May 13, 2012

A Poison Pill for PokerStars in New Jersey iPoker Bill?

NOTE:  This post was inspired by a lengthy Twitter conversation between a number of people I regard as experts in online poker legalization issues: @CKrafcik, @taxdood, @ftrainpoker, @Haley_Hintze, and @GrindUnumbMD_DC. They, along with @GamingCounsel, @PokerScar, and @JamesBarnesEsq, are well worth following if you have any interest in online poker legalization. This post is intended to both summarize and expand on yesterday's Twitter conversation in a more detailed manner and a more accessible format. My post will incorporate excellent observations made by the folks noted above, but the opinions expressed and factual errors made in this post are solely my own.

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Yesterday, Chris Krafcik, Research Director, North America, for GamblingCompliance, Ltd., tweeted a link to the newly amended version of the internet poker authorization bill being considered by the New Jersey legislature, as it was reported out of the Assembly Regulatory Oversight and Gaming Committee on May 10, 2012. Although there will likely be some opportunities for further amendments prior to final consideration by the legislature, this version of the bill essentially sets the basic parameters under which internet poker would be legalized in New Jersey.

Krafcik also pointed out a key new section added by the committee which specifically addresses so-called "bad actors"—those poker sites which permitted U.S. players after the UIGEA went into effect in late 2006. New Section 37 (at the very end of the amended bill) contains what appears to be a very broad prohibition against permitting bad actors from being licensed to offer legal internet poker. The provision states (bullets added to aid readability):

[A] corporation or any person seeking to provide goods or services to a casino licensee in connection with Internet gaming shall not be awarded a casino service industry enterprise license, and shall not be permitted to conduct business with a casino, in connection with Internet gaming if that corporation or person:

(1) has at any time, either directly, or through another corporation or person it owned in whole or in significant part, or controlled:

  • (a) knowingly and willfully offered, accepted, or made available bets, wagers, or stakes using the Internet from persons located in the United States after December 31, 2006, unless such activity is licensed by a federal or State authority to engage in such activity; or

  • (b) knowingly facilitated or otherwise provided services with respect to bets, wagers, or stakes using the Internet from persons located in the United States for a person described in paragraph (1) of this subsection and acted with knowledge of the fact that such bets, wagers or stakes involved persons located in the United States;

  • ....

    First, note that the initial predicate paragraph of Section 37 is broad, applying to any company that might provide any kinds of "goods or services" to a casino offering internet gaming. This would include software, programming, advertising, and marketing—the sorts of activities existing internet poker companies would be in prime position to offer to brick and mortar casinos just getting started in the online market.

    Next, note that Subsection 1 is also broad, applying to companies with any direct or indirect control of a company offering poker illegally in the United States. This broad phrasing is meant to ensure that companies cannot avoid the restriction merely by means of a multi-layer organizational structure; for example, the Full Tilt Poker web of interrelated companies (roughly comprised of Tiltware (software), Pocket Kings (marketing), and Filco-Vantage-Oxalic-Orinic (licensees)) would all be barred under Subsection 1 regardless of whether only some of the companies were directly engaged in the day-to-day poker operations. Also, the principals of these companies, at least those who were either owners or sufficiently involved in operations to be considered a "controlling" person would also be barred under Subsection 1.

    Further, note that Subsection 1 has a sweeping method for ensuring that all "bad actors" are encompassed in the prohibition. Subsection 1  essentially  defines the prohibited activity to be running an internet poker site that took wagers from U.S. residents after December 31, 2006 without a U.S. license (state or federal). Of course, there have never been any U.S. licenses available to any internet poker site, so this is simply a very clever legal method for drawing a line at December 31, 2006, and declaring all sites taking U.S. money after that date to have been operating illegally. So, all the legal arguments about whether poker is a game of skill, or whether UIGEA or other federal or state laws expressly prohibit internet poker are all rendered irrelevant. If a poker site took money from U.S. players after the cut-off date, they are officially "bad actors" under Section 37.

