Managing Expectations for DiCristina

This week, the Second Circuit Court of Appeals heard oral arguments in the DiCristina poker case. The DOJ is challenging a federal district court decision which found that the Illegal Gambling Business Act (IGBA) did not apply to poker because poker is a game of skill and the IGBA only applies to games of chance. Poker media guru "Diamond Flush" posted an excellent summary of the arguments, which by all accounts went very well for the pro-poker side.

PokerNews published highlights of a discussion with PPA litigation director Patrick "Skallagrim" Fleming, which is well worth a read. Unfortunately, PokerNews dropped the ball on a couple of major legal issues:

A Circuit Court ruling that IGBA doesn't include poker would be a big victory for the legality of poker. As it's already been determined that The Wire Act doesn't apply to poker, the IGBA is the last federal law the DOJ interprets as making poker illegal and was at the center of the Black Friday indictments. Other charges of money laundering and violating the Unlawful Internet Gambling Enforcement Act were dependent on operating a poker business being unlawful under the IGBA.

....

The case is sort of a freeroll for poker. If the DOJ wins, it will be able to continue interpreting the IGBA to include poker as it has been. If DiCristina wins, the DOJ won't have any legal standing against poker on a federal level. There also seems to be very little chance that the court would overrule Judge Weinstein's finding that poker is a game of skill since it doesn't affect the appeal.

There are two significant errors here, which are somewhat interrelated. First, the money laundering and UIGEA charges in the Black Friday indictments were not solely predicated on the IGBA violation. Instead, the indictments were based on violations of both federal law and New York state gambling laws. Certainly having the IGBA found inapplicable to online poker would undermine the Black Friday charges, but a pro-poker decision in DiCristina would not negate the UIGEA and money laundering charges.

Second, and more significantly, it is simply untrue that "the IGBA is the last federal law the DOJ interprets as making poker illegal" and that a victory in DiCristina means "the DOJ won't have any legal standing against poker on a federal level." Of course, the UIGEA still prevents the transmission of money to fund online poker sites operating in violation of state law, and most states have laws which classify poker as gambling for purposes of gaming regulations. More to the point, however, is that the Travel Act—a breathtakingly broad statute targeted at criminal enterprises—very much remains in play. As I wrote when analyzing the federal district court ruling in DiCistina:

The [DiCristina] decision only interpreted the IGBA. There are other federal statutes that could still be used by federal prosecutors against businesses offering poker, most notably the Travel Act. Unlike the IGBA which contained its own definition of "gambling", the Travel Act simply relies on a violation of a state gambling law to establish the predicate offense. Also, note that the Travel Act prohibits use of "the mail or any facility in interstate commerce" to "distribute the proceeds of any unlawful activity" or "otherwise promote, manage, establish, carry on, or facilitate the promotion, management, establishment, or carrying on, of any unlawful activity". This arguably could mean that merely mailing checks, promotional materials, or awards to players could be a violation of the Travel Act. So far federal prosecutors have not used the Travel Act in any poker-related prosecutions (at least not to my knowledge), but that might change if they lose the IGBA as a tool because of this decision.

My words turned out to be prophetic (though my prophesy wasn't any more challenging than predicting that LeBron James would win multiple NBA titles). A mere three weeks after the district court decision in DiCristina was issued, the DOJ amended their Black Friday civil forfeiture complaint against PokerStars, Full Tilt Poker, Ultimate Bet, and various business entities and individuals associated with those sites to include a Travel Act violation as a basis for forfeiture of poker-related assets. So, although it's unclear where PokerNews was getting its legal information on this point, PokerNews' coverage was unquestionably inaccurate on a significant legal point.

Now, why does it matter if PokerNews got this legal point wrong? The biggest issue is that this kind of misinformation feeds into the poker community's collective misunderstanding of applicable law and raises unrealistic expectations, in particular an impression that a favorable appellate ruling will clear the way for legalized online poker on a national basis. If the Second Circuit affirms the district court's decision—and I certainly hope that it does so—the effect on online poker will almost certainly be rather modest. As I wrote in my previous analysis of the DiCristina district court decision:

Even if the [DiCristina] decision is affirmed on appeal, its impact on the poker legalization fight is likely to be minimal. In many states, whether poker is a game of skill is utterly irrelevant as poker is explicitly regulated as gambling. In other states where poker's status is not defined by statute, courts have already ruled that poker is gambling, and those courts are unlikely to reverse course after having decided the issue. The decision probably has little application to other federal gambling statutes because the decision is based on the IGBA's particular definition of "gambling". ... Most likely, the decision will ultimately have only symbolic value.

Now, I don't want to leave the impression that DiCristina is not important; it is unquestionably a significant case. In fact, if the Second Circuit affirms the district court's ruling, then the DiCristina case will have significance both in removing poker from the ambit of another federal statute, and in being the first appellate court decision finding poker to be a game of skill. Nonetheless, at the end of the day, even a win in DiCristina will have little discernible impact on the effort to legalize poker. [FN1]. That's a fight that will need to be waged on a state-by-state basis, at least for the time being.

