October 29, 2015
Seth Harris to head the Fantasy Sports Control Agency
Posted by Matt Bodie

For-profit fantasy sports have taken a huge leap forward in the last year or so, with ads for daily/weekly fantasy competitions blanketing the airwaves.  Earlier this month, a scandal erupted over employees of two of the sites using insider information to get an advantage over other players.  Although largely not regulated as gambling (based on the skill/luck distinction), Nevada has stepped in to characterize these fantasy competitions as gambling and thereby require the websites to get a gambling license (or shut down).  Other states seem likely to follow with additional regulation.

In the wake of this legal and media scrutiny, the industry has created a new Fantasy Sports Control Agency to begin a system of self-regulation. The press release lists four parts to the system.  They are (quoting the release):

  • Standards: Develop a system of standards for the fantasy sports industry founded on transparency, integrity and ethical behavior.
  • Company Controls, Processes, and Leadership: Every FSTA member company will be expected to respond to the FSCA’s standards by establishing a system of controls and processes to ensure compliance. In addition, every member company will be expected to appoint a senior leader reporting to top executives and overseeing compliance efforts.
  • Auditing Policies and Procedures: Implementation of a sound, regular auditing process to measure and report on company compliance.
  • Enforcement: Establishment of a system that provides incentives and public recognition for compliance with FSCA guidelines and penalties for failure to comply.

Heading up the FSCA will be Seth Harris, former Acting Secretary of Labor and Deputy Secretary of Labor in the Obama Administration.  Prior to his service to DoL, Harris was a professor at New York Law School and a beloved member of the labor & employment law academy.  On his new position, he said that "[t]he reason that the FSTA established an independent authority and asked me to lead this organization is to ensure that it’s not a sham, that it’s not a fake, that it’s not just a publicity stunt."  You can hear Seth being interviewed by his brother (KTRS host Paul Harris) about his new position here.

The creation of the FSCA and the hiring of Seth are smart moves by the nascent industry.  Regulations will be coming at the state and possibly federal level, and the industry should get out in front of them and hope to blunt their force with a credible effort to self-police.  For new industries, especially those along the "vice" spectrum, regulation can actually help prevent a market for lemons and can facilitate greater consumer participation.  But prohibition can't!  They key is finding the regulatory sweet spot that prevents attention-grabbing abuses but allows the industry to grow.  The creation of this new agency demonstrates a recognition by the fantasy sports industry that there is likely "no freedom without regulation."

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March 10, 2015
New Article: Protecting Gamblers or Protecting Gambling? The Economic Dimension of Borderless Online "Speech"
Posted by Christine Hurt

Last Fall, I had the great honor and privilege of traveling to the University of Aberystwyth to participate in a conference on Internet Jurisdiction.  I was quite out of my league among a group of European and Australian scholars and professionals specializing in EU laws regulating the internet.  Speakers came from many different countries, representing universities, EU commissions, Google, Yahoo and Wikipedia.  My contribution was to discuss the U.S. policy regarding online gambling, which sticks out like a sore thumb from the U.S. policies on borderless speech.  

Here is the link to the draft of the short 6,000 word essay that followed, and the abstract:

The globe is a patchwork of laws on various “sin” activities: alcohol, drugs, prostitution, pornography, and gambling. Separately, the globe is a patchwork of laws on free speech. Many times, these categories of activities and speech are even more blurred. Prior to the internet, however, citizens of the world could only avail themselves of other jurisdictions’ looser laws by being physical travelers between these patches. Tourists could travel from gambling-free states in the United States to Las Vegas, Nevada to gamble, or even to foreign jurisdictions such as Monte Carlo. College students from the U.S. could study abroad in Europe, where the drinking age was lower than 21 years of age, and drink without impunity. The occasional American tourist venturing into the Amsterdam “Red Light District” would also not face penalties in his home jurisdiction for engaging in activity that would be illegal in the U.S. Home jurisdictions rarely were concerned about this type of tourism, even though some modest amount of dollars was exiting the jurisdiction. Writers and thinkers in countries with anti-free speech laws could emigrate to other countries to voice opinions, but could rarely freely move back and forth without reprisal at home. The valuable speech the authors created could also not be freely distributed in the home country, making speech tourism less practical or even valuable.
The advent of the internet and the ubiquity of computers have created the ability to be “virtual vice tourists” and well as “virtual speakers.” In the former instance, web-surfers engage in activities online that are illegal in the country in which they are sitting, but not in the country in which the computer server sits. In the latter instance, speakers with legal rights in the country in which they sit are projecting their speech into jurisdictions in which such speech is restricted. In addition, physical forms of speech, such as books, may be read or purchased online by residents of countries with stricter speech laws. Citizens of nations with strong free speech rights and histories wish to export that culture and demand that all countries respect the rights of the speaker. In other words, the speech law of the internet should be that of the country that respects speech the most. Though the U.S. government urges foreign jurisdictions to protect internet speech to the fullest extent, the U.S. does not protect fully internet activity, such as online gambling. In fact, the U.S. would like to spread the reach of its online gambling regime beyond its own borders. Perhaps this is consistency: our laws, whether they relate to free speech or online gambling, should be respected everywhere. Or, these policies could be incompatible: the laws of the internet should mirror the jurisdiction with the most liberal speech laws and the jurisdiction with the most restrictive online gambling laws.
In 2005, the World Trade Organization’s Appellate Body ruled that the United States was violating the General Agreement on Trade in Services by prohibiting online gambling sites headquartered in foreign jurisdictions (and domestically) while allowing certain kinds of internet gambling, namely horserace betting. Though the U.S. had argued that it had the ability to prohibit internet gambling under the exception for public morals and public safety, this argument was specious at best due to the fact that other types of gambling are legal and available in almost every state: casino gambling, tribal gambling, state lotteries, and video gambling, to name a few. Moreover, the next year the U.S. passed a federal law explicitly prohibiting online gambling and the processing of payments and credit to online gambling operators under the Unlawful Internet Gambling Enforcement Act of 2006, which was appended to the Safe Ports Act, legislation focusing on homeland security. This act made online gambling by U.S. residents harder by forcing U.S. banks, credit card companies and online payment processors to decline to transfer payments to offshore gambling companies, but not impossible. However, in 2011, the U.S. Department of Justice unsealed eleven indictments against individuals associated with the largest offshore gambling sites – sites that operated completely offshore but that also enjoyed a clientele comprised of U.S. citizens. These defendants faced charges associated with fraudulent practices aimed at bypassing the restrictions placed on banks by the UIGEA. After this so-called “Black Friday,” the illicit online gambling by U.S. residents through convoluted payment systems was severely curtailed.
The U.S. stance prohibiting online gambling has toughened substantially since the WTO’s 2005 ruling, yet the U.S. government’s public morals argument has grown even weaker. Since 2012, three states, Nevada, New Jersey and Delaware, have passed laws legalizing intrastate online gambling. Other states are contemplating the same revenue-generating move. To say that offshore online gambling must be prohibited for public morals and public safety reasons is particularly disingenuous when domestic online gambling is becoming widespread. However, as domestic online gambling grows, the pressure to keep offshore online gambling illegal also grows as U.S. states attempt to preserve their market among their own citizens. To add to this disconnect, the U.S. takes the stance that U.S. speakers should not be subject to tighter anti-speech laws of other jurisdictions when citizens of those jurisdictions access that speech, whether the speech is a book or a blog post. The U.S. should revisit its off-shore online gambling position in light of its free speech policies.

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November 07, 2012
Market Movement
Posted by Gordon Smith

The stock markets are tanking this morning ... because President Obama won reelection? So when an event that had something like 65%-80% probability actually happens, the markets go crazy? I understand that 65%-80% probability is not the same as certainty, but I am surprised by the size of the movements.

According to the WSJ, the markets are turning their attention to the fiscal cliff, but we have been talking about the fiscal cliff for a long time. Perhaps traders were surprised that the House of Representatives remained in Republican hands? Actually, according to Intrade, that was even more likely than the President's reelection, somewhere around 90%.

Then there was this revelation: "Financial stocks were also sharply lower, as investors fretted about the impact of electoral wins by Elizabeth Warren in Massachusetts and Alan Grayson in Florida." The Warren-Brown race was close at the polls, but Warren's election was trading at over 80% on Intrade in the days before the election, and Grayson won by 25 percentage points!