    Finally, as Haley Hintze specifically noted, use of the December 31, 2006 cutoff date rather than the UIGEA enactment date of October 13, 2006 effectively allows some notable companies and individuals to escape the Section 37 ban. Although Party Poker and 888 Poker stopped accepting U.S. play nearly immediately after the UIGEA enactment, other companies didn't terminate operations until later in 2006 (or in many cases, until Black Friday). For example, Hintze notes that current Bwin.Party CEO Jim Ryan led Excapsa—the original parent company for UB, including through its "superuser" scandal days—into liquidation in December 2006. So, Ryan and Bwin.Party escape the Section 37 cutoff by a mere couple of months. It pays to have good lobbyists. [FN1]

    Moving on to Subsection 2, we find some truly interesting language which expands the ban on licensing and working with licensed casinos to those persons or companies which:

    (2) purchased or acquired, directly or indirectly, in whole or in significant part, a corporation or person described in subsection b. of this section, or covered assets of such a person, and will use that corporation or person or those assets in connection with the services provided to a casino licensee with respect to Internet gaming. A casino licensee shall not be permitted to use, directly or indirectly, covered assets in connection with Internet gaming involving corporations or persons located in this State.

    b. As used in this section:

    (1) “significant part” means, with respect to ownership of a corporation or person, the ownership of 5% or more of that corporation or person’s assets, or any percentage of ownership which provides control over that corporation or person;

    (2) “covered assets” means any asset specifically designed for use and used in connection with bets, wagers, or stakes using the Internet from persons located in the United States after December 31, 2006, unless licensed by a federal or State authority to engage in such activity, including the following:

  • (a) any trademark, trade name, service mark, or similar intellectual property that was used to identify any aspect of the Internet website or of the operator offering the bets, wagers, or stakes to its patrons;

  • (b) any database of customer information or customer list of individuals residing in the United States who placed bets, wagers, or stakes in or through an Internet website or operator not licensed by a federal or State authority to engage in such activity;

  • (c) any derivative of a database or customer list described under (b) above; and

  • (d) software and hardware related to the management, administration, development, testing, or control of the Internet website or operator.

  • Subsection 2 is essentially a poison pill provision, intended to prevent any licensed casino or online poker site from getting around the restrictions in Subsection 1 by purchasing the assets of a "bad actor" poker site and making use of them. To pull an example from thin air, suppose a licensed casino decided to get a jump start on the competition by purchasing Full Tilt, or just buying or leasing Full Tilt's software, "Rush Poker" concept, or customer database from the Department of Justice. Under Subsection 2, Full Tilt and its assets are tainted because Full Tilt is a "bad actor", and the company and its assets cannot be used legally by a licensed casino or internet poker operator.

    The upshot of this poison pill is to make Full Tilt and other "bad actor" sites toxic to U.S. casinos looking to partner with these former sites in essentially any conceivable fashion. Partnerships, buyouts, software licensing, customer sharing, and any other cooperative actions would be barred. Basically, the "bad actor" sites would be completely barred from the New Jersey market permanently under the current bill.

    Now, the bill would provide a "bad actor" site an opportunity for an evidentiary hearing to attempt to prove they did not operate illegally post-UIGEA. However, the sites would have to overcome a high evidentiary hurdle—proof by clear and convincing evidence—but the mere fact a poker site dodged conviction for illegal gaming would not be considered by the licensing commission. Basically, the deck would be stacked against any current poker operator ever getting approved for licensing.