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[FN1]  As I previously discussed, one potential major winner from a DiCristina win in the appellate court is PokerStars:

Because the decision is from a different court, it does not change the pending DOJ Back Friday criminal or civil forfeiture cases other than to make it marginally easier for the remaining defendants to leverage a better plea bargain or settlement because the DOJ's IGBA and associated money laundering charges are now in a somewhat weaker position. The Black Friday cases are ultimately more about the banking and financial shenanigans of those involved than the underlying poker businesses themselves. But the decision certainly strengthens the argument to be made by PokerStars to state gaming regulators that merely running an online poker business did not violate federal law. Even if the decision is reversed on appeal, PokerStars could still argue that if a respected federal judge thought that poker was not regulated by the IGBA, then they certainly had a good faith belief they were not violating the IGBA. Of course, there would still be the matter of PokerStars allegedly violating state gambling laws, the UIGEA, federal money laundering laws, and federal banking laws. But if the applicability of the IGBA and the Wire Act can now be called into question, it becomes easier to raise doubts about some of the other laws in the mix.

Unfortunately, appellate courts rarely move quickly. A decision will likely take three to six months to be issued. If so, then PokerStars will be denied an opportunity to rely on a potentially favorable appellate court decision as New Jersey considers PokerStars' application for a gaming license.

United States v. DiCristina—A Win for Poker Players (with an Asterisk)

"Well, let's not start sucking each other's dicks quite yet."

~ The Wolf (Harvey Keitel), in Pulp Fiction (1994)

As most poker players are aware, earlier this week a federal district court judge entered a ruling in United States v. DiCristina finding that poker is a "game of skill" and therefore is not "gambling" for purposes of the federal Illegal Gambling Business Act (IGBA). The lengthy decision by Senior Judge Weinstein is as thorough a discussion of the statistical evidence of the effect of skill in poker as one will likely ever see in a judicial decision. The opinion also contains an exhaustive review of practically every conceivable state or federal statute or appellate decision that addresses the regulation of poker in the context of gambling laws. Every poker player should read the decision to better understand the nature of the legal issues certain to arise as online poker continues down the path to inevitable legalization and regulation in some form.

I skimmed the decision when it was issued and Tweeted some initial thoughts (one of the advantages of being a lawyer is learning how to find the legally significant spots in a 120-page decision) (for the record, those Tweets are here, here, here, here, and here). After a more leisurely perusal of the decision, my initial thoughts remain valid, but I did pick up a few additional points of interest. Now many poker players probably just care about the bottom line—a win is a win, right? In law, however, how one wins is often more important than the case specific outcome. [FN1]

So, in no particular order, here are what I found to be the key points and interesting nuggets from the opinion:

Big win for poker players and the PPA:  There is no question that this decision was a win for poker players. Having a federal judge give careful consideration to the "poker is a skill game" argument and then endorse it in a thoughtful opinion is a win, regardless of the ultimate outcome on any appeal, and regardless of whether the decision is adopted by other courts or remains a one-off outlier. The Poker Players Alliance (PPA) also deserves kudos for not merely rehashing its prior arguments, but for finding an expert economist and statistician, Dr. Randal Heeb, who provided critical analysis and testimony that formed the underpinning of the decision (more on Dr. Heeb later). This decision would not have been possible without the solid work of the PPA's attorneys, and the PPA rightfully should be proud of the decision. [FN2].

First meaningful win for poker: This decision is also important because it is the first court of consequence to issue a ruling that will have any precedential effect. To date, the handful of court "wins" for poker have all been issued by state district courts whose decisions have no binding or persuasive effect on other courts. Every appellate court to date has ruled against the "poker is a skill game" argument. But federal district courts occupy a unique spot in the legal authority realm. Federal district court decisions of consequence are "reported" (officially published) and can be cited as authority in other cases just like appellate court decisions. These district court decisions are not binding on other courts as an appellate decision would be, but they are often looked to as persuasive authority by appellate courts confronted with developing areas of the law. Having a thorough, well-crafted judicial opinion on the merits of the "poker is a skill game" argument on the books, so to speak, lends a certain gravitas to the argument which can bolster that argument if and when it is considered by other courts.

The decision has a shot at being affirmed on appeal:  The obvious question on most poker players' minds is whether the decision can survive if the government appeals. An appeal is not guaranteed, but given that the decision breaks new ground and cuts against precedents from other federal courts, and considering that the government invested a lot of resources fighting this issue rather than plea bargaining what otherwise looks to be a trivially routine gambling case, I would expect there to be an appeal. Now Judge Weinstein is known for a liberal slant, and has written groundbreaking criminal decisions that were later reversed on appeal. But the Second Circuit is less conservative than most federal courts of appeal, and Judge Weinstein is well-respected as a smart judge (and former law professor at Columbia). Also, the case involves a bread-and-butter interpretation of a federal statute rather than a hot button Constitutional issue, so ideological differences among the appellate judges will have very little impact on the outcome of any appeal.

The decision is going to generate a lot of attention among the appellate court judges for several reasons. First, the sheer length of the decision will signal that something significant is occurring. The reason for the length of the decision is that Judge Weinstein spends a great deal of time going over legislative history as well as an exhaustive analysis of poker-related statutes and decisions from around the country. That kind of effort simply is not put into a routine decision, and the appellate judges will certainly note that Judge Weinstein is setting up his argument for a novel interpretation of the IGBA. The weakest part of the decision is that it conflicts with: a) prior federal court decisions related to the IGBA in which state gambling law served as the sole determining factor as to whether a predicate offense had occurred, b) prior federal court decisions in which poker was the predicate gambling activity for an IGBA offense, and c) numerous state appellate decisions and several federal court decisions that have determined poker is "gambling", including some which have considered and rejected the "skill game" argument.

