As professional poker players, Howard Lederer, Chris Ferguson and Rafael Furst got rich by bluffing players out of their money in televised tournaments. Now, the U.S. government alleges that they and their colleagues used this same approach in running one of the world's largest online poker sites.
On Tuesday, the U.S. Justice Department in a civil suit accused Messrs. Lederer, Ferguson and Furst, and another director of the company behind the Full Tilt Poker website, of defrauding thousands of online poker players out of more than $300 million that is still owed to them. The government said that, in total, the 23 owners of the site had taken out $444 million in distributions over the years.
The Justice Department's civil suit against Full Tilt alleges that in 2010, Full Tilt began having trouble accepting new bets from players, thanks to U.S. efforts to crack down on payment-processing services for online gambling. But the U.S. says that Full Tilt's owners kept paying themselves millions of dollars anyway, fraudulently depleting the player funds on deposit with the company.
Full Tilt was not a legitimate poker company, but a global Ponzi scheme," said Manhattan U.S. Attorney Preet Bharara in a statement Tuesday. The U.S. government views online poker operations, at least those that cross state lines, as illegal. In its civil suit filed in U.S. District Court in New York, the government alleged that Messrs. Lederer and Ferguson received $38 million and $24 million, respectively, in distributions from Full Tilt. It also alleged that a third poker player involved in the site, Mr. Furst, received $12 million and Raymond Bitar, who helped manage Full Tilt, got $40 million.
Attorneys for Mr. Ferguson and for Mr. Bitar had no comment. Attempts to reach Mr. Lederer and Mr. Furst weren't successful.
In a statement in August, Full Tilt acknowledged that it was having problems processing player money and said it lost $115 million to government seizure and $42 million it says was stolen by a third-party payment processor.
"While the company was on the way to addressing the problems caused by these processors, Full Tilt Poker never anticipated that the DOJ would proceed as it did by seizing our global domain name and shutting down the site worldwide," the company said. It said it was seeking outside investment and was committed to paying players in full.
The accusations against Full Tilt are part of a crackdown that began in April when the Justice Department indicted executives at three major online poker companies, including Full Tilt, on charges of illegal gambling, bank fraud and money laundering. The government sought $3 billion from the companies, shut down their sites and stopped much of the online poker played in the U.S. It also filed a civil suit at the time, which it amended Tuesday to include much more detailed allegations against Full Tilt.
The Wall Street Journal has examined how the owners of Full Tilt played a cat-and-mouse game around the globe to process money from U.S. Internet poker players outside the purview of U.S. authorities.
The government charges have upended an industry that in the past decade became a behemoth online business as Full Tilt and other websites fueled a global poker boom. Full Tilt once hosted 54,000 people in a single online tournament.
The crackdown has shaken the large universe of poker fans. Before the April crackdown, researcher H2 Gambling Capital estimated there were 1.7 million active poker player accounts in the U.S. from players wagering around $14 billion a year online.
In London, Sebastian Fox, an aspiring music producer, said he could earn around $1,200 a month playing poker online. He racked up $8,000 in an account on Full Tilt. On June 29, he said that he tried to withdraw around $2,400 to pay for rent and other living expenses and discovered Full Tilt's website had been closed down, following the U.S. suit and a subsequent raid by authorities in the U.K.'s Channel Islands where Full Tilt is licensed to operate its website.
"I didn't even consider such a big company would be able to go bust just like that," Mr. Fox said.
The U.S. government has long argued that online gambling, including poker, is illegal under the Wire Act, a 1961 law that explicitly prohibits sports betting conducted over electronic communication. The law is less clear about other types of gambling that are outlawed by the Wire Act, say legal experts.
Online poker sites started popping up over a decade ago but took off in 2003 when an accountant named Chris Moneymaker entered an online tournament and later won $2.5 million in the World Series of Poker. His success enticed thousands of new players online and lured entrepreneurs hoping to capitalize on the boom.
Among them was a lanky poker player, Chris Ferguson, nicknamed "Jesus." Mr. Ferguson, who sported a thick, shaggy haircut and had a Ph.D in software engineering, and his colleague Mr. Bitar tinkered with their concept for web poker while they traded stocks in Los Angeles. The idea: recruit stars from the poker world to lure players to a new site.
The pair dubbed their cadre "Team Full Tilt." Team members were given stock in the company. Most of the early members got a 10% stake though that fell as more members were added. Mr. Ferguson took 20% of the company for himself, according to a person with knowledge of the situation.
To raise its profile, Full Tilt promised online players the opportunity to play with and learn from its stable of poker stars.
The site worked like many others. Players deposited money into an account held by the poker company. When the player won, the account would be credited; when the player lost, it would be debited.
Behind the scenes, poker sites used other companies, called payment processors, to maintain player accounts. The poker sites made money from tournament fees and took a small percentage, or "rake," of the money wagered. The processors, meanwhile, charged additional fees.
