Government shuts down 3 largest poker websites, indicts founders

Feds allege conspiracy to evade laws limiting credit card use in online gambling

By Martin Merzer

Dramatically raising the stakes in its battle against online poker -- and the credit card transactions that have fueled the explosive growth of Internet gambling -- the U.S. government has indicted the founders of the three largest poker sites, seized five Internet domain names and issued restraining orders against more than 75 bank accounts.

FOLDED: FBI, JUSTICE DEPARTMENT SHUT ONLINE POKER SITES
The U.S. government seized three large online poker sites Friday; players were greeted not by the chance to play, but a stern government notice. This is a screenshot from the PokerStars.com site Friday. Click for larger image.

The extraordinary action, taken last week, sought to shut the online operations of PokerStars, Full Tilt Poker and Absolute Poker, the three largest companies in the burgeoning field of Internet poker playing, but the government's moves appeared to be only partially successful.

By Monday, visitors to the original .com version of those three sites were greeted sternly by the logos of the Department of Justice and the Federal Bureau of Investigation and the terse message: "This domain name has been seized...." But PokerStars and Full Tilt Poker appeared to have resumed operation by using other domain suffixes.

Experts were not surprised by the continuing game of cat and mouse.

"Now, the feds have seized .com domain names and charged operators with bank fraud," said I. Nelson Rose, a gambling law expert who teaches at Whittier Law School in Mesa, Calif., and at the University of Macau. "So, gaming sites are switching to .eu and .uk [along with others], and cutting off all physical contact with the U.S."

In addition to bank fraud, among the charges filed in the indictment unsealed in New York City were: conspiracy, unlawful Internet gambling, money laundering, and wire fraud. The government said it was seeking at least $3 billion in the forfeiture of illicit gains and penalties for money laundering.

The founders of all three firms were among the 11 people charged in the indictment.

Broad conspiracy alleged
Government officials accused them of participating in a broad, multilayered conspiracy to evade U.S. laws against Internet gambling. In particular, they are accused of violating laws and regulations intended to block the use of credit cards by players of online poker.

That conspiracy allegedly included successful efforts to compromise owners and executives of small banks that were struggling to survive the banking crisis and other elements of the Great Recession.

"As charged, these defendants concocted an elaborate criminal fraud scheme, alternately tricking some U.S. banks and effectively bribing others to assure the continued flow of billions in illegal gambling profits," Preet Bharara, U.S. Attorney for the Southern District of New York, said after the indictments were unsealed.

"Moreover, as we allege, in their zeal to circumvent the gambling laws, the defendants also engaged in massive money laundering and bank fraud," he said. "Foreign firms that choose to operate in the United States are not free to flout the laws they don't like simply because they can't bear to be parted from their profits."

There was no immediate comment from the companies involved in the case. Organizer groups of online poker players, however, expressed fury.

"Millions of Americans across the country today are outraged over the U.S. Department of Justice's clear attack on internet poker," said John Pappas, executive director of the Poker Players Alliance, an advocacy group with more than 1 million members nationwide. "While the government's focus may be on the companies that operate these games, this is plain and simple a declaration of war on poker players and poker players' freedoms."

He noted that many online poker players were having trouble accessing their online transaction accounts.

"Not only are the over 10 million online poker players left without a place to play the game they enjoy, and from which many earn their livelihood, but they also have concerns over the availability of their funds," Pappas said. "The PPA believes that no players' money should be jeopardized by this prosecution."

Anti-gambling law enforced
The charges, based on a lengthy probe by the Federal Bureau of Investigation and the U.S. Attorney's office, were filed under the Unlawful Internet Gambling Enforcement Act, a 2006 law that has been widely criticized by online poker players and their supporters.

The law generally prohibits the transfer of money from U.S. financial institutions to gambling sites, requiring credit card networks and banks to navigate a dense jungle of conflicting definitions and rules. Though efforts were under way to negate or at least soften that law, the rules attached to it already had pushed virtually all of the online gambling industry overseas.

In effect, the charges filed Friday accused the gambling sites and their founders of using their offshore bases as staging areas for a nearly operatic effort to dodge the laws regarding financial transactions.

"Because U.S. banks and credit card issuers were largely unwilling to process their payments, the poker companies allegedly used fraudulent methods to circumvent federal law and trick these institutions into processing payments on their behalf," the government said in a news release.

In some cases, the indictment charges, several of the defendants manipulated credit card charges and camouflaged the payments received from U.S. online gamblers -- disguising them as payments for jewelry, golf balls and other merchandise. To accomplish this, they hired middlemen as "highly compensated payment processors" who created phony corporations and websites to handle the credit card payments, according to the indictment.

Later, as the recession deepened and small, local banks began to totter, some of the defendants settled on an even more nefarious scheme, according to the federal government. They allegedly tempted and successfully corrupted the owners or managers of some of those endangered banks.

"PokerStars, FullTilt Poker, and their payment processors persuaded the principals of a few small, local banks facing financial difficulties to engage in such processing in return for multi-million dollar investments in the banks," the government alleged.

Among the defendants in the case: John Campos, vice chairman and part owner of SunFirst Bank, located in Saint George, Utah. Though initially expressing "trepidations" about the scheme, the government said, he allegedly accepted a $10 million investment in his bank in return for agreeing to process credit card transactions related to online poker playing.

"These defendants, knowing full well that their business with U.S. customers and U.S. banks was illegal, tried to stack the deck," said FBI Assistant Director-in-Charge Janice K. Fedarcyk. "They lied to banks about the true nature of their business.

"Then, some of the defendants found banks willing to flout the law for a fee," she said. "The defendants bet the house that they could continue their scheme, and they lost."

More arrests sought
Others charged included Isai Scheinberg and Paul Tate of PokerStars, Raymond Bitar and Nelson Burtnick of Full Tilt Poker, and Scott Tom and Brent Beckley of Absolute Poker.

Campos and co-defendant Chad Elie, an alleged "payment processor," reportedly were arrested Friday in Utah and Nevada, respectively. The six principals of the poker firms were overseas. Federal prosecutors said they were working with Interpol and other foreign law enforcement agencies to secure their arrest.

At the same time, the U.S. District issued a restraining order involving 76 bank accounts in 14 countries -- accounts that allegedly contained the proceeds of the charged offenses.

On the other side of the poker table, defenders of the online version of the game said that while credit card transactions made in association with online poker might be illegal, the actual activity of playing poker on the Internet is not technically illegal.

"Let me be clear," said Pappas, of the Poker Players Alliance, "online poker is not a crime and the honest poker players across the country will not stand to be restricted from one of America's greatest pastimes."

Rose, the gambling law expert, made a similar point as he sought to place the government action in wider perspective.

"The DoJ has been waging a war of intimidation against Internet gambling for years, successfully scaring players, operators, payment processors and affiliates into abandoning the American market," Rose said. "Lacking the two essentials to any prosecution -- a statute that clearly makes the activity illegal and a defendant physically present in the U.S. -- the feds have announced showy legal action against easy targets about every other year."

And, if and when the cases come to court, Rose said prosecutors will confront another hurdle: identifying a victim.

"If the allegations are true, the operators brought this on themselves, by lying and bribing bank officials," he said. "Of course, the prosecutors have the problem of convincing a jury that there is bank fraud when the 'victims' are tricked into making millions of dollars."

Earlier stories: Bankers, poker players oppose Feds' online gaming rules, Rep. Frank introduces bill to allow online gambling, Europe to U.S.: Back off online gambling enforcement, Enforcement delayed on Internet gambling ban, Bill allowing online gambling passes House test

Updated: April 18, 2011

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