The prosecution of Full Tilt Poker Directors Raymond Bitar and Nelson Burtnick, the legal implications, by David Schollenberger, Partner and Head of Gaming Team at Healys LLP.
Much press and discussion has surrounded the recent surrender of Full Tilt Poker (“FTP”) Directors Raymond Bitar and Nelson Burtnick to the United States Department of Justice (“DoJ”) in New York. Their current indictment alleges violations of the Unlawful Internet Gambling Enforcement Act (“UIGEA”), fraud to their players, fraud to payment processing banks and credit card companies, fraud to their regulator the Alderney Gaming Control Commission (“AGCC”), money laundering, Wire Act violations, and operating a “Ponzi Scheme.” Bitar faces nine charges and Burtnick eight. If convicted of all, Bitar could face up to 145 years in prison.
UIGEA, which was enacted as a US federal law in 2006, makes it an offence for gambling businesses to “knowingly accept” most forms of payment “in connection with the participation of another person in unlawful Internet gambling.” It is alleged that FTP took in at least $1 billion from US residents through April, 2011.
The indictment alleges fraud against their players because they allegedly encouraged players to deposit money with FTP with assurances that the player money would be kept in segregated bank accounts that would be separate from operating accounts and not used in the operation of the business. The DoJ charges that FTP did not protect player funds in separate accounts and used player funds for whatever purpose directed by Bitar, including paying Bitar and other owners of FTP hundreds of millions of dollars. When the company stopped trading worldwide in June, 2011, the DoJ alleges that it owed players approximately $350 million.
Bitar and Burtnick are charged with using fraudulent methods to facilitate payments through US banks and credit card companies, which are forbidden under US law to process Internet gambling payments.
This was allegedly done by arranging for the money received from US gamblers to be disguised as payments to numerous online merchants and other non-gambling businesses. For credit card companies, gambling transactions were allegedly deceptively coded to appear as if they were non-gambling related.
FTP was required, under its license with AGCC, to maintain 100 percent of player deposits as cash in its accounts. Bitar and Burtnick allegedly presented falsified financial statements to the AGCC indicating that this requirement was met, when in fact it was not. Finally, the indictment charges money laundering through running the proceeds of crime through the banking system, wire fraud in transacting criminal activity over inter-state communications systems and operating a Ponzi scheme.
Legal analysis of indictment charges
It is hard for those in the iGaming industry not to feel some sympathy for the defendants on the UIGEA charges. More enlightened countries such as the UK have taken the more sensible approach that rather than be criminalized, online gambling should be permitted and regulated. It must be apparent to the DoJ that the $1 billion of revenue generated by the American public for Full Tilt indicates the desire of the American public for these services. Nevada has already enacted law that allows online gambling within the state.
Other states and the US federal government are also looking at similar legislation. It is only a matter of time before UIGEA is repealed. Nonetheless, it is currently the law, and FTP knowingly serviced the US market despite the law and its possible consequences.
The DoJ refers to the actions of Bitar and Burtnick as a Ponzi scheme, which has reverberated extensively in the press. Ponzi schemes are illegal investment schemes where an investment company takes money with the promise of a return and then uses the money of new investors to pay it back the original investors. FTP was not an investment company and did not promise a return. It was an operating poker company taking a rake. It promised to hold its player money safely and separately from its own and, instead, wrongfully comingled and mismanaged its players’ money.
These alleged fraudulent actions to players and financial institutions are unforgivable. Not only are they violations of law that have lost money for thousands of punters, but they have the potential to generate further bad will and stigma for the industry. Lying to customers about the safety of their money and then lining their own pockets with that money is egregious. Similarly, the pristine reputation of the AGCC and other highly reputable offshore regulators will no doubt be tarnished by this fraud. The AGCC was rightfully quick to terminate their license upon discovery of the fraud.
Did the problems arise from inadequate regulation by the AGCC? If the US would regulate online poker rather than prohibiting it, would the losses to players have been averted sooner? The AGCC requires of its licensees that they have adequate cash on their balance sheet. FTP misrepresented to the AGCC that it continued to meet this requirement. The fraud took some time to discover. Perhaps segregated trust accounts for punter money should be required as a license condition going forward to ensure the safety of punter money along with audited trust account statements and reconciliations.
Some industry leaders have pointed out that had the US regulated the FTP business rather than prohibit it, this type of abuse might have been avoided. Again, this was a fraud – an intentional misrepresentation of facts by Full Tilt senior management. It is granted that fraud is sometimes difficult to detect, particularly when it is carried out systematically by the senior management of a company. It seems likely, however, that the greater resources and investigatory powers of gaming boards in the US would have provided additional safeguards to punters had licensing been available in the US.
Industry reputational damage
The online gaming industry will be damaged by FTP’s very poor and dishonest management decisions. It is unfortunate that these types of events grab headlines, and isn’t helped when the DoJ inflames the situation by referring to it as a “Ponzi scheme,” implying that it was planned as an investor scam from the beginning. The general public, who has little contact with and understanding of the industry, may become even more skeptical.
Nonetheless, the industry has survived numerous setbacks over the years, and continues to flourish. Testimony to its health are the continually increasing numbers of participants who enjoy online gaming responsibly as well as the overall growth of the industry sector.
Further, no industry is immune to scandals, as recent discoveries in the banking and financial services sector have shown. There are occasional rogues in every industry. The vast majority of operators in the industry are honest and responsible.
There are several implications for online gaming businesses going forward after this latest setback to the industry.
- Punters will be increasingly concerned about the safety of their money on deposit. Companies who can demonstrably ring fence punter money in trust accounts will be able to ease this concern.
- Regulators will need to be increasingly attentive about fraud in their licensees, and may need to have greater vigilance over (and auditing of) company activities.
- Online gaming in the US is still illegal. Until the law is changed, companies should respect this position or run the risk of prosecution and closure of their company.
- The industry should continue to strongly lobby for the change of US state and federal laws to legalize and regulate online gaming. It is only a matter of time until this happens but the sooner the better for everyone concerned.