To be blunt, established case law weighs heavily against Judge Weinstein's decision, and it would be fairly easy for the appellate court to reverse the decision. But, many of the prior IGBA cases can be distinguished because they assumed that poker was within the scope of the IGBA rather than analyzing the issue. Also, this case has the best, most detailed factual record as to the "skill game" issue of any court challenge to date. In this regard, Judge Weinstein was a fortunate draw for poker players, as his decision does an excellent job of pointing out the flaws inherent in the legal and factual assumptions underlying the prior adverse decisions. Judge Weinstein has marked a clear legal analysis path for the appellate court, if it chooses to follow his lead.

Nonetheless, I think the deck remains stacked against poker players if there is an appeal. Despite Judge Weinstein's adept "skill game" analysis, poker is still regarded as gambling both under New York law and in the public eye. Poker's reputation in front of the appellate court will certainly not be enhanced by the highly publicized Black Friday prosecutions (and the DOJ's "Ponzi scheme" commentary), particularly given the context of the IGBA's anti-organized crime history and purpose. As I have discussed previously, poker's reputation is a tough hurdle to overcome. Poker's considerable historical and cultural baggage might well overwhelm Judge Weinstein's legal analysis. And if the Second Circuit decides it doesn't want to endorse legalized poker, existing precedents will make it easy for the appellate court to reverse the decision. The easiest and most likely analysis to be used by the appellate court to reverse the decision is to follow those federal courts which defer to state law to define "gambling", and to find that New York state law governs the issue of whether poker is "gambling".

Interestingly, if the decision is reversed on appeal, the portion of the decision analyzing the "skill game" argument would potentially still have precedential value. If the Second Circuit decides that state law controls the "illegal gambling" question and that no further analysis is required under the IGBA, then the Second Circuit would never reach the "skill game" analysis. In that situation, although the case would have been reversed, Judge Weinstein's analysis of the "skill game" argument would remain fair game for citation to other courts (lawyers refer to this by the phrase "reversed on other grounds").

If I were a betting man, I would wager that the decision is ultimately reversed on appeal. But the odds against poker players are not nearly as long as they have been in past cases, and with a favorable panel of judges the decision has at least a puncher's chance of surviving on appeal. [FN3]

The decision is limited in scope:  The decision only addresses the narrow question of whether poker is "gambling" for purposes of the federal Illegal Gambling Business Act (IGBA). As I have discussed in prior posts, when it comes to statutes, definitions are critical. "Gambling" for purposes of one statute may not be "gambling" for purposes of another statute. So the mere fact that poker is regulated as gambling under New York law (or another federal or state statute) is not necessarily dispositive of whether poker was gambling for purposes of the IGBA. Likewise, merely because the court ultimately found that poker was not gambling for purposes of the IGBA does not mean that poker is no longer illegal gambling under most state laws and possibly other federal laws. Still, if the decision holds up, it would remove one weapon from federal prosecutor's anti-poker arsenal.

Poker is illegal under New York state law:  Although the defense team abandoned its argument that poker is not gambling under New York state law, the court nonetheless found that the argument had no merit. The decision explicitly noted that, "New York courts have long considered that poker contains a sufficient element of chance to constitute gambling under that state's laws." Another defendant could always raise a challenge to New York's state law on poker, but it seems doubtful that such a challenge would be successful.

Poker is still illegal under most states' laws: The decision contains an exhaustive listing of state laws and appellate decisions which consider poker to be gambling subject to ban or regulation (see Section II(5), pp. 47-51). The list is pretty bleak from a pro-poker perspective. Most states either explicitly define poker as gambling, or have found poker to be within the definition of gambling, regardless of the amount of skill involved. Again, poker players must keep in mind that, even if skill predominates chance in poker, states can still define "gambling" in such a manner as to encompass poker. The decision doesn't change how any state gambling laws view poker. So if poker was illegal gambling in your state prior to the decision, it is still illegal today.

Poker may still be illegal under federal law:  The decision only interpreted the IGBA. There are other federal statutes that could still be used by federal prosecutors against businesses offering poker, most notably the Travel Act. Unlike the IGBA which contained its own definition of "gambling", the Travel Act simply relies on a violation of a state gambling law to establish the predicate offense. Also, note that the Travel Act prohibits use of "the mail or any facility in interstate commerce" to "distribute the proceeds of any unlawful activity" or "otherwise promote, manage, establish, carry on, or facilitate the promotion, management, establishment, or carrying on, of any unlawful activity". This arguably could mean that merely mailing checks, promotional materials, or awards to players could be a violation of the Travel Act. So far federal prosecutors have not used the Travel Act in any poker-related prosecutions (at least not to my knowledge), but that might change if they lose the IGBA as a tool because of this decision.

House-banked game defense was rejected:  The PPA and many poker players have argued that the fact that poker is not a house-banked game (like blackjack, or three-card poker) is a significant distinction in determining whether poker should be considered "gambling". Even Judge Weinstein rejected that argument, rather summarily (p. 109). This argument is one of those situations where an important factual distinction winds up having no legal significance. So legally, if money gets wagered, it's probably gambling, regardless of how the house makes it profitable.

