Joe and I will be discussing gaming—including Internet gaming—developments in New Jersey. I think this is going to be a fascinating program. As many of you already know, Joe is a highly knowledgeable and well-spoken resource on what is happening in US gaming law and policy, especially so with respect to New Jersey. I know that you may well have questions about what’s happening in New Jersey, about its ‘opening up’ to Internet gaming licensure, about how its landscape compares with Nevada, and other matters. This will be a fantastic opportunity to put your questions straight to Joe to learn more about what’s happening in this jurisdiction.

Tune in live to the program on the 24^th (through the link in this message) and call in with questions. I’m not sure you’ll have a better opportunity to engage on these issues with a more informed person than Joe.

The conference is really an interesting concept. True to the symposium definition, different authors with familiarity in the gaming space – and anyone else who wants to attend – are getting together, presenting a series of papers, and critiquing them. Later, each writer or writing team will return home and make further changes and amendments to her, his, or their article. The whole collection of papers will then be published as a book by the UNLV Gaming Law Journal sometime in the fall.

The symposium and the resulting book has as its objective the compilation of selected worldwide best practices in the regulation of Internet gaming and betting. Topics that will form discrete chapters include location verification; fraud and cheating detection and prevention; responsible gaming; accounting, reporting, and audit requirements; taxation; and, advertising. I don’t expect that the presentations will just rehash the papers. I hope that mine, for example, goes beyond what’s in the article to try to explore where international regulation of the igaming sector is going.

This is really an excellent opportunity to engage with and learn more about the sector from global authorities in gaming, including Anthony Cabot, David Schwartz, Tony Coles, and Lawrence Walters. Some of the best gaming law firms and minds in the world will be speaking and exchanging ideas. I expect that the discusison will be edifying whether you’re new to the sector or a seasoned veteran. It’s also only one day long. This event should really be worth your while.

The cost is $299 per regular attendee. There is a discount for Boyd Law School alums (lucky folks). Current Boyd students and faculty can attend for free. (This covers your lunch and a post-conference reception.)

For those looking for a printout instead of a link, a media alert is available here. I look forward to seeing and meeting many readers there.

Funny counterpoint: Rod Rosenstein, the US District Attorney in Baltimore, was interviewed as part of a W5 program on Calvin a couple of years ago.

Based on a comparison of Mr. Beckley’s plea agreement with Mr. Franzen’s plea agreement, I’m even more convinced that Mr. Beckley is not a co-operator.

First, let’s look at Mr. Franzen’s agreement. It contains the caveat that the sentence to be imposed is within the sole discretion of the US District Court and is careful to note that the USAO is not making any promise or representation about the sentence that Mr. Franzen will receive. (Mr. Beckley’s agreement has substantially the same language.) However, read the third paragraph on page 2 of Mr. Franzen’s plea. This paragraph sets out that Mr. Franzen is to do a number of things for the US Attorney further to this transaction. For example, he is to “truthfully and completely disclose all information with respect to the activities of himself and others concerning all matters about which this Office inquires of him, which information can be used for any purpose.” He is to attend all meetings at which the USAO requests his presence. Mr. Franzen is to bring to the Department of Justice’s attention “all crimes which he has committed, and all administrative, civil, or criminal proceedings, investigations, or prosecutions in which he has been or is a subject, target, party, or witness.” He is to provide truthful testimony at any trial—including, presumably, at the trial of John Campos and Chad Elie next March, if it goes forward—and at “any other court proceeding with respect to any matters about which this Office may request his testimony.” The essence of what this paragraph is after is in (b): that Mr. Franzen is to “cooperate fully with this Office, the Federal Bureau of Investigation, and any other law enforcement agency designated by this Office.” In return for his co-operation, and notwithstanding that his sentence will be up to the court, the USAO will (at page 3) inform the probation department and the court, among other things, of Mr. Franzen’s plea agreement and “the nature and extent of Mr. Franzen’s co-operation with this Office.” This is why Mr. Franzen doesn’t yet have a sentencing date. The government is waiting to see how he performs as a co-operator first; that will be one of the factors affecting his sentence.

