May 24, 2011

My First Big Bluff

The recent closure of the Sahara had me reminiscing about my first trip to Vegas in 2006. At that time, I had been playing poker in Iowa casinos for a couple of years, though the standard game had only recently evolved from limit to no-limit hold 'em. The game played a lot differently then, as well, with lots of soft players who could be run over by my uber-maniac style. Ah yes, the good ol' days!

In any event, my vacation was mostly focused on hanging with college buds who weren't into poker, so I had only two days / one night left to myself at the end of the trip to devote to poker. I had booked a West Wing room at MGM, a mere minute's walk to the MGM poker room. At that point, the MGM room was easily the biggest and most impressive poker room I had ever played in. The marble ring around the tables was the most decadent thing I had ever seen in a poker room, and the crazy vibe from the Centrifuge bar nearby (with its bartenders and servers dancing on tables and the bar) was just too wild for my innocent Midwestern mind to comprehend. I had brought along $1,000 for gambling, so I should've stuck to $1/$2 NLHE. But the action was slow, limited by the max buy-in of $200. So, young arrogant me decided to jump into the $2/$5 NLHE game. Predictably, my stack suffered the wild fluctuations inherent in the LAG style (and the Stupid Style), and I quickly found myself putting my entire roll into play via rebuys and top offs.

Now, back in those days, there were plenty of soft spots at the $2/$5 level, and I managed to build my stack to nearly $2,000. But with several stacks twice that size in the game, I was always at risk of busting out. I played through the night, with a strange new sensation of tense anxiety clawing at my gut the entire time. Yup, for the first time in my poker career, I was actually scared money. As good poker players know, scared money might as well be dead money. But hubris wouldn't let me leave the game, whispering that there was tons of easy money to be made. Apparently God watches over drunks and poker newbies, and somehow I managed to dodge any big confrontations. Surprisingly soon, morning was rolling around, and I was thinking about cashing out to head to the room for a nap and shower before heading to the airport. Then, the hand happened.

I wish I could remember the details of the hand better, but all I can recall now is that I called a small raise on the button with a middle suited connector. I flopped a monster draw, which normally I would've played aggressively. But I was scared money, and with $2,500 behind at that point, I was looking to play cautiously. I called near-pot-sized bets on the flop and turn, figuring if I hit one of my draws, one of the two characters in the hand would pay me off for decent value on the river with an overpair. On the river, I missed my draws, but hit top pair no kicker on a raggedy board. Preflop raiser checked, so sensing weakness, I pushed all-in, getting the second yahoo to fold.

My remaining opponent was a young kid, one of those short, scrappy guys who liked to do a little good-natured trash-talking. He and his buddy at the table were fraternity brothers celebrating their recent graduations, and the three of us had grown friendly while playing together for nearly 20 hours, as other players cycled through the game. There was a sense of rapport between us, and we'd exchange knowing glances at yahoos and donkeys, while informally soft-playing each other, overbetting with big hands and checking it down with marginal hands.

My river shove on this hand was a major overbet of the pot, and was consistent with our practice of betting our big hands when playing each other. My opponent tanked. Then, he asked me, "Can you beat a set?" That fist of anxiety was clubbing me even harder in my gut. I was going to go home broke from my first Vegas trip.

My opponent rolled over a flopped top set. I threw up a little in my mouth. I casually said, "Wow, I didn't know you were that strong!" This was probably the first honest thing I had said in over twelve hours. My opponent said, "Why bet so much? Did you hit the straight?" I looked at the board. Yes, the river had made an open-ended straight draw get there. I said, "Do you think I'm crazy enough to call you with a draw?" and laughed. My opponent laughed, too. "Yeah, you love your draws!" Yes, yes I did.

I had one last card to play, literally. I casually rolled over my non-paired card, which was one of the cards needed to make the obvious straight. I leaned back, took a swig of my Captain & Coke, and said, "You'll have to call to see the other card." My opponent tanked, but finally said, "I have to believe you. You haven't lied to me all night." As he mucked, he asked to see my other card. I obliged as I raked the monster pot. My opponent came unglued. "How could you do that to me? After we've played together all night, you do that to me? That's bullshit!" Suddenly, his baseball cap went flying across the poker room, landing near the Centrifuge bar.

His buddy laughed.

Hilarity ensued.

I racked up and cashed out with a very fortunate profit.

And so began my love affair with poker in Sin City.

Poker Peeping Toms—Angle Shooters or Felons?

Yesterday, I was reading Iowa gaming statutes and regulations for an upcoming post (yes, it's a task as thrilling as it sounds). I noticed two interesting provisions related to banned gaming-related activities:

4.  A person commits a class "D" felony and, in addition, shall be barred for life from excursion gambling boats and gambling structures under the jurisdiction of the commission, if the person does any of the following:
h.  Places a bet after acquiring knowledge, not available to all players, of the outcome of the gambling game which is the subject of the bet or to aid the person in acquiring the knowledge for the purpose of placing a bet contingent on that outcome.
j.  Knowingly entices or induces a person to go to any place where a gambling game is being conducted or operated in violation of the provisions of this chapter with the intent that the other person plays or participates in that gambling game.