Revenge of the nerds:  As noted earlier, it is obvious that Judge Weinstein was impressed by Dr. Heeb's statistical and economic research. Although there have been a number of studies that purported to prove that poker was a "skill game", those studies merely demonstrated that skill had an effect on the game, and none of those studies really reached any meaningful conclusions as to the relative effects of skill and luck on the outcome of the game. Dr. Heeb did some really interesting and persuasive analysis directed to that specific issue. One analysis showed that the "long term" required to allow skill to overcome chance is not nearly as long as might be imagined, perhaps as low as 1,000-3,000 hands (rates that can be seen over the course of a long, deep-stacked tournament or a relatively short period of cash game sessions). Another analysis attempted to isolate the skill element of poker by cleverly demonstrating how winning and losing players showed significantly different win rates even when playing the same hand (the examples Dr. Heeb used were K9o and QJs). Any fan of Freakonomics-style analysis would enjoy the court's discussion of Dr. Heeb's testimony. I don't think it is an overstatement to conclude that Judge Weinstein's decision likely would have turned out differently without Dr. Heeb's analysis.

The court's discussion also noted that most online players in the large dataset used by Dr. Heeb were losing players, with 90-95% of players showing net -EV. This statistic was somewhat higher than I would have expected. This statistic could also be used on appeal to argue that, since most players are expected to lose, poker is no different than house-banked games. Judge Weinstein dismissed this argument as irrelevant to the issue of whether poker is a "skill game", and I agree that it is not relevant. But that fact still is one that might be of interest to an appellate court.

The decision is probably not a game-changer:  Even if the decision is affirmed on appeal, its impact on the poker legalization fight is likely to be minimal. In many states, whether poker is a game of skill is utterly irrelevant as poker is explicitly regulated as gambling. In other states where poker's status is not defined by statute, courts have already ruled that poker is gambling, and those courts are unlikely to reverse course after having decided the issue. The decision probably has little application to other federal gambling statutes because the decision is based on the IGBA's particular definition of "gambling". The decision is unlikely to affect federal or state poker legislation efforts as legislation is mostly a political issue which will not be swayed by one court's technical legal analysis of one federal law; poker simply isn't the kind of hot button legal-political issue like abortion or health care where a court ruling matters to legislators. It is possible that anti-gambling groups will use the decision to press for an explicit ban of online poker, but nothing I've read suggests that anti-gambling groups would have any better success passing a poker ban than pro-poker groups have had in passing poker legalization; those issues appear to be in stalemate at least through the upcoming elections. Most likely, the decision will ultimately have only symbolic value.

PokerStars may be the hidden winner:  Because the decision is from a different court, it does not change the pending DOJ Back Friday criminal or civil forfeiture cases other than to make it marginally easier for the remaining defendants to leverage a better plea bargain or settlement because the DOJ's IGBA and associated money laundering charges are now in a somewhat weaker position. The Black Friday cases are ultimately more about the banking and financial shenanigans of those involved than the underlying poker businesses themselves. But the decision certainly strengthens the argument to be made by PokerStars to state gaming regulators that merely running an online poker business did not violate federal law. Even if the decision is reversed on appeal, PokerStars could still argue that if a respected federal judge thought that poker was not regulated by the IGBA, then they certainly had a good faith belief they were not violating the IGBA. Of course, there would still be the matter of PokerStars allegedly violating state gambling laws, the UIGEA, federal money laundering laws, and federal banking laws. But if the applicability of the IGBA and the Wire Act can now be called into question, it becomes easier to raise doubts about some of the other laws in the mix.

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[FN1]  Think of the recent U.S. Supreme Court kerfuffle over the Affordable Care Act; although the Act was upheld, the legal reasoning in the decision placing limits on Congress' Commerce Clause authority may ultimately prove critical in decisions far removed in time and subject matter from the health care debate.

[FN2]  The PPA's success in this case, however, does not change my prior critiques of the PPA's "legalization by litigation" strategy. The discussion of whether the damage done by the PPA's earlier legal blundering is redeemed by this decision is better reserved for a separate post.

[FN3]  Thinking way down the road, if the Second Circuit affirms Judge Weinstein's decision, it could potentially set up a U.S. Supreme Court appeal to resolve a conflict among the various circuit courts of appeal as to how the IGBA is interpreted. This would be most likely if the Second Circuit finds that state law does not control the determination of what constitutes "illegal gambling". A lot of stars would need to align for poker to have a day in that Court, but these are the types of issues that are SCOTUS' bread-and-butter cases (i.e., interpretation of a federal statute, and resolving conflicts among the circuits).

A Touch of Grey for Full Tilt Players?

I see you've got your list out, say your piece and get out.
Yes I get the gist of it, but it's all right.
Sorry that you feel that way, the only thing there is to say is
Every silver lining's got a touch of grey.

~The Grateful Dead, "Touch of Grey"

The big poker news of the day was the announcement that the DOJ and PokerStars had reached a deal to settle the federal forfeiture proceeding against PokerStars in exchange for PokerStars paying off Full Tilt Poker's players in full for the money stolen/mismanaged from them by directors Ray Bitar, Chris "Jesus" Ferguson, Howard Lederer, and Rafe Furst. Obviously this is welcome news to the tens of thousands of Full Tilt players whose funds have been frozen (or been gambled or spent by Full Tilt shareholders) for over fifteen months. But for some of those players, the check they get in the mail might be a little lighter than they anticipated.