    So, if "bad actors" can never be licensed in New Jersey, what implications does this have for internet poker on a broader scale? New Jersey has a large population base combined with a long history of gaming regulation, so it is a natural state to take the lead for regulating internet poker, in some ways more so than Nevada. New Jersey's population base gives it a major advantage over Nevada in terms of liquidity; more players means more money. If a multi-state consortium develops for internet poker, poker sites will need to comply with the most restrictive regulations among the participating states; most likely, many states will defer to New Jersey for licensing purposes. So, if New Jersey bans "bad actors", they will be banned across the board for all participating states. Further, if New Jersey begins licensing poker sites ahead of other states, it will set the standard for all other states.

    The upshot of these restrictions is that, if the New Jersey bill passes in its current form, PokerStars, Full Tilt, UB, and other poker sites operating in the U.S. post-UIGEA are likely shut out of the U.S. market permanently. In that case, Stars may have to reevaluate whether it makes financial sense to acquire Full Tilt's assets, knowing those assets can't be sold off in whole or piecemeal to U.S. brick and mortar casinos looking to break into the online poker world. Frankly, the entire Stars-Tilt deal might be in jeopardy if the New Jersey bill passes in its current form.

    So what are the chances the bill passes? It's hard to know how the New Jersey Senate will view the bill. But if the bill passes, it still must be signed by Governor Chris Christie. Here, the political issues are complicated. Governor Christie is a Republican in a Democratic-leaning state who clearly has national aspirations. If the Governor has his eyes on being the Vice Presidential nominee this year, then he likely would veto the bill to reassure social conservatives he is one of them. If he has decided to wait for a Presidential bid in 2016, he might well sign the bill or allow it to become law without his signature after 45 days in an attempt to curry favor and donations from casinos.

    Obviously the New Jersey internet poker bill is a long way from becoming law. But even if this bill is shot down, other similar bills in other states with similar restrictions are sure to pop up. Frankly, the future looks bleak for the prospects of PokerStars and other post-UIGEA poker site "bad actors" ever returning to the U.S. market.

    [FN1]  ADDENDUM (5/14/2012):  Paragraph discussing Bwin.Party CEO Jim Ryan added in response to excellent Twitter comments by Haley Hintze, the leading authority on the Absolute Poker/Ultimate Bet superuser scandals.

    ADDENDUM (5/15/2012): Haley Hintze has a new two-part post up at Kickass Poker looking at the proposed Stars-Tilt deal. Part 1 examines numerous rumors flurrying about regarding the Tilt-Stars deal. Part 2 analyzes the New Jersey iPoker bill, with some important background information related to Bwin.Party co-CEO Jim Ryan (with a few kind words thrown my way). As always, Hintze is well worth reading if you have any interest in online poker industry issues.


    1. If they did apply in some future NJ intrastate licensing process, I imagine they might find explaining and documenting everything that's been done in their enterprise to the administrative side every bit as fun. Recall that MGM has been ruled unsuitable to continue in the business in NJ.

    2. @ Local Rock: Agreed that MGM might not be nearly as wild about NJ taking the lead in licensing. Just goes to show how important the Asian market is that MGM willingly gave up Atlantic City to keep its lucrative Asian gaming operations intact.

    3. I caught only bits and pieces of this convo on Twitter, so I'm glad you posted this. This is a great analysis of the proposed legislation and possible effects. Any thoughts on what happens then to any of FTP's saleable assets?

    4. @ ProfMomEsq: I'm not sure FTP has many assets other than software, which is proprietary and would require hiring FTP programmers. Customer lists are of limited value; U.S. players will find their way to a legal site on their own, and the major land-based casinos have huge customer databases. If FTP assets can't be put into play in the U.S. market, the market price drops exponentially.

    5. Just as a fun thought experiment, I'm imagining someone like Stars needing to describe in detail and justify the propriety of any and all creative arrangements they may ever have have had for deposits and payment processing and who they had those arrangements with, to the same body that doesn't find MGM worthy of continued licensing as a non-managing partner for their existing business that is the most prominent gaming venue in the state.

    6. @ Local Rock: Clearly MGM would have been better off making a $135 million "donation" to a university that coincidentally curry favor with key regulators.