Iowa Code sec. 99F.15

Let's look at subsection h first. The obvious intent of this subsection is to prevent players from betting on games where the fix is in, or where a player has an unfair advantage in predicting the outcome of the game. But let's think about poker. Imagine a card is flashed during the deal but not replaced, or you see the bottom cut card or a flop card that other players do not see, or you see the cards another player is holding. Under a strict reading of subsection h, this knowledge gives you an unfair advantage over other players in the hand, and if you bet based on that knowledge, you are arguably committing a felony. Now, I'm not aware of any casino poker rooms enforcing this rule this strictly, but one has to wonder if or when an angle shot might become a felony.

Now let's look at subsection j. Despite the availability of casino poker rooms, there are still plenty of home poker games being spread in Iowa. I've been invited to quite a number of them, and it's possible I've invited people to play in games I may have hosted. Home games are illegal under Iowa law if any player puts more than $50 at risk. So, if someone merely invites me to a home game where the buy-in is over $50, are they committing a felony?

I don't have any quick answers to these questions. I just found these statutes to be interesting examples of the rather broad and elaborate statutory mechanisms which some states have enacted to prohibit non-licensed gambling. What do you think?

May 23, 2011

D-Bag O' the Day (v.2.1)—
'Til Tantrums Do Us Part

It's been a few months since our last D-Bag O' the Day, not because there's been any real shortage of D-Bags, but more because none of them seemed all that worthy of my attention. Sure, Wisconsin Governor Scott Walker (a Republican, natch) decided that gay couples didn't deserve even the limited right to visit or make health care decisions for their partners in the hospital. Minnesota legislators (again, Republicans) were hard at work addressing the state's infrastructure and economic issues by passing a state constitutional amendment to ban gay marriages. The Tennessee legislature and governor were working overtime to make sure schoolkids weren't exposed to the gay menace, and to strip away anti-discrimination protection from gays. The latter effort came with a shameful big assist from the Tennessee Chamber of Commerce whose members were shocked—shocked!—to discover Republicans were passing the law to target gays, who the Chamber members swear they really, really love. Still, given the impressive Republican achievements in bigotry and demagoguery the past couple of decades, this is all garden variety douchiness. To get my attention, you have to elevate your game.

Today, the anti-gay D-Bag gauntlet was thrown down from a rather unexpected source—a liberal gay man writing in the New York Times. Now liberals, gays, and Times writers are frequent contributors to the realm of political hyperbole and hypocrisy, but they generally have a good record on gay issues. Rich Benjamin—a gay man and blowhard of whom I have 'til now enjoyed the pleasure of blissful ignorance—makes a childish argument that, as long as it isn't legal for gays to get married, he will hold his breath until he turns blue while boycotting the weddings of his straight friends.

How utterly absurd to celebrate an institution that I am banned from in most of the country. It puzzles me, truth be told, that wedding invitations deluge me. Does a vegan frequent summer pig roasts? Do devout evangelicals crash couple-swapping parties? Do undocumented immigrants march in Minuteman rallies?

Benjamin's superficial analogies are particularly inapt. Gays aren't morally or politically opposed to straight marriage, they merely seek to be treated equally within that sacred institution. Why would Benjamin advocate the bizarre boycotting of straight marriages? Benjamin insists his reasons aren't political:

[My friend Zach] resents me for blowing off his special day, for putting political beliefs ahead of our friendship and for punishing him for others’ deeds. But screaming zealots aren’t the only obstacles to equal marriage rights; the passivity of good people like Zach who tacitly fortify the inequality of this institution are also to blame.

They’re proof of a double standard: Even well-meaning heterosexuals often describe their own nuptials in deeply personal terms, above and beyond politics, but tend to dismiss same-sex marriage as a political cause, and gay people’s desire to marry as political maneuvering.

What many straight people consistently forget is that same-sex couples aren’t demanding marriage to make a political statement or to accrue “special rights.” When I ask my gay friends why they wish to marry, they don’t mention tax benefits. They seek marriage for the same personal reasons that straight people do: to share life’s triumphs and trials with their beloved, to start a family, to have the ability to protect that family, and to celebrate their loving commitment with a wedding.

Benjamin misses the point on two fronts. First, my straight friends don't seem to regard marriage equality as primarily a "gay issue" or a "political issue". Certainly there is a political element to the issue, but the significant progress that has been made in advancing the cause of marriage equality is because straight folks have stopped thinking of the issue as a gay rights issue, and instead have reflected on the fundamental unfairness of depriving gay people the right to be in committed, loving relationships. Benjamin fails to give our straight supporters credit for understanding that the issue of marriage equality is fundamentally a moral, not a political, question.