A key provision of the settlement agreement provides that the DOJ will be paid settlement funds from PokerStars to reimburse U.S. players, while PokerStars will reimburse foreign players directly. The settlement agreement also provides that PokerStars will provide the DOJ with player account records to facilitate the reimbursement of U.S. players. Although the DOJ has not yet announced reimbursement procedures for U.S. players to follow, the involvement of the DOJ raises the interesting question of whether some players will receive their entire account balance.

What could possibly prevent a full refund? Well, it seems almost certain that players will need to file some kind of paperwork to the government to submit their claims, and that paperwork will almost certainly include basic information such as names, addresses, and social security numbers. Most likely, the government will also issue a Form 1099-MISC or a Form W2-G with any player reimbursements. Consequently, there are a number of legal issues that might arise that would affect the reimbursement of certain players, including:

• Federal & state tax debts:  Players owing tax debts will likely find their player accounts garnished.
• Delinquent child support obligations:  The federal government is actively involved in enforcing child support withholding.
• Divorce & bankruptcy court proceedings:  Players who have filed asset inventories in divorce or bankruptcy proceedings might find that attorneys for their former spouse or creditors have developed an interest in determining if a poker account refund is in the works.
• Civil judgment and criminal fine garnishments:  Players who have unpaid civil judgments and criminal fines may face garnishments of their account funds.

As a practical matter, the tax and child support debts are more likely to affect players, as the government is more active in seeking out funds to satisfy those kinds of debts, and those types of debts are fairly easy for the government to locate and garnish with the straightforward exchange of data (e.g., names, addresses, social security numbers). Divorce and bankruptcy proceedings, as well as civil judgments and minor criminal fines (e.g., traffic or parking tickets) are more likely to fly under the radar unless and until an interested party catches the whiff of money in the air; remarkably, this happens a fair percentage of the time.

However, even players who don't have any current outstanding debts are not immune from potential financial issues related to their refunds. Players with significant refunds due will likely find themselves facing tax withholding, as well as potential audits of prior tax returns (remember, the DOJ will have full access to all past Full Tilt accounting records for each player account). Every player receiving a refund will also need to pay taxes on their refund proceeds. If players have kept good records, they may be able to deduct poker losses to reduce or eliminate their taxes owed. But players who haven't kept good records may well find themselves paying taxes on the full amount of their refund.

I'm happy for all the Full Tilt players who now have a good chance of recovering their funds which once seemed lost to yet another online poker scandal. If some of those players have a portion of their funds garnished to satisfy child support, tax, or other legal debts, well, every silver lining has a touch of grey.

ADDENDUM (31 July 2012):  After I hit publish, I found out via Twitter that tax attorney Brad Polizzano (@taxdood) had also written about the tax implications of Full Tilt refunds. Check out his post!

ADDENDUM (1 August 2012): To follow up on a series of questions and comments on Twitter, I want to clarify that it's not a guarantee that the DOJ would issue a Form 1099/W2-G with any refund. The federal regulations related to remissions in forfeiture cases are silent as to tax withholding, but do provide that the DOJ can impose procedures and conditions for remissions. So at the very least, there will be some kind of paper trail to tie remissions to players, and that paper trail at least creates potential tax implications for players.

Also, normal tax rules will apply to any remissions. So tax would only be owed on the profit/gain, and not on the deposit portion of the player account. Assuming players paid taxes in prior years and have good records, they may well owe nothing further (unless they declared a casualty loss for theft/loss of their account funds). Players who did not pay taxes, underpaid taxes, and/or lack appropriate records to document wins/losses may well find themselves with tax issues. Depending on the records available to the DOJ and PokerStars, the DOJ might be able to document deposits and wins/profits for player reporting purposes, but I'm not certain the DOJ is going to want to go to that kind of trouble. As Brad Polizanno wrote in his blog (see first Addendum above), it would be a surprise if the DOJ and PokerStars have not already thought out most of these sort of logisitics.

Egg On Your Face Up Gaming

Recently I read about several poker bloggers who had played in a special freeroll tourney arranged by famed poker media guru AlCantHang through Face Up Gaming (Lightning's account of the first tourney and a screen shot of the Face Up table display are here, while JT88Keys blogged about the tourney here). Face Up is a subscription model poker site which offers play chip poker tournaments, "cash" games, and leagues, with various cash and non-cash prizes awarded for tournament wins or monthly performance. Although registration is free, additional benefits (mostly more free play chips and better access to tourneys and leagues) are available for a monthly fee of $25.

A few days ago, Al posted on his blog that he had arranged a second freeroll tourney on Face Up, set for mid-afternoon yesterday. I had some errands to run, but was spousal unit free for the weekend, so I figured why not organize my day to play some cards online during the worst of the scorching heat wave Iowa (and half the country) has been enduring recently. Plus, there was plenty of free swag up for grabs, including an iPad, an iPod, a pair of fancy sunglasses, and assorted clothing items. Pretty sweet set up, eh?

I got registered just fine. I opened the poker lobby around 2:00, 15 minutes before tourney start time. The lobby did not really indicate how to go about getting your table to display, and I was starting to wonder how to get seated when my tournament room finally displayed a link to my table a minute or two before the tourney started. I was dealt the Ace of spades for the button, which is always a good omen. I then spent a few hands trying to figure out the table set up, auto-folding several trash hands.

