May 17, 2013

Atlantic Club Casino Drops a Neutron Bomb on PokerStars

The already contentious lawsuit between former—and possibly future—business partners PokerStars and Atlantic Club Casino just turned nasty. The lawsuit in New Jersey state court centers on whether Atlantic Club properly terminated a contract to let PokerStars purchase the casino because PokerStars missed a key deadline tied to obtaining a gaming license. Because the parties' legal filings this week are not yet available to the general public [FN1], I cannot analyze and comment on the relative strengths and weaknesses of the opposing legal arguments. One widely reported argument raised by Atlantic Club, however, does have intriguing legal implications.

A key defense raised by Atlantic Club is that it was purportedly unaware of the most serious Black Friday-related charges against PokerStars and its then-CEO, Isai Scheinberg, until after entering into the purchase agreement. Indeed, Atlantic Club claims it was in the dark about the extent of the Back Friday charges until after PokerStars submitted its New Jersey gaming license application in March. According to Atlantic Club, "significant information emerged publicly that Plaintiffs’ principals were associated with serious criminal activities more extensive and unresolved than previously disclosed." Further, Atlantic Club claimed to have been unaware that former PokerStars executives Scheinberg and Paul Tate had been indicted on a number of federal charges related to offering online gaming illegally in the United States and disguising monetary transactions related to such illegal gaming. Perhaps most significantly, Atlantic Club contends that Scheinberg has been actively involved in the negotiations for the purchase of the casino and in PokerStars' licensing efforts, which implies PokerStars may be in violation of their settlement agreement with the Department of Justice which required Scheinberg to give up any managing role in the company.

As a litigator, my first impression was that Atlantic Club included these allegations mostly in an attempt to throw some dirt at PokerStars. As you will recall, PokerStars had raised certain claims such as breach of the duty of good faith, promissory estoppel, and unjust enrichment which are based in equity (i.e., principles of fairness). In essence, PokerStars claimed Atlantic Club was not acting fairly and in good faith in terminating the purchase agreement. However, a litigant seeking an equitable remedy is generally required to come to court with "clean hands", meaning the party has itself acted fairly and in good faith. By contrast, issues of law—such as PokerStars' claim for breach of contract—apply rules without regard for fairness (though it never hurts to dirty up an opponent even on purely legal issues). So, Atlantic Club's response bringing up PokerStars' Black Friday legal issues is an obvious attempt to undermine PokerStars' entitlement to equitable relief.

Another obvious purpose of raising the Black Friday scandal is to undermine PokerStars' credibility with the court. Given the nature of the charges in the criminal indictments and civil complaints—violations of gaming laws, bank fraud, and money laundering—Atlantic Club is painting PokerStars as an unsavory characters, folks the court should send packing. Of course, this raises interesting questions for Atlantic Club as to why they were doing business with PokerStars in the first place. The official Atlantic Club line is that they were unaware of the serious nature of the Black Friday allegations until the American Gaming Association (AGA) filed a brief in opposition to PokerStars gaming license application. This explanation is pure bovine excrement. The general public might not know about the Black Friday charges, but it was big news in the gaming industry. A gaming executive, even one at a land-based casino, would have known enough about Black Friday and PokerStars' prominent connection to the criminal and civil cases to have done some basic due diligence investigation of PokerStars before getting into bed with them on a multimillion dollar business deal that depended on gaming commission approval.  Still, even if the accusations tar Atlantic Club indirectly, the more PokerStars is talking about Black Friday in court, the less likely they are to win their case on the merits.

Which brings us to my personal "neutron bomb" theory. A neutron bomb is a nuclear device much like conventional hydrogen bombs, but specifically designed so that the majority of the bomb's energy is released as neutron radiation instead of explosive energy. The purpose of a neutron bomb is to maximize lethality to people, while minimizing damage to structures. So, a neutron bomb's destructive radius is relatively small, yet it causes death by radiation to people within close proximity (~1500 meters) to the detonation point. Many of those exposed to lethal doses of radiation linger for days or weeks before dying, with no viable treatment options.

The more I think about Atlantic Club's decision to throw Black Friday mud at PokerStars, the less sense it makes if this were a simple contractual dispute. PokerStars has a legitimate shot at winning the breach of contract claim, and specific performance of the contract—requiring the parties to abide by the purchse agreement and selling the casino to PokerStars if they obtain licensing—is the most likely remedy (money damages are often viewed as inadequate if the contract involves sale of property or a similar unique transaction). If there is a real chance the parties will be ordered by the court to continue forward with the deal, then Atlantic Club's muckraking only poisons an already tense relationship for a questionable amount of litigation benefit.

