Online Poker’s Black Friday

While I was away, the online poker world suffered a complete meltdown. It may–and most likely will–emerge from the wreckage, but it will take time and it will be something new.

On April 15th (yes, tax day: take a moment to savor the irony), the U.S. Department of Justice seized the domains of Full Tilt Poker, PokerStars, and Absolute Poker; unveiled indictments against 11 of their officers; and froze billions of dollars in assets.

No one really knows how many people make their living from online poker, but based on anecdotal evidence and industry information, the number is significant. All of that vanished in an instant, with nary a concern for the lives affected or its impact on an economy already at the brink.

The reason this needed to happen are unclear. We’ll get to the individual cases in a moment, but the larger issue at hand is online gambling, and the entire online economy.

Should online gambling be legal? If not, then why? Who suffers? Who benefits? The legality of gambling is a state issue, but online gambling is a gray area. The Unlawful Internet Gambling Enforcement Act of 2006 has the following to say:

No person engaged in the business of betting or wagering may knowingly accept, in connection with the participation of another person in unlawful Internet gambling— (1) credit, or the proceeds of credit, extended to or on behalf of such other person (including credit extended through the use of a credit card); (2) an electronic fund transfer, or funds transmitted by or through a money transmitting business, or the proceeds of an electronic fund transfer or money transmitting service, from or on behalf of such other person; (3) any check, draft, or similar instrument which is drawn by or on behalf of such other person and is drawn on or payable at or through any financial institution; or ‘(4) the proceeds of any other form of financial transaction, as the Secretary and the Board of Governors of the Federal Reserve System may jointly prescribe by regulation, which involves a financial institution as a payor or financial intermediary on behalf of or for the benefit of such other person.

The key phrase in this is “unlawful Internet gambling,” which is not clearly defined except as “to place, receive, or otherwise knowingly transmit a bet or wager by any means which involves the use, at least in part, of the Internet where such bet or wager is unlawful under any applicable Federal or State law in the State or Tribal lands in which the bet or wager is initiated, received, or otherwise made.”

Translation: “unlawful Internet gambling” is “using the Internet for gambling unlawfully.” It’s simply a tautology. Gambling laws are not comprehensive enough to make that definition clear. Nevada is the only place where gambling is legal statewide. All other states maintain strict controls on the locations and types of gambling which they consider legal. The goal of the Unlawful Internet Gambling Enforcement Act was to shut off the flow of money to the online gambling sites by preventing them from using any of the financial mechanisms available for e-commerce, without making any of the hard decisions about how to define online gambling. It was a punt.

And thus we get to April 15th, and the end of online gambling. The United States District Court for the Southern District of New York launched a federal criminal case against the executives for the Full Tilt, Poker Stars, and Absolute Poker. Portions of the charges dealing with violations of various gambling laws are nonsense, since those laws were never written for the internet age.

More serious is the charge of bank fraud. offers one example of the money games being played by some of the indictees :

Chad Elie and his associates persuaded small, local banks facing financial difficulties to process gambling transactions in return for sizable fees and multimillion dollar investments in the banks. The indictment cites a Sept. 23, 2009, e-mail in which defendant John Campos, a vice chairman and part owner of the SunFirst Bank in St. George, Utah, proposes to accept processing gambling transactions in return for a $10 million investment in the bank, which would give Elie and his partners more than a 30-percent ownership of the bank. The indictment further alleges that Elie and his partners made a $3.4 million initial investment in December of 2009 and that, around that time, the bank began processing payments for PokerStars and Full Tilt that would total about $200 million over the next year or so. Campos and Elie were arrested Friday morning.

The online poker companies were trying to circumvent the e-commerce prohibitions, and broke the law. But the issue about the legality or illegality of online gambling remains, and the United States needs to make a decision. Rep. Barney Frank has made some attempts over the years to clarify the position of online gambling with the Internet Gambling Regulation, Consumer Protection, and Enforcement Act, and this case should finally force some action that will define online gambling, for good or ill.

That will almost certainly take years, and the damage done to online poker could take even longer to undo. In the meantime, the pros and grinders who make their living playing poker are toast. The poker economy is driven by casual players, who are now so spooked that they are unlikely to trust online poker sites with their money. What will emerge (eventually) will be government regulated, heavily branded extensions of casinos into the online realm. I have no idea whether or not that will be a good or bad thing, but I do know that the government will favor established entities over new startups. It’s just what they do.

The collapse of internet gambling will have a ripple effect on all gambling, particularly the lucrative realm of professional poker, which now has marquee stars, TV shows, events, and sponsorships, just like a sport. Many of those sponsors were online poker companies, now known as “the defendants.” So you think Daniel Negranu is going to keep wearing all that swag?

This case wasn’t about wire fraud or money laundering. It was about the Justice Department staking out a position on internet gambling in the absence of decisive Congressional action. The Obama administration chose to pursue this case, just as they chose not to pursue users of medical marijuana.

Internet gambling is a soft target in the coming war on the entire internet economy. The government needs to feed the budget beast, and the left is desperate to tax e-commerce. They will do this without the least bit of concern for the lives that will be disrupted and the money that will be lost. There are thousands of pro and semi-pro online gamblers–now out of work and trying to pick up the pieces of their lives–who can vouch for that.