Triumph of hope over experience?

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May 16, 2011
Chuck E Cheese's, Gambling & Breach of Contract
Posted by Christine Hurt

Like most reasonable parents, I am no fan of Chuck E Cheese's.  Fortunately, we haven't lived in a city with one in quite awhile, so we have been spared outings and birthday parties there.  There are lots of reasons to avoid it:  it's loud, the food is not great, and the soda cups are really small.  And, though I've run no controlled experiments, I've yet to take kids there and not have one of them run a fever a few days later.  And, unless you have the will power to let every visit end in screams and tears, you will spend many, many dollars on tokens to be used on games, while your mediocre pizza gets colder and even more mediocre.

Pizza is a sideline; here's the business plan.  You buy tokens to use on the games, and sometimes if you win, coupons will spew out of the machine.  If you save coupons, you can turn them in for "prizes" (euphemism for "plastic crap").   Big huge prizes are on display, but unless your child saves their coupons for several years, you will choose from a small bouncy ball and a key chain.  Basically, for every hundred dollars you spend on tokens, a very successful ten year-old can yield you about $8 retail in plastic crap, which must cost the store about $.75.  Now, other kid-friendly eateries have adopted this model, which definitely brings (little) people in even when the food is not fourstar.  In Texas, Gattitown is bigger (Merry-go-Round) and has better food.  And a lot of even higher-end, grown-up places like Dave & Buster's  also work on this scheme.  In Champaign, a local restaurant family has a successful high-end eatery with this model (and mini-bowling!).

If the pizza is not enough to sue Chuck E Cheese over, Denise Keller of California has filed a (purported) class-action lawsuit against CEC Entertainment, Inc. alleging that many of the token-eating games at her hometown CEC are actually gambling devices similar to slot machines.  Unlike traditional Skee-ball or Pop-a-Shot games which require skill (much more than most children have), these are pure games of chance.  Here's a video of the Wheel of Fortune game  and the Deal or No Deal game that may be the ones Ms. Keller cites in her complaint.  Sure enough, Section 330a and 330b of the California Penal Code make it unlawful to possess "slot machines," which are defined broadly as basically any machine that you put something of value into, then through the operation of pure chance, you may receive something else of value.  Voila!  Half the arcade games in these token-to-plastic crap eateries!

So, two things.  First, this is not the first time anyone has told CEC or other kiddie arcades this.  Apparently, the Supreme Courts of both Mississippi and Alabama have that these types of devices (like the "Quarter Pusher") are gambling devices.  In Mississippi, the legislature let them off the hook with a "low-stakes" exception.  As I've learned in trying to research and write in this area, once you start to think in terms of gambling, then every decision seems to be an illegal wager.  Particularly at these places, where you must buy the tokens, the games are like slot machines.

The second thing is how does Ms. Keller turn what is basically a violation of the Penal Code into a civil class action worthy of a contingent-fee attorney?  Well, in her complaint, she alleges an unfair or illegal business practice, a demand for rescission of an illegal contract and a declaratory judgment that the games are illegal.  There you go. 

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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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July 30, 2010
Necessity is the Mother of Invention; Financial Necessity is the Mother of Legalized Gambling
Posted by Christine Hurt

I don't think it's any real secret that almost every decision by a government to liberalize regulation of gambling activities has a financial aspect.  And, the internet gambling prohibitions in the U.S. have been attempt to keep gambling dollars (and gambling tax dollars) in the U.S. and not see U.S. gamblers funnel dollars to offshore ventures.  (I've posted a lot about this on the Glom, but my research began with this article

Now, four years after Congress banned online gambling in a last-minute addition to the Safe Ports Act, legislation is winding its way back to legalize online gambling and let states and the federal government tax the revenue.  Story here.  The 2006 statute attempted to prohibit internet gambling by preventing credit cards, banks and other payment systems from routing any transaction with a gambling provider. 

Stay tuned for arguments for and against from various legislators and groups.  The arguments for legalization will focus on tax revenue and may champion a particular use for those funds (education, health care, etc.)  In addition, there will be the argument of resignation:  you can't prohibit it, so keep it above ground and tax it.  The arguments against will focus on minors, particularly college students, compulsive gambling and money laundering.