Atlantic Club's focus on PokerStars' Black Friday issues makes complete sense, however, if Atlantic Club has another buyer lined up and simply wants to kill off the PokerStars' deal at any cost, even if that means making PokerStars too radioactive for a gaming license. When the American Gaming Association (AGA) raised the Black Friday issues in its brief to the New Jersey Division of Gaming Enforcement (DGE), those issues did not seem to gain much traction publicly. The Black Friday issues would have been easy for the DGE to minimize in reaching a decision on PokerStars' application for a gaming license. But now those accusations have been made publicly, in court, in a high-profile case, and include accusations that PokerStars has breached its DOJ settlement agreement to keep Scheinberg out of the operations side of PokerStars. Even worse, those accusations are not coming from potential business rivals to PokerStars, as with the AGA brief. Instead, it's the Atlantic Club, a current gaming licensee and party to the proposed sale who claims that its own business partner is unsuitable for licensing. That fact alone is going to make it much more difficult for the DGE to simply whitewash PokerStars' Black Friday issues.

Atlantic Club seems intent on leveraging Scheinberg's apparent influence over PokerStars into evidence that PokerStars is unsuitable for licensing. Of course, without a gaming license, the purchase agreement is dead, whether now or in three months after the DGE's decision on PokerStars' application. In a similar case, DGE pressured MGM Resorts to sell off its New Jersey gaming operations because of DGE concerns that MGM's partner in its Macau operations, Pansy Ho, was too closely tied to her father, Stanley Ho, who is reputed to be connected to Chinese organized crime. DGE would be open to accusations of inconsistency if it now grants a gaming license to a company like PokerStars which has as a behind-the-scenes leader a man indicted for violating United States bank fraud and money laundering laws.

Further, Atlantic Club may be injecting Scheinberg into the debate to create a basis for having Scheinberg subpoenaed to testify in the United States about his current role in PokerStars, either in the litigation with PokerStars, or before the DGE as part of the licensing process, or both. Of course, Scheinberg would almost certainly decline to appear in the United States to avoid being arrested on his outstanding Black Friday charges, but doing so would likely sink the lawsuit and the gaming license.

New Jersey is PokerStars' best and possibly last chance to obtain a gaming license in the United States. If PokerStars continues to pursue the Atlantic Club litigation, Atlantic Club will ratchet up its attacks on PokerStars' Black Friday issues, which in turn will increase the pressure on the DGE to take a hard line in the licensing process. PokerStars could easily win the TRO battle and keep the Atlantic Club purchase agreement alive, only to find that the fight has fatally poisoned its chances to obtain the gaming license it needs both to complete the Atlantic Club purchase and to pursue licensing in other states. The Atlantic Club, on the other hand, would walk away relatively unscathed, $15 million richer, with its business operations intact and ready for sale to another, higher bidder.

With Scheinberg and Black Friday, the Atlantic Club may have created itself a litigation neutron bomb. If PokerStars presses their current lawsuit, don't be surprised if their hopes for a gaming license take a significant, even fatal, hit.

UPDATED (5/17/2013; 3:52 PM):  As I was editing and hitting "publish" on this post, news broke that, following today's hearing, the judge in the PokerStars-Atlantic Club Casino case lifted the TRO. This will permit Atlantic Club to move forward with a sale to another buyer. This ruling effectively ends the effort by PokerStars to buy the casino, but PokerStars could still continue to fight to recover the $15 million it has sunk into the casino to keep it operational during the term of the purchase agreement. The more intriguing question is whether the Scheinberg-Black Friday issues have already made PokerStars too radioactive for licensing in New Jersey, and effectively elsewhere in the United States.

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[FN1].  Although there have been a lot of filings by both parties this week, New Jersey's state court system does not provide online access to court records, and my New Jersey legal contacts have not been able to obtain copies of documents directly from the court (likely because the judge has the file for a key hearing on PokerStars' request for a temporary restraining order later today). However, at least two journalists—John Brennan of the "Meadowlands Matters" blog for and "Diamond Flush" of the eponymous poker blog—have either been provided copies of the parties' recent filings or had access to those filings and have provided excellent, detailed summaries of the legal jujitsu. Brennan's posts summarize Atlantic Club's resistance to the TRO, reviews the timeline of key events, notes the views of a number of "big gun" experts retained to support Atlantic Club's view of a key gaming law issue, and summarizes PokerStars' reply to Atlantic Club's arguments. Diamond Flush—who confirms she has a confidential source with access to the legal proceedings—has provided substantially more detailed summaries of the Atlantic Club's resistance to the TRO and supporting affidavits, as well as PokerStars' reply to those arguments. Most intriguing, however, was Diamond Flush's reporting (which I don't recall seeing covered elsewhere) of the details of an emergency court hearing held on May 7 in which Atlantic Club attempted to have the initial TRO rescinded prior to the original hearing date of May 17. The presiding judge denied that request, which is not unusual, though the hearing is quite interesting as it helps understand how the parties and the judge are framing the issues.

2 comments:

  1. Thank you for taking complicated stuff and breaking it down enough so us non-lawyer types can deal with it.

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  2. you need to start a youtube channel and get into some social media asap dude. you'll get way more people to view your stuff there. anyways nice article.

    ReplyDelete