That business in the U.S. hit a wall in 2006 when Congress made it illegal for financial institutions to process funds for online gambling. The law, called the Unlawful Internet Gambling Enforcement Act, stopped online poker sites from processing payments in the U.S., forcing many online poker companies to abandon U.S. players.
Others, such as Full Tilt, had already moved their processing of U.S. poker games outside of the U.S. By this point operating out of Ireland, Full Tilt thrived, and in April of 2007, began paying its owners a total of about $5 million a month, according to a person familiar with the situation.
That same year, the Justice Department clamped down further, arresting and charging two U.S. executives of NETeller, a publicly traded payment processing company based in the Isle of Man, with money laundering. The U.S. seized $55 million belonging to gamblers and shut down NETeller's U.S. operations, while both executives pleaded guilty.
The closure of NETeller put poker companies on the hunt for people still willing to move online poker money. That included Australia's Intabill Inc., whose founder, an entrepreneur named Daniel Tzvetkoff, directed his employees to tell banks the transactions were related to legal activities such as the repayment of payday loans, according to a later complaint by the U.S. government against Mr. Tzvetkoff. Mr. Tzvetkoff also approved employees to set up dozens of phony shell companies to help disguise the payments, the government said. Mr. Tzvetkoff's attorney, Robert Goldstein, declined to comment.
The relationship worked until 2008, when the Australian company began holding onto the money it owed Full Tilt for increasingly longer periods, according to a person familiar with the matter. In October 2008, Full Tilt executives emailed Intabill to complain about roughly $14 million in payments that were supposed to have been wired to Full Tilt, according to emails viewed by the Journal.
On Nov. 3, 2008, Mr. Tzvetkoff apologized by email saying the delay had been caused by middle men who were having trouble trading currencies, according to an emails.
Yet behind the scenes, at least one Intabill official was less cordial: On Nov. 4, Intabill's general counsel, sent Mr. Tzvetkoff an email that used obscenities to describe Full Tilt. Mr. Bitar, the Full Tilt chief executive, "doesn't realize what we are doing for him is illegal and we are the only ones smart enough to come up with the solution to allow him to make all this money," the general counsel wrote.
Full Tilt sued Intabill, Mr. Tzvetkoff and Intabill's general counsel in a Brisbane court in 2009 for not paying its debt and won a default judgment for $43.5 million plus interest. Later that year, Mr. Tzvetkoff filed for bankruptcy leaving Full Tilt mostly unpaid, according to court records.
Intabill's collapse and seizures of assets at other processors by the U.S. government eventually forced Full Tilt and other online poker companies to seek the help of a small bank in St. George, Utah, that was in financial trouble, according to regulators.
The poker companies convinced the bank, called Sun First, that processing the transactions was legal due to a loophole in the 2006 financial transactions law, according to the U.S. government complaint. They produced a letter from an attorney at former U.S. Attorney General John Ashcroft's law firm, backing up their claim that poker was not illegal. In an interview, the lawyer, Catherine Hanaway, a partner at the Ashcroft Group, said she had been hired by a Full Tilt competitor to write the letter, which held that a payment processor was more likely than not to prevail in arguments in court that poker was not illegal under federal laws.
The government crackdown created increased difficulties by the poker companies to find places to move and store player funds. Sun First in the fall of 2010 stopped processing the poker money because of an order from bank regulators.
Though cut off from most of its ability to move money, Full Tilt continued to run poker games, crediting players' accounts with cash even though the deposits weren't always processed, according to the government complaint. Often the money remained in the players' own bank accounts.
This stopped most money from coming into the company, but it didn't stop dividends from electronically flowing out of the company to the bank accounts of Full Tilt's owners, according to several people with knowledge of the situation.
Meanwhile, lawyers were meeting with federal attorneys in an effort to stop more actions and convince them their business wasn't illegal, according to several people familiar with the matter. But those talks never went anywhere and the situation grew more dire, according to these people.
On March 31, 2011, Full Tilt owed approximately $390 million to players around the world, including $150 million to U.S.-based players, but the company had just $60 million in its bank account, the government said in its filing Tuesday.
Yet it nonetheless maintained an image of stability to the public. That same day, it announced a partnership with Las Vegas casino executives to push for federal legalization of gambling.
On April 15, the Department of Justice shut down the site to U.S. players, and Full Tilt didn't have the money available credited to U.S. players—around $160 million. Still, Full Tilt continued operations outside the U.S. and issued a statement, assuring players that their "funds remain safe and secure."
On June 9, Mr. Lederer reported to other Full Tilt insiders that the company had only $6 million in the bank but liabilities of over $300 million, the government alleges.
On June 30, regulators from Britain's Channel Islands suspended the company's license to operate around the world, and Full Tilt ceased operation.
The regulators, the Alderney Casino Control Commission, are holding hearings this week behind closed doors on the matter.
Reply With Quote
Originally Posted by zY|