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April 19, 2010
Playing Bridge vs. Playing Poker: Goldman, ACA, and Paulson
Posted by Erik Gerding

One last card metaphor for the Goldman suit before I return to writing and teaching my final classes.

One way to think about the SEC's allegations against Goldman with respect to misleading ACA, the collateral manager is to think about what card game Goldman allegedly led ACA to believe it was playing.  According to the SEC, Goldman misled ACA into believing that Paulson was its bridge partner when really it was playing poker against it.

It is true that in a synthetic CDO unlike a normal CDO, the CDO issuer doesn't buy cash-producing assets but enters into derivatives to mimic cash-producing assets.  It thus needs a derivative counterparty.  Thus ACA as collateral manager and the CDO investors should have known that there was a party out there betting against them -- a poker player.

But that doesn't mean they should have known it was Paulson.  In fact, that is the crux of the SEC Complaint; the SEC alleges Goldman misled ACA and by extension the CDO investors into believing Paulson was investing in the CDO and had interests aligned with ACA.  If you think someone is your bridge partner, you are not going to be skeptical that they are going to request you pick up bad cards.

But if ACA knew Paulson was on the opposite side of the synthetic CDO bet, it would take a sharper look at the assets Paulson wanted and bargain hard -- more arm's length -- when it received a request that Paulson wanted those assets in the deal.

Again, much will turn on whether Goldman's statements, silence, actions, and inactions misled ACA and the CDO investors in this regards.  If the Goldman team thought that ACA was under a misimpression that Paulson was investing in the CDO not betting against it, prudent practice would be to disclose.  But we are beyond figuring out what best practices would have been at the time and now down to brass tacks of waiting for specific facts and combing through the elements of 10b-5 and 17(a) claims.  

Do the legal standards of Rule 10B-5 or Section 17(a) in evaluating whether Goldman misled ACA as to Paulson's true interest or should have disclosed to investors Paulson's role and interest in picking collateral change because these are high risk securities or because this was a synthetic pure bet CDO?  When you frame it that way, I'm not sure they do.   

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October 30, 2008
Gambling on Gambling
Posted by Lisa Fairfax

In an issue that is right up Christine’s alley, this election day, voters in several states will be considering ballot initiatives involving gambling or lotteries.  Indeed, my own state of Maryland has proposed such an initiative, which would add a new constitutional amendment approving up to 15,000 “video lottery terminals” in five locations throughout the state.  Like other states, Maryland’s initiative aims to raise money to cover its significant budget shortfall—a shortfall of about $430 million.  As one can imagine, these initiatives have sparked considerable debate, and that debate seems to be heightened when viewed in the context of the current financial and economic crisis. 

Proponents of the Maryland measure contend that the initiative could potentially raise $600 million, a significant portion of which would go to fund public education.  From this perspective, in a time when states are strapped for cash and thus not only have had to increase taxes, but also have had to take measures such as slashing budgets and instituting hiring freezes and/or mandatory furloughs, it is hard to argue with a proposal designed to inject $600 million into the state’s coffers.  As the Baltimore Sun noted in its recent endorsement of the measure, while raising revenue from gambling is not ideal, it may be better than the alternative choices of higher taxes or allowing public education and health care to suffer if budget cuts continue unabated.  Proponents also point out that many Marylanders travel out of state to nearby states like Delaware or West Virginia where gambling is allowed, and hence we might as well enable these Marylanders to spend those funds in their own state. 

Opponents first question whether gambling initiatives can be counted on to raise significant revenue.  Given recent reports indicating that revenue has fallen sharply in many casinos, this is not an idle question.  These reports reflect the reality that people no longer have discretionary funds to spend on activities like gambling.  Then too, opponents insist that gambling has costly secondary effects because, as studies suggest, it is addictive, leads to increased alcoholism and otherwise negatively impacts other businesses and the surrounding community.   Moreover, opponents express concern that gambling measures will prove especially harmful to lower class communities, imposing what some describe as a regressive tax on those communities.  Again, such an argument has particular salience in these economic times.  Indeed, if more people are living paycheck to paycheck, can or should we pin even part of our economic recovery on the hope that they will use part of their paychecks to gamble? 