Second, and more to the point, it is Benjamin himself who abuses his friendships by injecting politics into a meaningful personal celebration of love and commitment. It is Benjamin who is making a political statement at the expense of sharing in the joy his friends experience. I do not have kids, but I still get great pleasure from sharing in the births, baptisms, graduations, and weddings of my friends' children. Just because I and other gay folks may not be able to marry the person we love in most states isn't a valid reason to churlishly hold ourselves aloof from the weddings of our straight friends.

Benjamin ultimately betrays his truly childish motivation—if he can't play, then he's taking his ball and running home to pout:

In recent years, many straight people have admirably pledged not to get married until gay people have the right to do so nationwide. I can’t ask friends like Zach to cancel their weddings, but I expect them to at least understand why I won’t attend. Straight friends and family need to accept their wedding invitations as collateral damage to exclusionary marriage laws. They should feel the consequences of this discrimination as sharply as we do.

Looking back over the past decade, it's nothing short of astonishing what strides gay people have made in achieving equality: merely being gay is no longer criminal, gays are mere months away from finally being able to serve their country openly and with honor, and the idea of gay marriage has gone from being an alien concept to being legal in five states (with civil unions in several others). The future looks even brighter. Despite the occasional spasms of anti-gay rhetoric from the Republican social conservative machine, a majority of Americans now support marriage equality, and the head of the odious Focus on the Family group has admitted that, with overwhelming support from younger Americans, marriage equality is all but inevitable. The only real question is whether a lengthy state-by-state operation will be required to bring about equality, or whether the U.S. Supreme Court will deliver a speedier coup de grâce to anti-gay discrimination.

This remarkable progress toward gay equality has occurred because of the thoughtful support of our straight friends. In fact, without the support of straight folks, there would be no gay rights progress. When we ultimately achieve marriage equality, it will because of our many straight allies who rallied to our cause, even if only by rethinking their view of the essence of the bonds of marriage. Boycotting the weddings of straight friends is a childish temper tantrum. Instead, Benjamin should rejoice in the marriages of his friends, gay or straight, knowing they wish him the right to join in that joyous bond.

(Image source).

May 17, 2011

Good Riddance, Sahara

During IMOP-VI in March, our intrepid crew heard some disturbing news—the venerable "old school" Sahara casino was closing its doors. Now the Sahara has long played a minor supporting role in my Vegas experience. During my first Vegas trip—only 2006, though it feels like it was two decades ago—I stayed two nights at a friend's timeshare at the Hilton (when it still had a poker room), and two nights at the MGM Grand in a then-new and swanky West Wing room (conveniently a minute's walk from the poker room). On that trip, I pretty much walked through every casino from MGM to the Wynn, and Sahara to Stratosphere (cutting out the wasteland between Wynn and Sahara was an easy call). The first meal I ate in Vegas was at some seedy cafe in Sahara, where we chewed third-rate steak and egg specials while playing cheap keno. Let's just say I was thrilled with my move out of the junkie-hooker-thug war zone of the Sahara-Stratosphere corridor to the relatively posh casinos on the main portion of the Strip. To put things in historical perspective, the Wynn was barely a year old, and the Venetian poker room was big, fancy, and mostly empty, still trying to find its niche after less than two months of operations. Strange how time flies.

During our IMOP outings, the Sahara late night tournament was a standard group outing for our crew. This tournament had a hideous structure, used chips whose denominations were worn off from use, and attracted every nit over the age of 50 within a 20 mile radius. The room would serve a six-foot (or more) long sub sandwich during a break, but I always passed, assuming the sandwich tasted as sketchy as it looked. Other than one cash game session where several regulars—how bad must your life suck to make the Sahara your home poker base?—donated over a grand to me as I waited for the other Ironmen to bust out, the Sahara poker room offered nothing of value or interest to me.

The rest of the Sahara was equally pointless. In a town where new, modern, and glitzy rules the day, the Sahara was a dirty, smelly, smoky dump filled with ancient slot junkies riding their rascals and sucking on oxygen tanks. While some "dive" casinos on the Strip revel in a certain "everyman slumming it up party" atmosphere—think Imperial Palace, O'Shea's, Bill's Gamblin' Hall, Casino Royale—the Sahara never seemed to embrace a sense of irony and refused to imbue a sense of fun into its squalor. Even the Sahara's restaurants found ways to pass along the corporate message of despair; on one IMOP pre-tournament dinner at "Paco's", our waiter morosely informed us that the Mexican restaurant was out of tortillas.

The only redeeming trait of the Sahara was how its repulsive character gave birth to the best nickname of all time. One of our IMOP crew happens to be a big shot attorney from Milwaukee who enjoys the finer things in life. After IMOP-II, this gentleman begged our crew to ditch the Sahara tournament with the first of many of his famed emails that all began, "I have only two requests ..." The first request was invariably a plea to ditch the Sahara as an official IMOP poker tournament venue. Of course, this whining only made the Sahara a required stop in future IMOP outings, and also led to us nicknaming this gent "Sahara". One of my favorite moments of IMOP history was when I walked into the Venetian poker room on IMOP-III, spotted our resident elitist, yelled out, "Yo, Sahara!" and actually had him turn around and shake his head like a good puppy.

