Legal Status of Online Poker in the United States 

Author: Jake Vaughn

For its far-reaching impactful events, April 1, 2011, is infamously known as Black Friday among the online poker-playing community. Before the events of this day, online poker was a major growing industry within the U.S. and was accountable for its largest worldwide revenue share of about 27%.

On Black Friday, the U.S. Department of Justice temporarily shut down the online poker sites of three major players in the country, namely PokerStars, Full Tilt Poker, and Absolute Poker. These three together had a 95% market share in the U.S. online gambling industry. Their websites were seized and displayed the FBI takedown notices. In addition to this, 76 accounts linked with these companies and holding player funds in 14 different countries were frozen.

The prosecutors claimed that the defendants had violated the Unlawful Internet Gambling Enforcement Act (UIGEA) and were involved in money laundering and bank fraud while processing transfers between the customers and themselves. The civil complaint asserted that the players entrusted their gambling money to these companies to be kept in secure accounts; however, it was indeed being transferred and used by the owners and management for personal purposes. The companies were also bribing the banks and committing fraud using miscoded transactions to bypass the law.

The Federal Wire Act of 1961

The Federal Wire Act of 1961 forms the basis of the issue of granting legal status to online gambling and wager transactions in the United States. The law itself was an attempt to give the Department of Justice more power in being able to stop trafficking and organized crime. Though over time, it’s been used in cases unrelated to the initial objective.

In 2005, the North Dakota House of Representatives sought to regulate and legalize online poker for companies that would establish their physical location within the state. Their efforts failed to materialize as the Department of Justice determined that such pending legislature could be in direct conflict with the federal Wire Act. The Fifth Circuit Court of Appeals ruled that this does not apply to online gambling types other than sports betting. The reason why this act is still being used as justification to target online poker companies and related legislation is that there has been no ruling as of yet by the Supreme Court on this matter.

The SAFE Port Act

In 2006, the Bush administration passed the SAFE Port Act to strengthen security at U.S. ports. This act contained the UIGEA provision. Under the UIGEA, which was passed to keep in check the rapid progression of gambling towards the online arena in the United States, it was made a felony to process payments pertaining to illegal online gambling. All financial institutions within the United States were prohibited from engaging in transactions connected with online gambling sites.

As a result, many poker sites halted their operations in the U.S. The act also had adverse effects on the stock market value of these companies. Consequently, many online gambling companies shut down completely to avoid any illegal activities. However, the three poker companies being discussed here continued to operate under the pretense that the game of poker did not fall under gambling.

The logic behind this assumption was that poker, in its very nature, is a game of skill and not chance and therefore cannot be considered gambling. The only state that explicitly outlawed the game of poker being played online was Washington. By September 2010, the Washington Supreme Court upheld the law, declaring it a crime to play online poker in the state of Washington.

The Federal Wire Act of 1961 Takes on Big Brands

Introduction

Handling the case against these three specific companies was Preet Bharara, U.S. Attorney for the Southern District of New York. He pressed charges against them for violating New York law rather than federal law since these companies conducted their operations from Isle of Man (PokerStars), Ireland (Full Tilt Poker), and Costa Rica (Absolute Poker) respectively and were not based in the United States. The defendants were charged with violating the UIGEA and The Federal Wire Act of 1961.

Freezing of Accounts

During this action by the Southern District of New York, five banks in the U.S. were ordered to freeze the accounts of these companies that were worth more than 30 million dollars and affected more than 27,000 poker players. One of the criticisms of this action was that the government had seized not the money that the online gambling companies had made but the assets of the players.

Revocation of Licenses

As the case proceeded, Full Tilt Poker's license was revoked and all online gambling activity came to a halt. Full Tilt was a subsidiary of Blanca Gaming based in Antigua. After the shutdown, Antigua and Barbuda government officials sought to turn the events into an international matter and brought them to the attention of the World Trade Organization, claiming that the United States had violated global trade laws. However, their attempts were unsuccessful and the Alderney Gambling Control Commission (AGCC) found Full Tilt guilty of misrepresenting financial information.

Impact on Players and Media

Individuals had to go to nearby countries to play online or go to a land-based casino and join real poker tables. Poker players that had major endorsements were hurt by this. The media was also affected because a large sum of money was spent on marketing and advertising campaigns that involved televised shows and competitions which were not running. ESPN regularly covered the World Series of Poker and had a $22 million deal with PokerStars, which came to an end. It was a major concern for the millions of people who had gambled their money at these virtual poker clubs.