In the end, much like recovery/bailout measures at the federal level, these gambling initiatives sorely test our ability to find solutions that do not exacerbate our problems or otherwise offer short-term fixes that undermine our long-term ability for economic growth and financial health.  In its opposition to the initiative, the Washington Post insisted that the gambling measure will not promote healthy economic growth and hence voters should resist the “false promise of pain-free revenue” that the gambling measure represents.  The Baltimore Sun also recognizes the problems associated with relying on gambling revenue to finance government, but nevertheless suggest that while relying on such revenue represents a painful choice for voters, these extraordinary times require us to make painful choices. 

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July 31, 2008
College Football Fantasy Sports on CBS Website
Posted by Christine Hurt

According to the Chronicle of Higher Education (gated version here), CBS Sports is creating a fantasy football league (no entry fee, no prizes, but we know how people use fantasy sports websites) using college football players' names and stats.  Fantasy sports are not considered online gambling (and therefore illegal) under federal law, so this may not prompt the "no gambling in college sports" argument.  (Fantasy sports, it is argued, don't pose the threat of corruption of sports because it would be incredibly hard for someone to payoff all the people necessary to ensure that one's fantasy team wins.)  A college basketball fantasy league is also in the works.

However, some are a little concerned about the "exploitation" of the college athletes, and some say that fantasy game may run afoul of NCAA amateurism rules.  Note that the NCAA receives more than $500 million a year from CBS just for televising March Madness, and there is no telling how much per year total.  And none of the money goes to any of the athletes, including the athletes that will be featured on the fantasy sports site.  The NCAA is looking to broaden its rules so that teams can capitalize more on players' popularity, but letting the actual popular player in on that moneyfest doesn't seem to be on the table.

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July 11, 2008
Prediction Markets & Being Blacklisted at Volokh Conspiracy
Posted by Christine Hurt

Jonathan Adler today quotes from an opinion in the NYT by Northwestern professor on whether prediction markets should be granted a safe harbor by the CFTC.  I tried to comment on this post, but the spam filter wouldn't let me post my comment because it contained "blacklisted words" that gave the suspicion that I was a gambling spammer.  Because I could not think of how to write my comment without the blacklisted words, here is my comment:

I agree that there should be a safe harbor for prediction markets (and other types of online speculation), but I take issue with the statement (of Professor John McGinnis) that federal and state law generally does not prohibit gambling.  I think that's false.  Federal law does prohibit online gambling generally, with few exceptions for securities trading and fantasy sports.  Federal law also prohibits gambling over "the wires."  Given its jurisdiction, that's about all federal law can do.  I would also say that most states generally prohibit gambling, but have many exceptions.  In other words, in most states, gambling is prohibited unless it is specifically allowed.  A better way to frame the argument is to say that most states allow many types of gambling, from casino gambling to horse racing, and prediction markets, which have positive externalities, should also be allowed.  Of course, the real comparison is that prediction markets are online, and online gambling is illegal throughout the U.S.  To carve out an exemption, one would have to face that blanket prohibition head on.

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May 14, 2008
Something Store: Grab Bag or Gambling?
Posted by Christine Hurt

Sometimes I think while teaching Securities Regulation that I could make an argument that anything is a security, and the same goes with researching gambling.  Here's another gambling candidate that caught my ear on the radio today:  Something Store.

Here's the idea -- you pay $10, and Something Store will send you "something."  You have no idea what until you receive your package.  The store doesn't try to match you with anything, so "[y]ou can be a 25 year-old man and your something maybe a white tank top embroidered with a pink heart."  In fact, the website says shipments are chosen randomly (albeit from their storeroom, which I assume was not stocked randomly).  The concept as sold as a way to suprise yourself.  The website says that your something will probably be brand new (although possibly refurbished) and they "hope you will be pleasantly surprised."  No returns, all sales final; the site suggests regifting, giving away, or selling any "something" you don't need.

Is this gambling?  It seems a little like games at the fair where you could win a big stuffed animal, but odds are you will win a plastic dinosaur the size of a fig newton.  I seem to remember in my past "grab bags" being for sale at stores -- the bags were closed, so you didn't know what you had until you bought the bag.  At Something Store, the experience seems to be what is being sold, not the potential upside of a great something.  (They do not have testimonials from customers who received iPods or flat screen TVs, for example.)  You are buying a surprise, and that's really about all you'll get.