Ah yes, good times, Sahara.

May 10, 2011

Regulation, Segregation, and a
Cereus Case of Déjà Vu

By now, most poker players know the sordid details. Online poker site commingles player funds with its working capital. Poker site uses player money to fund daily operations. Poker site unexpectedly gets slammed with requests by players withdrawing money from their accounts. Poker site experiences cash flow problems and can't pay player withdrawal requests. Poker site sends out a series of misleading statements and emails to players assuring them their funds are secure and withdrawal requests will be processed in the near future. Poker site changes tune, blames a third-party payment processor for taking player funds. Poker site closes down its operation without reimbursing players the funds in their accounts. Poker site owner skips on his merry way without any financial consequences.

"Alex, What was Cereus (Absolute Poker / UB Poker) in 2011?"

"I'm sorry, we were looking for PokerSpot in 2001."

That's right, well before the Moneymaker boom and the heyday of Paradise Poker and Party Poker (remember them?), poker star Russell "Dutch" Boyd started a little online poker room called PokerSpot that became rather popular. Perhaps too popular. The site owners apparently commingled player funds with operational funds, and dipping into those funds had to be pretty tempting for an undercapitalized internet start-up business looking to expand its market share. When a shady third-party payment processor made off with player deposits (at least, that's the official company line), PokerSpot stalled and lied to its players in a futile attempt to cover up the cashflow problem. Eventually, PokerSpot simply shut down and stiffed its players, and owner Dutch Boyd skated off scot-free, at least financially.

Now the parallels between PokerSpot and Cereus are not completely identical. PokerSpot never had a cheating scandal, nor were there ever allegations that Dutch Boyd or other PokerSpot principals had absconded with player funds for personal gain. But some of the underlying poor business and financial practices adopted by PokerSpot are once again in play with Cereus, and to a lesser extent, Full Tilt Poker. In particular, the experiences players have had in getting funds repaid to them following Black Friday only proves that, in the decade since the Poker Spot scandal, online poker has yet to adopt appropriate player protection mechanisms. Frankly, the only difference between trusting customers and gullible suckers is a particular poker site's current cashflow position.

Last year as the Frank and Reid bills to legalize online poker on a federal level were debated in Congress, there was grumbling from some poker players who resisted any form of government regulation of the game. After Black Friday, however, some of the advantages of gaming regulation came into painful relief. While PokerStars appears to have been able to process player cashouts in fairly quick fashion, Full Tilt has struggled with player refunds, at least in part because player funds apparently are commingled with company operating funds in accounts seized by the federal government. Even worse off are players wanting refunds from Cereus; rumors are swirling that the company faces cashflow problems and is unable to pay back players, and some players fear the company may even simply refuse to pay U.S. players or declare bankruptcy.

Imagine the different situation players would face if online poker were legalized and regulated. Most financial industries—e.g., banking, securities and commodities trading, and insurance—are highly regulated with respect to certain financial requirements—e.g., working capital, financial ratios, permissible investments, reserves, and protection of client funds. Not surprisingly, brick and mortar gaming companies face similarly strict financial oversight. Imagine how things today would be different if online poker sites were subject to regulations requiring that:
  • Client funds must be held in trust accounts, segregated from the company's accounts for operating, investment, and other funds;
  • Client funds must be protected by adequate cash bond, insurance, reserves, and other security;
  • Companies must maintain positive working capital and other key financial ratios at or above a minimum level; and,
  • Investments by the company must be low-risk and relatively liquid, making them available as necessary to fund player withdrawal requests
Now each of the Big Three affected by the DOJ's Black Friday bank account seizures—PokerStars, Full Tilt, and Cereus—are currently licensed and subject to gaming regulations in foreign countries. But the regulatory requirements of the licensing authorities for the Big Three vary widely, and those regulatory differences essentially explain why PokerStars is nearing the finish line on its way to cashing out American players in full, while Full Tilt is still on the backstretch, and Cereus has barely made it out of the blocks.