Finally, I found a hand to play—Ace-Queen offsuit on the button. As players started to fold, I tried to figure out where and how to put in a raise. As the betting display finally popped up, I went to enter a raise amount ... and nothing happened. As my timer ran down and my hand was folded, I frantically clicked buttons as it slowly dawned on me that I had been disconnected.

OK, stuff happens. I waited briefly to see if I reconnected automatically, but no luck. So I went back to the tourney lobby, but couldn't find the blogger tourney because once a tourney starts, it is no longer displayed. I tried to engage in the lobby chat, but kept getting an error message telling me I needed to log in. Then when a log in dialogue box appeared, I tried to log in but only got error messages. I tried closing and reloading the Face Up site, but no luck. Finally, after about 30 minutes of trying various solutions, I successfully reconnected. It took a few minutes after that for the lobby to again display the blogger tourney. But I was back in action.

I had been blinded down from 2000 to ~1400, but stole a couple of pots with preflop all-ins with deuces and A6 sooooted. Then I knocked a player out when I won a race with a middle pocket pair versus his Broadway Ace (funny how I can't remember the details of my one big winning pot).

I was running good, too good. I was almost immediately disconnected again, this time for only five minutes or so. I got back to the game in time to find 66 under the gun. I decided to get tricky and play for a check raise. Unfortunately, six of us saw a flop of 5-5-7. I bet out, got raised by a shorty who was all in, and it folded back to me. I called off the small raise, and found myself up against Q5 sooooted. Ouch. I was back to being a short stack, and got it all in with KQ offsuit against pocket Fours. Four in the window and goodbye, good luck, good gravy.

From the Face Up lobby chatter and the poker blogger Twitter stream, it was pretty clear that Face Up was having major connection issues during the blogger tourney. The lobby showed a mere 500 or so players logged in, and I don't know how that number compares to the normal player volume. The site problems clearly were affecting all tourneys, not just the blogger freeroll. As another blogger, Heffmike, noted on his blog, the Face Up administrator disabled lobby chat for a period, so I can't comment how long the connection issues lasted. But between the players labeled as disconnected on the site and the Twitter stream, I would guess well over half of the poker bloggers in the tourney experienced some level of connection problems.

When any business throws a promotional event like this for influential media and blogger types, the purpose is to get some free publicity, preferably glowing reviews and enthusiastic endorsements. Whether it's a poker site's freeroll, a new restaurant's sneak preview, or a casino's "soft opening"—the one big rule is make sure everything runs smoothly. After all, you invited these people to try your business for free in hopes they will be impressed enough to generate some favorable publicity. So if your business has serious problems during your promotional event, you have pretty much shot yourself in the foot.

That being said, although the connection issues were annoying, it was just a freeroll, after all. None of the players lost anything other than an hour or two of their weekend. I will probably give the site another shot or two to see how things run once they have the connection issue sorted out, though I can't see myself renewing my monthly membership if the connection issues aren't resolved in the next few weeks.

In all fairness, however the site seemed to run fairly smoothly during the periods I was able to stay connected. I did find some areas where the site could look to improve:

• Table size—The table was awkwardly sized. I had to reduce the window size to get it to fit on my laptop screen, but this made many parts of the screen hard to observe without scrolling up and down.
• Betting options—The bet slider was very difficult to use, and I had to resort to typing in numbers.
• Slow graphics—The dealing and action graphics were notably slow.
• Lobby screen—The lobby screen needs a place to log in if you are disconnected, rather than having to close the lobby, go back to the website, and start all over from scratch. Also, there needs to be a tab to display tourneys that have started, as well as a better way to get back to your table when you are disconnected. Finally, when you click on a cash game or tourney with no players, the screen basically locks up instead of indicating that no games are available.
• Player chat—The availability of video and voice chat are nice. But it looks to be difficult or impossible to chat with players not at your table.

Certainly Face Up is well behind the sophisticated player interface of established play money poker sites like Poker Stars (where I have been playing occasionally over the past six weeks). But Face Up is solid enough for a new start up site, and hopefully Face Up gets its glitches fixed and keeps working to upgrade its interface software. Face Up's real prize reward system for fake money play could fill a desperately needed niche in the online poker eco-system as we continue to see very slow and fragmented movement toward online real money poker legalization. But for the moment, Face Up is coming off as being an amateur hour operation.

(Image source).

Inertia Poker Players Can Believe In

Last fall, the Poker Players Alliance organized poker player support for an online petition to the White House advocating the legalization and regulation of online poker. On Friday, the Obama Administration posted its response, which was disappointing only to those poker players who were naive enough to believe that the online petition was something other than a silly publicity stunt on both sides. Chris Krafcik, Research Director for GamblingCompliance, asked me for my take on the response. I emailed him the following:

I don't have any profound insight to share re the Obama Administration's statement on iPoker, mostly because I think the statement is pretty much a standard political puff piece, a souped up version of a polite blow-off letter from a legislator to a constituent on an issue the legislator doesn't care about. The statement basically restates the current status of the law—federal law bans sports betting, states can authorize iPoker and other forms of iGaming, and violations of state iGaming laws may also be a violation of federal law. The statement then placates any social conservatives or law and order types by ticking off the usual laundry list of concerns—addictions, minors, fraud, and money laundering.