Who would do this?  Well, not many people.  According to the site, less than 6000 somethings have been ordered in the past six months.  Perhaps bringing this idea online during a time of less economic uncertainty when $10 seemed like a good price to throw away on being surprised.

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May 13, 2008
Catching Up on the Deal or No Deal Gambling Lawsuits
Posted by Christine Hurt

This semester has been fairly busy, so I have not been following gambling issues in the news as well as I would like.  For example, viewers of Deal or No Deal have filed lawsuits in multiple states claiming that the "Lucky Case" game is an illegal gambling game.  In some states, losers may file civil suits to recover gambling losses in illegal games.  The Lucky Case game allows at home viewers to choose which of five or so cases a prize is in (like a shell game) for money.  Viewers text in their guesses.  Texting charges apply, as well as a $.99 fee, which seems to go to NBC.  At least here in Illinois, that sounds like gambling.  However, the Georgia Supreme Court, in answering a question certified to it by the federal district court in Georgia, said that the game did not fall under its definition of "gambling contract," and so the viewers could not sue for losses.  The court left open the question whether the Lucky Case game is a lottery, however.  Fortunately or unfortunately, viewers do not have the ability to sue for losses in illegal lotteries, so unless the State of Georgia wants to prosecute NBC, the game could go on.  (In Illinois, gambling losses must be at least $50 for losers to have the right to sue for recovery.)  Because these laws vary from state to state, cases are still pending in other states, including California.

NBC seems to understand what is going on.  On the website, the Lucky Case game is listed as taking a "short break."  Another game, where viewers text in votes for the next Deal or No Deal model for a chance at a $10k price, NBC seems to be covering all bases.  First, in consideration of the $1 texting fee, voters receive Deal or No Deal computer wallpaper and a chance to win the $10k.  Second, if the viewer doesn't want to vote, they can merely enter for a chance to win the $10k for free.  By tying the $1 to the right to vote and the wallpaper, the game does not seem to require gambling consideration. 

What I thought was interesting about this Law.com story on the Georgia case was its disdain for the "colonial era Georgia statute."  I guess all old statutes are obsolete, like those for murder, burglary, etc.

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April 09, 2007
From Virtual Tax to Virtual Gambling
Posted by Christine Hurt

I was going to blog on this story last week, but I wanted to wait until we had a virtual world expert, Leandra, in-house to help with the analysis.

Leandra blogged below on the economy of Second Life and whether exchanges there for Lindens should be taxable.  This duplication of an economy in cyberspace has another ramification besides than this very interesting tax question.  Apparently, there are "hundreds" of casinos on Second Life where players can wager and win Lindens.  The creators of Second Life, Linden Labs, worried about possible criminal liability for hosting the world that contains these casinos, invited FBI agents into Second Life to take a look around and give them guidance.  (CNN story here.)  Apparently, since the U.S. crackdown on online gambling (which readers of the Glom should probably be sick of hearing about by now!), gambling on Second Life has increased.  Unfortunately, the FBI have not given Linden Labs any clear conclusions at this time.

So, how could gambling on Second Life be any different from gambling on an onine site, which the U.S. government says is illegal nine different ways?  I could go to an online site, use money from my bank account or credit card to create an account at the online casino.  When I have winnings, I can cash out.  Now, it sounds like on Second Life, I would use money from my bank account or credit card to buy Lindens to use at the online casino.  When I have winnings, I can then cash out.  How is this different? 

According to the DOJ, I would be violating the Wire Act by gambling on Second Life.  (I would like the chance to fight that one in court, but I don't have time to be a test case right now.)  Also, after the SAFE Ports Act passed last Fall, Second Life would be liable for processing the exchange of U.S. dollars to Lindens and from Lindens that facilitated the illegal online gambling.  So why is the FBI so confused?  If PartyPoker would just make me purchase "PartyBucks" at some ratio, would that make it legal?  My colleague Larry Ribstein has coined the phrase "the Apple Rule" to describe the seeming willingness to prosecute corporate officers for options backdating, which may or may not be illegal, but not popular officers such as Steve Jobs, who have done the same exact thing.  Perhaps we could call this "the Posner Rule"; Second Life is so hip and cool and brainy that even lovable jurists like Richard Posner drop by every now and then.  So how could Second Life be criminal like those sleazy online gambling sites based in foreign countries and run by foreigners?  Either it's all legit or it's all not.