Let's look first at PokerStars, licensed by the Isle of Man Gambling Supervision Commission. Essentially, there are a few key regulatory requirements that made it relatively easy for PokerStars to complete the cash out process once the DOJ agreed to allow payments to be sent to American players:

  • Player account funds are required to be segregated in accounts separate from accounts holding non-player funds, such as operating or investment accounts, and each player account must be labeled with "client account" in its title. (Participants' Money Rules 3, 4)
  • Player funds include "deposits, winnings, transfers, gratuities, and redeemed bonuses". This would seem to include any accrued rakeback, FPPs, or similar prizes, bonuses, and rewards with monetary value.  (Participants' Money Rule 3)
  • Player account funds are held "on trust" for players. (This is significant because it imposes legal fiduciary duties on the person or company holding the funds.) (Participants' Money Rules 4, 6)
  • Player funds not held in a player account must be covered by security deposits and reserves approved by the Commission. (Participants' Money Rule 4)
  • Player funds held by a third-party payment processor must be covered by the poker site if the funds were credited to the player's account by the poker site. (Participants' Money Rule 5)
  • Poker sites must maintain sufficient reserves and security deposits as the Commission deems necessary to allow the poker site to pay its debts—i.e., solvency testing. (Regulations 6(2), 13(5)
Because of these regulations, PokerStars did not commingle player funds with operating funds. So, when PokerStars accounts were seized, presumably the seized accounts either were not the player accounts, and/or PokerStars was able to document to the DOJ's satisfaction that the seized accounts contained player money rather than company funds, a task made easier by the requirement that every player account bear the phrase "client account" in its title. Also, because the funds were segregated and because of solvency rules requiring PokerStars to have sufficient liquid funds, security deposits, and reserves to meet its outstanding debts, PokerStars likely faced little or no impact on its operational cash flow from the rather significant volume of player cash outs. Given the circumstances, PokerStars deserves credit at least for its relatively quick and forthright handling of the player cash out process.

Now let's look at Full Tilt, licensed by the Alderney Gambling Control Orgaization (Alderney is one of the Channel Islands). Alderney's gaming laws comprise both regulations and internal control system (ICS) guidelines. There are some key differences that distinguish the Alderney regulations from the Isle of Man regulations:

  • Player funds may be segregated or unsegregated. Segregated funds are those which are accounted for separately from a company's operational or other general funds. Segregated funds can be held in separate player accounts which are not labeled as "client accounts", or may simply be tracked as a separate entry in the company's internal accounting system without being held in separate player accounts. Unsegregated funds are commingled both in company bank accounts and in the company's internal accounting system—i.e., treated as company funds rather than player funds. (ICS Guideline 2.9.2)
  • If segregated, player funds may be protected or unprotected. Protected funds are those held in player accounts separate from accounts holding operational or other company funds, and must be labeled as "client accounts". (ICS Guideline 2.9.2)
  • If player funds are unsegregated or segregated but unprotected, the poker site is required to notify players of this status. If player funds are segregated and protected as validated by the Commission, the poker site is allowed to notify players of this status (presumably as a marketing point). (ICS Guideline 2.9.2)
  • Player funds may be held by the poker site itself or an associate (which includes software licensees and third-party payment processors). The poker site technically cannot have "recourse" to the funds except to debit or transfer funds for certain approved purposes (e.g. player loses a wager, player buys in to a game, or player transfers funds to another player), while "associates" holding funds are only limited by the terms of the poker site's gaming license requirements. (Regulations 57, 231, 234)
  • Poker sites are required to maintain certain financial ratios, including total assets of 25% in excess of total liabilities [(TA-TL) / TL > 25%], current assets greater than current liabilities, and cash greater than amounts due customers. (Regulation 243 & Schedule 20)

I have not been able to find any documentation of whether player funds at Full Tilt were segregated, and if so, whether those funds were protected or unprotected. I think a fair inference can be drawn from Full Tilt's reaction to the DOJ's seizure of its bank accounts, in which Full Tilt claimed that the accounts contained player funds, that at the very least the funds were unprotected; i.e., player funds were commingled with company funds in the accounts. Based on its progress in processing player cash outs, Full Tilt appears to have segregated the player funds by tracking them separately for accounting purposes; however, this definition of segregated is different than the definition used by the Isle of Man regulations. For a fair "apples to apples" comparison, the player funds held by PokerStars were segregated and protected while the player funds held by Full Tilt were segregated but not protected. Notice how dangerous this slippery definition of segregated can be to uninformed players; players hear "segregated" and think funds are held in trust in separate bank accounts, while in fact their money is commingled with company operational or investment funds, a practice which can be easily abused by unscrupulous company insiders. However, if Full Tilt segregated the funds with internal accounting, it is easy to see how in practice Full Tilt has lagged behind PokerStars in player cash outs because of the need to separate out commingled player funds from seized company funds. It appears highly likely that Full Tilt will be able to pay players in full if and when player funds can be recouped from the seized accounts.[FN1] If, however, Full Tilt needs to dip into operational or investment funds to pay players, Full Tilt's need to maintain the financial ratios mandated by the regulations may slow the repayment process, though ultimately repayment in full should be possible so long as the company maintains a healthy level of non-U.S. business.

