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2009 Gambling Year in Review - 5 Stories that Dominated the News: Part II...By Hartley Henderson

Read Part I here:

3- Barney Franks New Bills and the Postponement of Mandatory Compliance to the UIGEA.

Realizing the December 1 deadline was fast approaching where banks would have to abide by the flawed UIGEA regulations, Congressman Barney Frank proposed 2 bills in May. The bills were HR2266, "The Reasonable Prudence in Regulation Act" and a companion bill HR2267, "The Internet Gambling Regulation, Consumer Protection & Enforcement Act." The goal of HR2266 was to delay mandatory compliance to the rules by a year to allow Congress the chance to hear all objections and concerns regarding the UIGEA, and as the act's name suggests, that reasonable prudence is given before enforcing the regulations. HR2267 was similar to other bills previously initiated by Frank and it proposed to Congress to consider legalizing and regulating internet gambling for the sake of both consumer protection and also to generate massive tax revenues in a projected $60 billion industry. The bill, like previous ones issued by Frank, excluded sports betting. Frank has been asked why sports betting is excluded in all his legislation and his response has been that the concession has to be made in order for the bills to have any chance of passing. The sports leagues' lobbies are just too strong, and as long as sports betting is permitted the chance of a bill passing is next to none. In fact at a prior meeting, Frank stated that the arguments of the sports leagues were very poor, but he nonetheless acknowledged the power of the lobbies. The bills started out slow, but gained momentum throughout the year, and by November there were over 60 co-sponsors to HR2266 and HR2267. That support, along with requests by the Poker Player's Alliance, seemed to be important because in late November the U.S. Treasury gave the banks a 6 month extension before requiring mandatory enforcement of the regulations. That was less than what HR2266 asked for, but it did provide Congress time to hear more arguments surrounding the bill and any concerns regarding implementation.

Not surprisingly, Spencer Bachus, Robert Goodlatte and John Kyl bemoaned the delay and cried foul. The congressmen argued that the bill went against the will of the people and both Houses who overwhelmingly passed the law in 2006. What they failed to mention of course was that the UIGEA was attached to the Safe Port Act so there was never a real vote on the UIGEA itself. And in fact prior votes on gambling legislation failed to pass. Moreover, several polls showed that U.S. citizens stated that they didn't want a law banning betting, and the Poker Player's Alliance, with over a million members, would agree. So how the delay went against the will of the people is still a mystery.

A meeting to discuss the UIGEA was held on December 3rd, and various experts testified as to why the UIGEA was bad legislation and how there was no proof that online gambling was any more addictive or harmful than land based gambling. Regardless, Spencer Bachus, who seemed to represent the anti-gambling faction, essentially pulled a Helen Lovejoy, crying, "won't somebody think of the children." It seemed everyone saw through this at the meeting, however, and Barney Frank rightly pointed out that the issue wasn't about children, and that Bachus' stated concern for youth addiction was disingenuous. Frank also rightly pointed out that throughout history Republicans ran on a platform of free markets and less government interference and it was confusing how and when the Republicans went from the party championing free choice to the neo-conservative moral dictators they have become today.

4- Gary Kaplan's Guilty Plea & the Continued Delay Paying BetonSports Clients

The issue with BetonSports has been going on for some time. BetonSports closed operations in 2006 following the arrest of David Carruthers and the indictment by the state of Missouri. And in 2007 the company's founder, Gary Kaplan, was arrested in the Dominican Republic. Kaplan originally fought the case and was actually represented by various attorneys, including Alan Dershowitz who tried to argue that Kaplan shouldn't be charged with an offense because sports betting is a game of skill which is not illegal in the U.S. Not surprisingly that defense went nowhere, and earlier this year Kaplan pleaded guilty to racketeering and received a sentence of 51 months in prison. He also agreed to pay a $43.65 million fine. Of course most of that sentence was already served as he has been in prison since 2007.

At the time of BoS' bankruptcy, the courts appointed Vantisplc, a British based recovery firm as the liquidators and asked them to oversee the distribution of assets. The company said when they got access to the books of BoS the liabilities far exceeded the assets and BoS was thus insolvent. Vantis stated that they believed there were almost 90,000 player accounts that were owed money and urged everyone to come forward to get their pieces of the pie. It appears that Vantis' fees also had included compensation based on the number of people who came forward to submit for moneys owed. While Vantis suggested U.S. citizens had nothing to fear, it's clear that there was a lot of distrust of the whole situation, and many Americans were worried that their names and financial information would end up in some Federal database should they put in a claim. Vantis stated that they were disappointed with the number who sought compensation and late this year sent a letter to customers saying that to date only 9,206 people asked for compensation totaling just under $8.1 million. Trade creditors asked for over $14 million in compensation. According to a release, Vantis only managed to recover $2.1 million in assets even though the balance sheet showed over $10 million when they took on the case, and the current asset balance available for distribution is $1.33 million. One doesn't need a degree in mathematics to figure out that this leaves very little for the players. Vantis suggested that they were asking for Gary Kaplan's fine to pay players and creditors, but the District Court of Missouri indicated that players weren't entitled to that money or the $5 million collected from Kaplan's family because they were proceeds from organized crime and not assets of a bankrupt company. Consequently if Kaplan was considered to be a criminal by accepting bets from Americans, then the bettors are seen as complicit in the "crime," and thus would not be entitled to benefit from the "ill gotten gains". The state argues that they spent more money than that trying to prosecute Kaplan and Carruthers anyway, so taxpayers should benefit by recovering some of those costs. There is, of course, a precedent for players getting money back from these "crimes," since the federal government allowed players to retrieve money lost when the DoJ froze the NETeller funds. But NETeller paid the players from sources other than the funds that were confiscated. The government kept the funds they froze.