I think the most telling sentence of the statement is: "The Administration will continue to examine this issue and is open to solutions that would help guard against the use of online gambling sites as tools for conducting illegal activities or preying on unsuspecting individuals to the extent that online gambling is permitted." I read this statement to mean that the Administration is not actively pursuing any particular policy re iGaming or iPoker. Given the Administration's other policy priorities, combined with the fact this is an election year, I doubt the Administration has any interest at all in spending political capital on a niche issue like iPoker where there is strong social conservative resistance, no real political pressure from the President's base, and the issue has little resonance as a pivotal electoral issue either nationally or in swing states. In fact, legalizing iPoker on a national basis is probably a political negative for the President, likely to be portrayed by conservatives as another example of the President dictating social policy to the states.

In short, I think this statement is utterly inconsequential, and was intended to be so. Of course, the poker world will seize on it to support their collective delusion that iPoker legalization is a major political issue.

To be blunt, President Obama does not give a flying pig about internet poker or gambling. Nothing the President or his Administration have said or done at any point in time indicates the remotest interest in the issue near and dear to the hearts of poker players. At best, the President is not opposed to iPoker legalization, and if presented with an iPoker bill hammered out by the major casino, Indian, and law enforcement interest groups, would probably sign it (which is admittedly a major advance over the Bush Administration). But don't expect Obama or his Administration to lift a finger to push an iPoker bill through Congress.

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.

* * * * *

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.

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[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.

Online Poker Legalization Will Ultimately Be a State by State Fight

"All politics is local."

~Former House Speaker Thomas P. "Tip" O'Neill

Earlier today I discussed the reasons why online poker isn't legal despite the DOJ's recent formal opinion stating that the Wire Act applies only to sports-related gambling. Essentially, because poker, like all gambling, is regulated at the state level, the DOJ's position regarding the Wire Act ultimately has little direct effect on the legality of online poker. An important corollary to this point is that the online poker legalization battle will have to be fought and won in each individual state.

I know poker players and the PPA are focused (correctly) on federal legislation to legalize online poker. Technically, Congress could use its Commerce Clause power to preempt state gambling laws and impose a national online poker system. Given that gambling issues are traditionally the province of the individual states, and given the lack of national consensus as to legalization of online gambling, a sweeping federal plan is a complete non-starter.

The best result poker players can hope for on a federal level is legislation permitting online poker on a national basis, while allowing individual states to choose whether to participate in the system. An "opt-out" system (where states are included in the system unless they specifically choose not to participate) is superior to a federal "opt-in" system (where states must affirmatively choose to join the system). For any controversial issue, it is politically easiest to maintain the status quo, as political change requires affirmative use of political muscle. So, an opt-out system is almost certain to bring many states into a federal system which otherwise would lack the political will to affirmatively join under an opt-in system (as of now, Nevada, California, New Jersey, Florida*, and Iowa are the only states which have actively explored legalizing online poker).

If federal legislation fails, then individual states will likely begin to legalize online poker on an intra-state basis. As I have discussed previously, it is likely states will adopt some type of reciprocity system to permit players from states where online poker is legal to play against players from other states with similar online poker regulations. Consortiums like this would improve liquidity and create synergy for all participating states, leading to increased numbers of players (and greater rake and tax receipts). It's also possible, even probable, that as states become comfortable with security issues, foreign players from countries where online poker is legal would be permitted to play as well (though there likely would be some tax and money transfer issues to work out on a federal level first).

The most important point to remember, however, is that whether online poker legalization occurs at the federal or state level, the online poker legalization process is controlled by each of the 50 state legislatures. The legalization process will be easy in some states. But in many states, online poker advocates will have to engage in a political battle against a variety of opponents. Obviously, the usual groups opposed to gambling on moral and social grounds will be vocal. In some states, local or tribal casino interests fearing loss of revenues may oppose online poker, and may have the money and political clout to prevent legalization. There will certainly be a few states where opportunistic politicians will shanghai the online poker issue to strong-arm political concessions for completely unrelated issues.

Make no mistake about it, the online poker legalization fight will be a long and messy process. Regardless of whether a federal or state level system develops, it's entirely possible that online poker may not be uniformly available in all of the states for several years, possibly even a decade. Professional players willing to relocate will likely be able to find a state where they can play legally within a year or so. Unfortunately, many recreational players will not have that option, and will be left to the whims of their state political process.

It's time for poker players to get to know their state legislators.

----------------------------------------------------------------
* ADDENDUM (26 December 2011):  Edited to add Florida to the list of states which have actively explored legalizing online poker. I was inspired to go back over my post by a thoughtful discussion of the DOJ opinion posted today by Shamus at Hard-Boiled Poker. Just more evidence my memory isn't what it used to be!

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Why the DOJ's Wire Act Opinion Is No Big Deal for Online Poker

"I don't know how to put this but I'm kind of a big deal. ... I'm very important. I have many leather-bound books and my apartment smells of rich mahogany."

~Ron Burgundy (Will Ferrell) in Anchorman: The Legend of Ron Burgundy (2004)

The DOJ today gave the poker world a nice Festivus gift, issuing an opinion letter stating the DOJ believes the Wire Act is applicable only to sports-related gambling. Consequently, by implication it is the DOJ's position that the Wire Act does not apply to bar online poker. Predictably, the poker world overreacted, misconstruing the DOJ opinion as either conceding that Black Friday was invalid, and/or that online poker is now legal.