One other interesting point arises from the Alderney regulations. The regulations permit a poker site to allow player funds to be held by an associate, which includes software licensees and third-party payment processors. The software licensee provision raises questions about the relationship between Full Tilt and Pocket Kings, the software company closely connected to Full Tilt. The third-party payment processor provision does not seem to apply to Full Tilt, at least at this time, but does raise some interesting issues to be discussed with respect to Cereus. [FN2]

Speaking of Cereus, we finally come to online poker's black sheep—the Cereus Poker Network, operator of the scandal-plagued poker sites, Absolute Poker and UB Poker (f/k/a Ultimate Bet). Weeks after Back Friday, well behind the efforts of PokerStars and Full Tilt, and after much foot-dragging and double-talking, Cereus today finally issued a press release indicating it had reached something of an agreement with the DOJ that will enable it to ... well, it's not entirely clear what Cereus will be doing, a point we'll return to in a moment.

Interestingly, despite the sale last summer of Cereus to Blanca Games—a gaming company based in Antigua—Cereus remains regulated by the Kahnawake Gaming Commission in Canada (note the references to Kahnawake regulation on the Blanca Games home website, as well as the still-operational European facing websites for Absolute Poker and UB Poker). This is especially curious considering Antigua has its own gaming commission, relies on gaming as a significant industry, and has loudly protested the DOJ's actions against Absolute Poker as a WTO trade violation. More intrigue arises from a June 2010 agreement between the Kahnawake and Antigua gaming commissions which allows reciprocal gaming licenses for companies based in either jurisdiction. According to the agreement, a company can be located in Antigua and be regulated by Kahnawake or vice-versa, so long as authorization is given by both gaming commissions. One of the gaming commissions provides the "Primary License" and has primary regulatory responsibility—Kahnawake in the case of Cereus. Given the rather questionable ties between former Cereus owner Tokwiro Enterprises and the Kahawake Gaming Commission (not to mention the rather unsatisfactory Kahnawake investigations of the Absolute Poker and Ultimate Bet scandals), the timing of the regulatory agreement a mere two months prior to Cereus' move to Antigua certainly raises suspicions of Cereus' motivations. One has to wonder if Cereus and its owners relocated to Antigua because of favorable laws related to taxation, business operations, or criminal extradition, not to mention its antagonism towards the United States on all matters gambling related.

Fortunately, there is no need to speculate about Kahnawake gaming regulations. Interestingly, they track in large degree with Antiguan gaming regulations, and seem to be based on the same model gaming code. Some Kahnawake gaming regulations of note with respect to player funds include:

  • Poker sites are required to post security sufficient to cover their operational costs and expenses, "including but not limited to obligations owed to players". (Regulation 88). The security may be used by the Commission to satisfy poker site debts, so poker players may have some recourse against the Commission in the event Cereus stiffs its American players. (Regulation 89). However, whether a poker site is required to post security, as well as the amount and type of security, are ultimately left to the discretion of the Commission. (Regulations 90-94). So, it is an open question whether the Commission required Cereus to post security at all, and if so, in what type and amount. It should also be noted the type of security matters, since a lien on company property may be unenforceable or worthless due to foreign law or a bankruptcy filing, while a cash bond or insurance policy may be more easily accessible.
  • Grounds for a suspension or revocation of a poker site's license include:  a) significant financial problems, including insolvency, bankruptcy, or receivership; b) "fail[ure] to discharge financial commitments to players ... or the Commission has reason to believe such failure is imminent"; and c) "in the Commission's sole discretion" the company "no longer has a good business reputation or sound financial position". (Regulation 118(a), (i)-(k)).
  • Players' funds must be kept in separate accounts at a financial institution or other "body approved by the commission." (Regulation 2)
  • Players must have "direct access to funds" in their player account, and must be able to "obtain the balance of funds in that account and close the account". (Regulations 2, 181).
  • A poker site "must, at the request of a player in whose name a player’s account is established, once the player’s identity is established, remit funds in the player’s account to the requesting player as soon as practicable after receipt of the request." (Regulation 187).
  • A poker site "must not have recourse to funds in a player's account except" to debit or credit the account for gaming transactions. (Regulation 193).
Compared to the sets of regulations which applied to PokerStars and Full Tilt, the regulations for Cereus seem fairly similar, and in some ways, more protective of players. However, the regulations are only as strong as the Commission enforcing them. When a regulatory agency lacks authority or political will to enforce its own rules, licensees will bend and even break rules. The Commission clearly could have suspended or revoked the Cereus license (or done so for either Absolute Poker or Ultimate Bet individually) after their past scandals, particularly if Scott Tom were still calling the shots behind the scenes (it would be unfathomable if the Commission knowingly permitted Scott Tom to serve as a "key person" post-scandals, and if the site hid his role, that alone is sufficient to revoke a gaming license under the regulations). Unfortunately, the Commission seems either too weak or too influenced to enforce its regulations against Cereus.

If Cereus fails to pay players back, again that would be grounds to revoke a gaming license. However, there is some wiggle room for Cereus, as payment need be made only "as soon as practicable". With Cereus dragging its feet since Black Friday in making a deal with the DOJ, Cereus might assert—and the Commission might endorse—a position that it is unable to pay players back at present.