The question on everyone's mind, however, is why there is so little money out there from BoS. BetonSports, after all, was a publicly traded company that by all indications was making hefty profits. There are many answers to this question. First, BetonSports purchased numerous companies like MVP Sportsbook, V Wager and Player's Only for $37 million, and also paid $20 million for Easybets in an attempt to capture the Asian Market (but never even took charge of that operation). There is also indication that several lavish parties and marketing events initiated by David Carruthers ate away at the profits. And as was indicated in an article last year, there is specualtion that much of the company assets were moved out of Antigua by directors ahead of the closure. Most importantly there is every indication that the company was involved in creative accounting to hide the company's real financial situation from the authorities. And sources indicate that in a desperate move to make the balance sheets look good the company took on almost all comers and charge backs were close to 13% at the end of operations. Thus the $10 million that was on the balance sheet was likely exaggerated.

One thing that is still confusing is why Vantis was hired as the liquidators. This type of operation seems out of Vantis' scope, and there are other companies that certainly would have done much more digging and likely found more of the truth. Of course maybe that is precisely why they were hired. With all the major players now in custody and having pled guilty, expect the BetonSports issue to be cleared up shortly.

5. The Continued War of Intimidation by the Department of Justice

There were several stories that could have made up #5 of the top 5 stories of 2009, including the ongoing Kentucky domain name seizure case. But I decided the last story would be the ongoing war of intimidation by the DoJ against gambling operators. There was truly a sense of hope that the Obama administration would bring some sensibility to the issue of online gambling, but that hasn't been the case. In fact many have suggested that the decisions being made by Obama in various areas, including Afghanistan and prosecution of gambling operators, make it appear like this is George W. Bush's 3rd term. This was clearly highlighted in October of this year when Queen's District Court of New York announced it completed an ongoing 38 month sting called "Operation Betting it All" and subsequently arrested 27 people. All 27 were indicted for money laundering and racketeering. Among them were Josef Fafone and Eric Davis Harp, who operated various websites. The press release made it sound like Fafone was involved with the mob, but most who know the man claim he is soft spoken, hard working and was an asset to the industry. Few equate him to a mafia boss. Of course just because the feds suggest someone is involved with something doesn't make it the case.

But it wasn't just this one incident that has the industry frustrated and scratching its head. The Department of Justice made various arrests related to gambling throughout the year and has initiated many plea bargains, including the one from Kaplan. In fact some web sites have indicated that the government has set up a task force on how best to go about generating more arrests for online gambling. Along with gambling operators, the feds have also gone after payment processors. And earlier this year the feds froze money from a payment processor for Pokerstars. The goal, as stated by the feds, seems clear - to dissuade Americans from betting online. The government honestly believes that when players see arrests made of gambling firm directors they'll have second thoughts about sending money offshore. The problem is that, with the exception of the state of Washington, it isn't illegal for a citizen to gamble online. And with the efforts being put forward by Barney Frank and others to legalize internet gambling, it seems that a wiser course would be a wait and see attitude. Nevertheless, the federal government is pressing forward and has stated that it believes that Operation Betting it All will put a major dent in the online gambling industry, although those in the industry know better.

The one entity these arrests seem to be frustrating the most is the Remote Gambling Association, a European trade group that has been fighting with the EU and the United States regarding its policies. The RGA rightly points out that the UIGEA, as flawed as it is, was not passed until October 2006, and that arresting people and charging them with crimes prior to that date is prejudicial and lacks common sense. Furthermore, it points out that under WTO rules the U.S. is still required to allow gambling services from offshore until such a time that it rewrites its policies. As of December 15 that still hasn't been done. Unfortunately it seems even the new DoJ lacks common sense in many of its policies. There is hope that if Frank's bill passes the DoJ and Feds will take another look at their tactics of intimidation, but that is probably a pipe dream. In the meantime many EU companies are preparing to enter the U.S. market.

Hartley Henderson

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