Repayment to Players

However, after these drastic events, a deal was struck with the prosecutors to fund back and repay all the money that was owed to the players. To assist with the repayment process, the domain names for the websites namely PokerStars and Full Tilt were returned to them, but only partially. Online poker had definitely attracted some high rollers and had players with millions of dollars in their online accounts with these companies. On one hand, it came as a shock and a major concern for many players while on the other, it made quite a few of these players famous, such as Chris Ferguson, who had major winnings and was owed around $60 million.

Reimbursements and Scandals

Only PokerStars managed to fully pay back its American players. Absolute Poker and Full Tilt Poker’s reimbursements were not well managed and stopped after a while. It was evident that the owners had used these accounts for benefiting themselves, further justifying the initial reasoning employed by Preet Bharara. He is also known for having previously cracked an insider trading ring, claimed that the websites had set up a Ponzi scheme, and that they were also rigging the game in a manner that the players were being left empty-handed. This could indeed be further corroborated by the fact that there was a hole worth about $350 million in the books of the companies.

Legal and Financial Ramifications

What made the above action more interesting was the fact that the gambling companies reimbursed the player’s money that the government took from them. In this way, the reason for the players to press the case against the actions of the government in the courts became weaker and the companies chose not to challenge the government on this. Due to these events, in future cases, it will not be clear if this forms a valid precedent as there have been no deliberations on this matter in any court of law to determine if the actions taken by the government were indeed in line with the law or was a case of abuse of power.

United States vs Scheinberg

Following this, the complaint was directed toward the individuals rather than the companies, and the case would thereafter be known as the United States vs Scheinberg. The case came to an end on July 31, 2012, when the government dismissed with prejudice the civil complaints against PokerStars and Full Tilt. As a part of the settlement, PokerStars bought and took over Full Tilt. Both companies were cleared, however, criminal indictments against owners and individuals involved remain unresolved.

The Need for Regulation

The event highlighted the need for regulation to be put in place for online poker and gambling. Many players and individuals held the government accountable for their failure to bring necessary regulations into place. Gambling law experts criticized the government’s efforts. U.S. Senator Alfonse D’Amato deemed the actions of the Department of Justice as an attack on Internet poker and stressed the fact that they were causing much harm to the poker player’s economic status as they had gambled all their money and savings on these sites and had trusted them with it. The absence of legal online gambling also keeps the government from earning additional tax revenues.

Legislative Attempts

One of the federal laws that could have cleared the stage for the online poker industry was the Internet Gambling Regulation, Consumer Protection, and Enforcement Act, which was proposed in the year 2009. This bill eventually got 70 cosponsors; however, the last major activity related to this bill was in 2010 when it was placed on the Union Calendar. The presence of such a law would have removed the prospect of online poker from being considered in a legal grey area and would have made it clear that it was excluded from the ambit of the UIGEA 2006 law. However, as this law failed to be enacted, the actions discussed earlier came to pass.

Legal Developments

The situation regarding online poker took a turn for the better by August 2012, as the New York court declared that poker was not in fact gambling as it was a game based on player skill rather than pure chance. Although this is in line with what the three companies were claiming, for them this announcement came a bit too late. Poker fans who had been pushing for the online legalization of the game were delighted by the end of April 2013 when Nevada embraced the online game legally for people over twenty-one years of age and located within the state. Delaware and New Jersey soon followed and brought in a legalized and regulated online gambling market. Despite all of this, there has been no action from the federal legislature, and therefore the chance of an inter-state legal dispute when players from one state are gambling on a legal online establishment of another state still remains. Therefore, it would be advisable for players to make a thorough check of the legal state of their specific case before they begin to engage in any such activity.

Poker Players Alliance

From the player’s side, there is an alliance called the Poker Players Alliance which is registered as a non-profit organization consisting of both online as well as offline players. One of the activities of the alliance has been to lobby to legalize online gambling and they had a role to play in the promotion of the Internet Gambling Regulation, Consumer Protection, and Enforcement Act as well. In addition to that, they also lobby against laws that are suggested to be enacted which would outlaw online gambling. One such law that has been proposed by U.S. Senator Lindsey Graham (S. 2159) & U.S. Representative Jason Chaffetz (H.R. 4301), which would prohibit online poker, is being fought off by the alliance with their call to action across the nation. On their website, they have set up a system in which members of the alliance, as well as other visitors, can find easy information on how to email, tweet to, or call their respective congressional representatives in an attempt to have the voices of their constituencies heard. If the law does end up being enacted, this could be a death blow to the online poker community as well as move the subject out of the grey area for good. However, the counter efforts would make it likely that it would at least take some time before, if at all, the law would be enacted.

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