Which brings us back to the Cereus press release from today (broken down nicely by Mark Gahagan on Sparta Poker). [FN3] In its statement, Cereus (technically Absolute Poker—how the DOJ missed the low-hanging fraud fruit at UB Poker is beyond me) announced:

Today's signing of the agreement with the DOJ is an important step towards the safe and efficient return of funds to our US players. We can now move as expeditiously as possible to collect player monies from third party processors as a prelude to establishing proper mechanisms for the return of funds to our US players. As previously announced, we have already taken specific actions to exit the US market by closing our US-facing operations. Blank Rome LLP will continue to engage in discussions with the SDNY in order to complete the necessary agreements for the final transfer of frozen fund balances to our US players. This remains our highest priority. We will continue to update our players and the poker community, as we move forward to resolve outstanding issues.

There is something of a disconnect here. At one point, Cereus blames its failure to pay U.S. players on the need to "collect player monies from third party processors", yet a few sentences later, Cereus shifts its explanation to needing to "complete the necessary agreements [with the DOJ] for the final transfer of frozen fund balances to our US players". What's going on here? Given Cereus' shady track record and the lack of transparency into both Cereus' operations and the actions of the Kahnawake Gaming Commission, we are left to conjecture based on the evidence available.

Cereus' complaint about the DOJ holding player funds in seized bank accounts is probably a relatively straightforward—and accurate—explanation. If so, it appears Cereus was most likely commingling player funds and operational funds in its corporate accounts, much like Full Tilt. Of course, commingling funds would be in violation of Commission regulations, but it's not much of a stretch to believe that Cereus was violating the player account regulations while the Commission either failed to detect the practice or tacitly endorsed it. Still, if this is the primary reason for the delay in paying U.S. players for account cash outs, then presumably Cereus, like Full Tilt, should be able to account for player funds in the frozen accounts and arrange for the return of those funds. However, if Cereus not only commingled the funds but failed to account for them separately and simply lumped player funds in with other corporate funds (a practice that would have been permitted under Alderney regulations as an "unsegregated" accounting practice), then Cereus may well face difficult obstacles in convincing the DOJ to release frozen funds as the DOJ will be reluctant to release funds that belong to the corporation rather than to players.

The third-party payment processor provision is potentially more troubling and more sinister. Clearly the most important business function for a poker site is to move money on and off the site; "on" to fund operations via game play and the rake, "off" to keep customers happy and coming back for more play. Given the difficulties online poker sites have faced with money transfers since passage of the UIGEA, it is possible (maybe even probable) that a poker site might use third-party payment processors as a quasi-bank for a portion of players' funds. A payment processor could hold incoming player funds and use them to process outgoing player withdrawals at the direction of the poker site, with regular "squaring up" between the poker site and payment processor as funds built up or diminished at the processor. The advantage to the poker site would be to minimize the number of transactions into or out of the poker site's bank accounts. In addition to legitimate business purposes, this arrangement would also make it harder for regulators or law enforcement officials to detect improper monetary transactions (e.g., violations of UIGEA or money laundering laws) as funds would be more difficult to trace back to a poker site. However, this arrangement would also require a poker site to be more involved in the third-party payment processor's operations, which might explain some of the conspiracy claims included in the Black Friday indictment which purport to connect the poker sites themselves to some of the third-party payment processors' questionable business practices (e.g., intentional miscoding of transactions and setting up phantom "legitimate" businesses).

A third-party payment processor holding player funds in this manner seems permissible pursuant to the Alderney and Isle of Man regulations discussed earlier (though the Isle of Man requires the poker site to credit the players' accounts for funds held in this manner; Alderney's regulation does not have such an explicit requirement). But such an arrangement would be a clear violation of Kahnawake gaming regulations, unless the Commission approved the use of a third-party payment processor in lieu of a bank (see Regulation 2), or Cereus simply ignored the rule or bypassed it by designating certain corporate accounts as "players' funds accounts" to satisfy the Commission on a technical basis, but on an operational basis used funds held by third-party payment processors as its de facto players' accounts. Of course, if Cereus did operate in this fashion, now that the U.S. river of milk, honey, and cash deposits has dried up, there's not a lot of incentive for any of those third-party processors to return a dime of player funds to Cereus.

Considering other newsworthy events at Cereus, how long will it be before they announce their new U.S. professional poker player spokesperson—Dutch Boyd?


[FN1] ADDENDUM (10 May 2011):  In response to a valid criticism raised by someone close to the industry that Full Tilt has yet to begin player cash outs and has not adequately explained the reasons for the delay, I recognize I am giving Full Tilt a certain benefit of the doubt. It's also true there are indications Full Tilt funds in the seized bank accounts are still the subject of serious contention between Full Tilt and the DOJ, which could be expected if funds were commingled. It is entirely possible Full Tilt's financial issues are significantly closer to the Cereus situation than to PokerStars, with a combination of commingled funds being seized and player cash out requests causing serious (if hopefully temporary) cash flow issues given Alderney liquidity and reserving requirements. However, Full Tilt does seem to be at least communicating with players and attempting to answer player concerns (see HERE and HERE on the TwoPlusTwo forums for Full Tilt Q/A posts, along with player responses and criticisms), and Full Tilt has a much better non-U.S. player business operation (to better generate cash flow) as well as a stronger desire to protect its public image. So, for now, I still think Full Tilt is much more likely to pay back U.S. players sooner and in full than Cereus.

