arose when the defendant was charged with bribery and false pretenses (fraud) arising out of the sale of equipment to the State of Michigan. The trouble was, most if not all of the defendant's illegal actions occurred while the defendant was in Illinois. The Court held:
If a jury should believe the evidence, and find that Daily did the acts that led Armstrong to betray his trust, deceived the board of control, and induced by fraud the payment by the state, the usage of the civilized world would warrant Michigan in punishing him, although he never had set foot in the state until after the fraud was complete. Acts done outside a jurisdiction, but intended to produce and producing detrimental effects within it, justify a state in punishing the cause of the harm as if he had been present at the effect, if the state should succeed in getting him within its power. We may assume, therefore, that Daily is a criminal under the laws of Michigan.

Of course, we must admit that it does not follow that Daily is a fugitive from justice. On the other hand, however, we think it plain that the criminal need not do within the state every act necessary to complete the crime. If he does there an overt act which is and is intended to be a material step toward accomplishing the crime, and then absents himself from the state and does the rest elsewhere, he becomes a fugitive from justice when the crime is complete, if not before. For all that is necessary to convert a criminal under the laws of a state into a fugitive from justice is that he should have left the state after having incurred guilt there, and his overt act becomes retrospectively guilty when the contemplated result ensues. Thus, in this case, offering the bid and receiving the acceptance were material steps in the scheme, they were taken in Michigan, and they were established in their character of guilty acts when the plot was carried to the end, even if the intent with which those steps were taken did not make Daily guilty before.

Strassheim v. Daily, 221 U.S. 280, 284-85 (1911) (citations omitted) (emphasis added).

Since Strassheim, states have had the ability to regulate and criminalize conduct occurring outside the state's geographical boundaries, but which was intended to produce or actually produced detrimental effects within the state. Although a different test than the personal jurisdiction "purposeful availment" analysis, the two tests have similar underlying principles. In short, if a person or business intentionally engages in some kind of interaction with people or businesses within a state, that interaction may subject the person or business to civil or criminal liability in that state.[2]

Recent applications of this kind of extraterritorial criminal jurisdiction to internet-based crimes ("cybercrime") have most notably arisen in the context of sexual solicitation of minors or online harassment ("cyberstalking") when the offender resided in a different state from the victim.[3] Similarly, extraterritorial jurisdiction issues have arisen in the context of out of state professional practice by doctors and pharmacists working for online pharmacy sites.[4] But what about online gaming? Is online gaming somehow different than other extraterritorial internet activities, rendering it immune from criminal jurisdiction by the states merely because they are based in and licensed by foreign countries?

One court—and a New York federal court, to boot—has answered that question with a resounding "No". In looking at New York law in the context of a federal Wire Act prosecution (not at issue in the present indictment against the Big Three), the Second Circuit Court of Appeals held that New York state law unquestionably makes the placement of wagers illegal. United States v. Cohen, 260 F.3d 68 (2d Cir. 2001). The Cohen court first found that placing of bets via phone or the internet was illegal per se under New York law. The court then turned to Cohen's argument that merely placing a bet from New York was not illegal gambling. The court found that it was in fact illegal gambling:
Cohen appeals the district court’s instructions to the jury regarding what constitutes a bet per se. Cohen argues that under WSE’s account-wagering system, the transmissions between WSE and its customers contained only information that enabled WSE itself to place bets entirely from customer accounts located in Antigua. He argues that this fact was precluded by the district court’s instructions. We find no error in those instructions.

Judge Griesa repeatedly charged the jury as follows:

"If there was a telephone call or an internet transmission between New York and [WSE] in Antigua, and if a person in New York said or signaled that he or she wanted to place a specified bet, and if a person on an internet device or a telephone said or signaled that the bet was accepted, this was the transmission of a bet within the meaning of Section 1084. Congress clearly did not intend to have this statute be made inapplicable because the party in a foreign gambling business deemed or construed the transmission as only starting with an employee or an internet mechanism located on the premises in the foreign country."

Jury instructions are not improper simply because they resemble the conduct alleged to have occurred in a given case; nor were they improper in this case. It was the Government’s burden in this case to prove that someone in New York signaled an offer to place a particular bet and that someone at WSE signaled an acceptance of that offer. The jury concluded that the Government had carried that burden.

United States v. Cohen, 260 F.3d 68 (2d Cir. 2001).

In other words, the court found that merely placing a bet from New York was a violation of New York's anti-gambling laws, even though making those kinds of wagers was entirely legal where the company was located (Antigua). If this interpretation of New York law is applied to the Big Three in the context of online poker (and there may be subtle distinctions between poker wagers and sports wagers that could affect the analysis), then it seems probable the Big Three have in fact been violating New York law regardless of whether online poker is legal in the countries where they are located and licensed.[5]

In another federal case related to online poker and gaming, the Third Circuit Court of Appeals rejected a challenge to the UIGEA brought by iGaming industry advocacy group iMega. Interactive Media Entertainment & Gaming Ass'n, Inc. v. Attorney General, 580 F.3d 113 (3rd Cir. 2009). Now the primary focus of the decision was on iMega's claims that the UIGEA was unconstitutionally vague and a violation of due process and First Amendment rights. However, the court did touch on jurisdictional issues in a footnote in its decision:
Relatedly, Interactive notes that some of its members operate gambling websites from outside the United States and contends that the Act is ambiguous as to whether such members could face criminal sanctions under the Act if they engaged in financial transactions with a gambler who placed a bet from a state that prohibited such gambling. However, the Act unambiguously prohibits such transactions and we note that it "has long been settled law that a country can regulate conduct occurring outside its territory which causes harmful results within its territory." Lake Airways, Ltd. v. Sabena, Belgian World Airlines, 731 F.2d 909, 922 (D.C. Cir. 1984).