The CNN article reported that there are "hundreds" of casinos on Second Life, and that the larger ones might earn $1500 (U.S., not Lindens) per month.  So, let's multiply $1000 per month by 500 casinos.  That's $500,000 per month, or $6M a year.  And it's only beginning.  If the FBI tells Linden Labs that these casinos are legitimate, how many casinos do you think there will be this time next year, as U.S. players shift away from online gambling, which has become increasingly difficult to navigate after U.S. payment systems have opted out?  Look for the Bellagio -- Second Life, Trump Second Life, and even PartyPoker Second Life.

Just one more thing, In the many comments to Leandra's posts, it seems that some readers equate "virtual" for "imaginary."  I think that gambling helps put this in some perspective.  Lindens seems to have a real-world value, an exchange rate to the U.S. dollar, so Lindens are more like foreign currency than imaginary currency.  Or, you can think of Lindens as casino chips.  Just because your winnings come in chips doesn't make them untaxable winnings, nor do you get to pay your taxes in chips.  Just as I would have to report the sale of my house to the IRS if I were paid in casino chips, Beanie Babies, Lira or free lawn mowing for the rest of my life, I see no difference in being paid in Lindens for my goods, services or poker playing. 

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April 03, 2007
Texas Hold 'Em May Become Legal in Texas
Posted by Christine Hurt

In Austin today, a public hearing is being held on this bill, which would allow poker games to be organized by licensed persons in the state of Texas.  Apparently, California and Montana have already legalized poker outside of casinos.  Should the bill pass, Texas would be an interesting gambling state.  Although Texas has had a lottery since the early 90s, Texas has no commercial casinos and only one tribal casino (in Eagle Pass, which is fairly "out of the way" for most folks).  For Texas then to allow legalized poker would be a bold move and might open the door to other efforts to expand gambling in the state.  However, the bill distinguishes poker from other games because it is a game of skill, not chance.

There are multiple bills pending to allow casino gambling, electronic gaming devices, etc.

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March 12, 2007
NCAA Tournament Pools & Nonprosecution
Posted by Christine Hurt

I'm sure many of our corporate law readers get kind of sick of my posts on gambling.  What does gambling have to do with corporate law?  Aside from the obvious speculation comparison with investing, I am also interested in the "can a whole industry be criminal" aspect.  In recent years, we have seem criminal prosecutions for corporate misconduct that was not only widespread in certain industries but also not perceived by many to be criminal in nature.  (Think "earnings management" or backdating.)  Well, this week begins our nation's traditional revelry in illegal gambling:  the NCAA Tournament Pool.  Can a whole country be criminal?

Note that the Glom pool contains no wagering; it is clearly above-board and good, clean fun.  However, the other office pools that charge $2, $5, or more are seen by almost all as also good, clean fun.  I have received several emails today from licensed attorneys or future attorneys inviting me to participate in these fun pools.  According to some counts, almost one-third of U.S. workers this week will participate in a pool, with some of them spending work time to contemplate their entries.  And yes, in most states, these pools are clearly illegal.  (Vermont actually passed a law a few years ago making such pools not illegal as long as all entrance fees are paid out, interestingly.)  In Illinois, it is a Class A misdemeanor to "[m]ake a wager upon the result of any game, contest, or any political nomination, appointment or election," yet I'm sure it's happening right now, as I type! 

So why do we care, if we now that state regulators have historically turned a blind eye to something they have zero resources and zero incentive to investigate?  Because who knows when the tide will turn?  As Monty Python fans know, "Nobody expects the Spanish Inquisition!"  Perhaps U.S. prosecutors will take organizers of office pools away in handcuffs for "theft of honest services" for using employer time and materials to print out brackets.  Or perhaps those of us who received the brackets via email will be arrested for violating the Wire Wager Act and face federal prosecution.

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