April 21, 2011
The SDNY's War Against Online Gambling
Posted by Christine Hurt

So, (as Dr. Doofenshmirtz would say) here's the backstory: 

States generally have been allowed to prohibit, exempt and regulate gambling.  However, the last decade has seen the federal government very interested in the prohibition and prosecution of online gambling.  (To catch up to 2006, here's my article).  Then, in 2006, the U.S. government raised the stakes, first arresting David Carruthers, the CEO of Betonsports, a legal gambling site in the U.K on racketeering and fraud charges while he was changing planes in the Dallas-Fort Worth airport.  (Earlier post here).  After spending three years in house arrest in a hotel in St. Louis, Carruthers was sentenced to 33 months in prison.  In 2007, prosecutors arrested two former officers of Neteller who were also passing through U.S. jurisdiction. (Earlier post here.)  The officers agreed to pay a fine of $100 million and were scheduled to be sentenced in October 2007, but I cannot find any information on their sentences (if any).  Interestingly and perhaps connected with last week's excitement (explained below), Anurag Diskshit of Party Gaming agreed to pay an enormous fine in return for cooperating with federal prosecutors for the past two years before being sentenced to probation in December. 

During this time, Congress passed the Unlawful Internet Gambling Enforcement Act of 2006 as a last-minute amendment to the SAFE Ports Act.  (Earlier post here.)  The UIGEA makes it a crime to accept wagers or bets online or to process those wagers or bets.  The Act exempts a number of activities, including lucrative state lotteries and fantasy sports. But then the online gambling industry seemed lulled into complacency.  Online poker sites continued to do business, accepting wagers from U.S. residents through a series of online intermediaries designed to foil U.S. banks poised to block illegal gambling payments.  Mainstream print media advertised these sites, and mainstream television stations such as NBC and ESPN aired poker tournaments with players sporting hats and shirts with online gambling logos.  Major U.S. casinos formed ventures with online sites to  possibly expand into online gaming.

Then came Friday, April 15.  Federal prosecutors unsealed eleven indictments naming officers of the three largest foreign-based online gambling sites:  Pokerstars, FullTilt Poker and AbsolutePoker. (Economist article here.  NYT article here.) In addition, three U.S. individuals charged with fraudulently processing online payments were arrested.  Moreover, the prosecutors got the gambling companies’ attention by seizing their domain names and freezing their U.S. assets.  Defendants were charged not only with violating the UIGEA, but also with bank fraud and money laundering in their attempts to circumvent the Act.  The prosecution is definitely going “all in” and forcing the first trial run of the UIGEA.  Many fans of online poker want defendants to argue that poker isn’t gambling at all because it is predominantly a game of skill, not of chance.

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