Interactive Media Entertainment & Gaming Ass'n, Inc. v. Attorney General, 580 F.3d 113, n. 5 (3rd Cir. 2009) (emphasis added).

This footnote from the iMega decision is likely not the final word on the territorial implications of the UIGEA, as the court did not engage in any extensive analysis of the issue, and neither the parties nor the court seemed to consider the jurisdictional issue central to the issues resolved on appeal. However, the court's rather perfunctory rejection of the claim that offshore internet gaming sites are beyond the jurisdiction of the United States hardly bodes well for the Big Three in their attempts to fight the recent DOJ indictment.[6]

Taking a step back from gambling, the concept that merely being located outside the United States is insufficient to grant immunity from federal and state laws in the United States actually makes a lot of sense. Think about criminal activities such as drug distribution, sexual exploitation of minors, securities or bank fraud, bribery, computer hacking, etc. that might be legal in some countries, but clearly illegal within the United States. Shouldn't the United States' federal and state governments be able to enforce their criminal laws when people from outside the country try to solicit, conspire, or actually engage in such conduct within the United States?

Obviously these criminal jurisdictional issues are highly complex, and will require significant legal briefing and argument by the DOJ and the Big Three. Also, there may be additional legal authorities such as treaties that come into play. But the important takeaway is that the mere fact the Big Three are located and licensed in countries where online poker or gambling is legal may not be a "get out of jail free card" for the Big Three with respect to their offering online poker to U.S. residents.

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[1] For example, in a federal prosecution of former internet sports wagering site BetOnSports.com, the DOJ sought and was granted a permanent injunction barring the website from operating in the United States (along with other civil penalties). United States v. BetOnSports.com, No. 4:06CV01064 CEJ, 2006 WL 3257797 (Nov. 9, 2006). The founder of the site eventually plead guilty to violating federal gambling laws (despite being based in Costa Rica), and was sentenced to 41-51 months in federal prison along with a fine of nearly $44 million.

[2] As an example of a modern criminal jurisdiction statute, look at Ohio Revised Code section 2901.11, in particular subsections A(3)-(7) and (C). The statute specifically addresses crimes committed outside the state where part of the crime involves computer data transmitted into the state.

[3] For example, Arizona and Pennsylvania courts have found that sexual solicitation of minors was a crime within their state, where the victim was within the state but the perpetrator committed all of his criminal acts outside the state. The cases from other states relied upon by these courts indicates this finding of jurisdiction in extraterritorial internet crimes is probably the widely held majority rule among the states. Similarly, this article has a good overview of the criminal jurisdiction issues related to cyber-harassment.

[4] These articles (HERE and HERE) discuss online pharmacy law jurisdictional issues.

[5] It should be noted that the Cohen court specifically held that "[Cohen's] beliefs regarding the legality of betting in New York are immaterial." In other words, even if the Big Three have an honest belief—backed by legal opinions (as they have repeatedly claimed)—that they are not violating any laws in accepting U.S. wagers, their beliefs in the legality of their actions are likely not a valid defense to the pending criminal charges if they have in fact violated U.S. federal or state gambling laws.

[6] This section related to the iMega decision was added after initial publication (on 23 April 2010) when I discovered the footnote in the decision while reading the case for other reasons.

4 comments:

  1. Excellent post as always in reference to the subject matter. Definitely a bit over my head but it seems to indicate that a betting person would not bet against the DOJ in this case and is something I would expect given a logical way of viewing things, if that makes any sense.

    A question I have though, given there maybe some grey area here in relation to the big three's location and local applicable laws, would that play a factor in the punishments enacted? In other words while I think the writing on the wall says that the companies will in fact be found guilty, does the factor of where they are, treaties and such possibly influence the decision on the penalty for them?

    My guess is it's immaterial, but I was just curious based on the complexity of things, as I think ultimately how 'successful' the DOJ is in this case may in fact influence what we see down the line in the continuing saga of online poker. (IE if the big three essentially remain in tact with a hand slap they have far more ability to lobby or if they are completely destroyed it leaves the path far more open for American brick and mortar corporations.

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  2. Interesting.....would you recommend a removal of funds from these 'big three' sites? Any chance that individual players will ever be prosecuted? On an unrelated note, can you cross post Santa's IMOP trip report here? Our web filter blocks so called 'gambling sites' like AVP.

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  3. @ Michael: I suspect the DOJ feels they have the goods on the Big Three, and they will want more than the proverbial pound of flesh. Certainly they will expect substantially more than the $100 million range paid by Party Poker post-UIGEA. At a minimum, I suspect they would also require the Big Three to agree to an injunction barring them from reentering the US market. Hard to say, and there will be a lot of skirmishing before talks get serious. Don't expect any settlement prior to the Big Three taking a shot at a motion to dismiss.

    @ RedXBranch: I don't think you can withdraw funds from the Big Three right now, as the DOJ action has likely impaired their ability to ship funds. So, wait until you hear word from sites like 2+2 that funds are available to US citizens and get them out posthaste.

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