I'm currently on vacation for a couple of days of poker in Vegas before moving on to celebrate Christmas with my brother and his family, so I have neither the time nor the computer access to write a lengthy post. However, I'm pecking a post out on my iPhone because I wanted to provide a skeleton argument to explain the interplay of federal and state gaming laws in an attempt to help combat some of the widely held misconceptions being bandied about by many poker players on Twitter and by some in the poker media. This post is just an outline of several lengthier posts I started some time ago in my poker and the law series, but shelved when Black Friday made them somewhat superfluous. I will probably resurrect a few of them to provide a fuller treatment of the topic in the near future.

First, the good news. The title of this post is hyperbolic; the change in the DOJ opinion on the Wire Act is a big deal in two respects. First, it removes one federal criminal statute from the weapons prosecutors can wield over online poker companies. Second, and to my mind more important, it removes a potential legal barrier that would otherwise prevent states which legalize intrastate online poker from forming multi-state online poker consortiums to permit residents of states with reciprocal regulations to play against each other (akin to multi-state lotteries) in the event poker legalization occurs at the state level rather than the federal level (as increasingly seems the most likely path forward). The Wire Act does contain an exemption for transmitting wagering information from a state or country where it's legal to another such state or country, but when it comes to federal criminal law, it's better to know you aren't covered by the law in the DOJ's eyes than to have to worry about how a prosecutor or judge will interpret the law.

Now the bad news. First, the DOJ opinion will have no effect at all on the Black Friday criminal or civil cases. Those cases are based on federal statutes other than the Wire Act. Frankly, I think the DOJ knew applying the Wire Act in the Black Friday prosecution would add a problematic legal issue, so they chose to rely on other criminal statutes. Going forward, if the DOJ should choose to pursue cases against other online poker sites, the DOJ has plenty of other statutory arrows left in its quiver—the UIGEA, the Travel Act, and Illegal Gambling Business Act spring to mind.

Second, and more significantly, the DOJ opinion does not change the current legal status of online poker. Online poker has been illegal since its inception and remains illegal today.

The first step in analyzing the legality of online poker is to recognize that gambling has historically been regulated at the state level, as a function of a state's police powers. Most states banned all gambling until recently, while a few (notably Nevada and New Jersey) were far ahead of the curve in permitting some forms of regulated, legal gambling.

There are a number of federal laws that criminalize gambling related activities; e.g., the Wire Act, the UIGEA, the Travel Act, and the Illegal Gambling Business Act to name a few of the more prominent. These laws, however, are generally dependent on violations of state gambling laws as a predicate act triggering federal criminal liability. Congress could, if it wished, use its Commerce Clause power to preempt the field of gambling law (or just online gambling law—which it might do if online gambling seems inevitable at the state level). But instead, Congress essentially lets each state determine the level of legalized gambling it wants available to its residents. Federal law then provides the legal tools needed to apprehend criminals who try to evade state gaming laws by crossing state lines in some aspect of operating an illegal gambling business.

The next analytical step is the key to understanding online gambling regulation. Currently, every state either bans poker or regulates poker as a form of gambling. To be a bit more precise, every state either bans operating a poker game for profit or only permits such for-profit poker business subject to strict state regulations; even though the playing of poker may not be illegal in many states, the offering of poker as a business (e.g., as a casino, card room, or online poker site) is the key operative activity subject to state regulation.* Note that I said "poker" and did not distinguish between live and online poker, because most states do not make that distinction.

Now many poker players assert that online poker is not illegal under state law unless the state law specifically bans online gambling. I'm not certain where this argument comes from, but it's pretty sketchy legal reasoning. If it's illegal under state law to run a for-profit poker room in your basement, simply setting up a computer server across state lines to run your poker game online doesn't magically make your poker business legal (or beyond the law). As I have discussed in prior posts on jurisdictional issues, states have routinely exercised criminal jurisdiction over people outside the state's borders who engage in illegal conduct that affects people within the state's borders (a prime example is child pornography or solicitation). If a company uses the Internet to offer gambling within a state where that form of gambling is illegal outright or only legal subject to state regulations, then that company is breaking state gambling laws. Break the state gambling laws, and the federal gambling statutes kick in. Presto! We have Black Friday.

As of right now, it's safe to say that poker is either illegal altogether or regulated as gambling in every state. As of right now, no gaming company has ever been licensed by any state gaming commission to offer online poker (or online gambling of any kind). Therefore, online poker is, and always has been, illegal under existing state gambling laws. States that added a specific statutory or regulatory prohibition against online gambling did so to make the law crystal clear or to strengthen penalties, not because there was some online gambling loophole that made online poker legal.

In sum, the new DOJ Wire Act opinion has no immediate effect on online poker. Online poker remains illegal under state law as it exists today. However, Nevada and other states may soon begin issuing licenses permitting gaming companies to offer intrastate online poker. If and when multiple states permit online poker, then one should expect multi-state consortiums to develop to permit online poker play between residents of states with similar online poker regulations. Nonetheless, the days of unlicensed foreign companies like PokerStars or Full Tilt offering online poker are at an end. All hail the new, licensed, regulated, domestic online poker sites!

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* ADDENDUM (26 December 2011):  Edited to add the second half of the sentence to clarify the distinction between laws covering playing poker and those addressing those who offer poker as a for-profit business (e.g., casino, card room, online poker site).

Also added a link in the final paragraph to a post by Shamus at Hard-Boiled Poker which has some excellent discussion linking the DOJ opinion letter to the recent Nevada state legislation setting up the regulatory framework for intrastate online poker.

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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?

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[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.