[FN2]  ADDENDUM (31 July 2011):  In retrospect, I clearly gave far too much credit to Full Tilt's management, or underestimated the seriousness of their financial troubles. As events unfolded after the original post, Full Tilt couldn't process player cash out requests, most likely because player funds were completely commingled with operating funds, and the cash flow from their European operations was not sufficient to fund operations and player cash out requests. It appears likely that, prior to Black Friday, Full Tilt was using player funds to finance operations, including expensive ad campaigns (such as the Poker After Dark TV show), player endorsement deals, and executive compensation for Ray Bitar and Howard Lederer. In any event, more than three months after Black Friday, Full Tilt has had its license suspended by the Alderney GCC, and prospects for cash outs for American players seem tied to some kind of outside buyout of Full Tilt.

[FN3] ADDENDUM (10 May 2011):  Literally moments after I hit "publish" for this post, Gary Wise of ESPN Poker reported that a revised statement was issued by Cereus/Absolute Poker. The critical difference I note is that the revised statement deletes any reference to issues with third-party payment processors. Whether the original statement was in error, or the original statement was accurate but raising too many uncomfortable questions, or it was considered better PR to just throw the DOJ under the bus rather than third-party processors who hold significant amounts of money they'd like to get back, is impossible to know.

May 01, 2011

Interesting New Information Surfaces About Absolute Poker and Founder Scott Tom

The St. Petersburg Times just released an interesting article on the history of Absolute Poker (hat tip to Bill Rini). The article is worth a full read by anyone interested in online poker, and serves as a cautionary tale regarding the behind-the-scenes machinations that many online poker players seem more than happy to ignore so long as the money keeps flowing. Four highlights:
  • Despite publicly proclaiming that their site and the underlying financial transactions supporting the site were fully legal, once the UIGEA was passed, Absolute Poker sent home most of its American workers, told American senior executives they could not return to the U.S. if they continued working, and set up a series of multinational financial transactions intended to shield American investors from the taint of illegal gambling proceeds (even telling those American investors they could not hold any direct interest in the company). These actions are hardly consistent with running a fully legal business.
  • The sale of the company to Tokwiro Enterprises, part of the effort to dissociate the American owners from the poker business, is rather sketchy, considering that the owner of Tokwiro Enterprises was Joseph Tokwiro Norton, a former grand chief of the Mohawk Tribe of Kahnawake. As most poker players are aware, the Kahnawake tribe licensed Absolute Poker and its sister company, Ultimate Bet, and investigated both the Absolute Poker "Potripper" scandal (which directly implicated founding co-owner/operator Scott Tom along with his friend and fellow Absolute Poker executive AJ Green) and the Ultimate Bet "superuser" scandal (involving part-owner Russ Hamilton among others). Also of note, Absolute Poker's servers were apparently hosted on servers owned by another of Chief Norton's companies. Chief Norton had established the Kahnawake gaming commission, giving him great influence over the regulators overseeing Absolute Poker and Ultimate Bet.  Nothing better than having the fox guarding the hen house!
  • Following the cheating scandals at Absolute Poker and Ultimate Bet, the companies secretly built duplicate servers and moved their operations from Kahnawake to Antigua (where they continue to operate today as part of the Cereus network). This was apparently engineered by some of the original founding American owners who supposedly no longer owned or operated the companies.
  • As recently as 2009, Scott Tom was apparently still involved in the operation of the companies, despite his involvement in the Absolute Poker scandal (Tokwiro Enterprises combined Absolute Poker and Ultimate Bet into the Cereus platform in December 2008, so it seems clear that Scott Tom and Chief Norton were still involved in the companies for that critical transaction). It remains unclear from this article whether Tom had any connection to the company after the sale of Absolute Poker and Ultimate Bet to Blanca Gaming and the transfer of operations to Antigua in 2010, though the article intimates that Tom and other original founding owners are still calling the shots, likely from behind the shield of several corporate layers. Nat Arem's comment from late 2007 seems particularly prescient: "Scott Tom probably owns something multiple levels/shell companies removed from the actual AP organization, but I really don’t care how it’s legally structured. If he’s receiving income from the operation (and I don’t see any reason why he wouldn’t be), then he’s an owner."
Long story short, Absolute Poker and Ultimate Bet have long been operated in a legally questionable manner. These new historical details are interesting, but anyone still doing business with these sketchy companies deserves the full force of the old legal principle—caveat emptor