Now read Mr. Beckley’s plea agreement. It sets out the counts to which he pleaded guilty, stipulates that he agrees to forfeit $300,000, and establishes a schedule related to that forfeiture. It also contains stipulations related to the sentencing guidelines and (as discussed above) it leaves any term of incarceration up to the court. (The parties also agreed that Mr. Beckley’s stipulated guidelines sentencing range is 12-18 months.) But none of the extensive co-operating language in Mr. Franzen’s deal is in Mr. Beckley’s plea agreement. According to Mr. Beckley’s plea, he doesn’t need to testify before a grand jury or at trial or at any other proceedings. He need not give information about any other party in response to any queries put to him by the USAO. He doesn’t have to attend any meeting at the USAO’s request. In short, he doesn’t have to co-operate with the USAO, the FBI, or any other law enforcement agency under the terms of his deal.

It looks like all Brent Beckley has to do is show up to be sentenced on April 19, 2012.

Let’s see what happens in the spring. But based on the publicly-available documents, it appears that Mr. Beckley does not need to do anything to help the government in order to move ahead with his sentencing, and I’m even more confident that he’s not a co-operator. He also presently appears to have more of a final date for getting out of this case than any other Black Friday defendant.

One of the more intriguing parts of the US Attorney’s press release is the following sentence: “He [Mr. Beckley] is scheduled to be sentenced by United States Judge Lewis A. Kaplan on April 19, 2012, at 4:00 pm.”

Why is that interesting? Because I think it might indicate that Brent Beckley is not (or at least is not thus far) a co-operating witness for the government. I think he’s made his guilty plea to the court, thereby admitting his own involvement, but without rolling over on anyone else.

Compare what we know about Mr. Beckley with what we know about Bradley Franzen’s deal. Recall that Mr. Franzen pled guilty in May of this year to three counts in connection with the same criminal indictment: conspiracy to commit bank fraud; conspiracy to accept funds in connection with unlawful Internet gambling; and, conspiracy to commit money laundering. Mr. Franzen’s plea agreement is here and the press release announcing the plea is here. When is Mr. Franzen’s sentencing? If you look at the bottom of page 2 of the press release, it says that the hearing has yet to be scheduled. That’s actually not quite right. When Mr. Franzen pleaded guilty in May, a sentencing hearing was set for late summer. There is no mention of what happened to that hearing on the court docket, but it does seem clear that it never happened and that it has not yet been rescheduled. So it was originally scheduled; it just hasn’t taken place yet.

One interpretation of this is that Mr. Franzen’s sentence is contingent on what he provides to the Department of Justice. In other words, he is a co-operating witness in the investigation and prosecution and his sentencing was put off to see how his co-operation shakes out. If that’s true, then he won’t be sentenced until the proceedings are over and they see how he’s performed. If he’s a good co-operator for the government, that should be reflected in any representations that the US Attorney makes to Judge Kaplan. If he’s a bad co-operator, then that will also be taken into account. The bottom line is that it seems he still has to earn any consideration in this regard from the Department of Justice.

Right now, it appears that Mr. Beckley might be on the same initial track as Mr. Franzen was before Mr. Franzen’s sentencing hearing was deferred. Mr. Beckley currently has a fixed date to get out of the case. It will be interesting to see if his hearing proceeds on April 19th. If it does, and if he doesn’t appear as a witness at trial, then it’s reasonable to infer that he’s not a co-operator.

Why would the government make such a bargain without co-operation? Perhaps the prosecutors wanted an early victory against one of the alleged operators in the case. Maybe Mr. Beckley is getting some consideration for being at the front of the line. Certainly the deal, while exposing the accused to a federal prison sentence, wasn’t undertaken lightly by Mr. Beckley, but on the plus side he gets a certain amount of finality, even now, before his sentencing. He currently has a target date for moving on with his life. Brad Franzen doesn’t.

So keep watching the docket and the proceedings. The trial for Chad Elie and John Campos is set for March 12, 2012, if they don’t decide to plead out beforehand. If we don’t see Mr. Beckley appear in those proceedings and if his sentencing hearing goes forward as currently scheduled, then I’m confident he’s not a co-operator and he’ll be out of the case.

The pressure on any criminal defendant in a case like this—from all sides—to settle by becoming a co-operator is immense. I think it shows a great deal of fortitude to resist that kind of pressure, to own up to one’s own involvement, and to not take anyone else down in the process. I expect that several of the other defendants won’t see this matter through the same way I suspect Mr. Beckley has thus far.

There appear to be the usual outs for the parties if Congress doesn’t legalize Internet poker. While it may seem that these three are hitching their wagon to federal legislation (no particular surprise for Boyd and MGM), the release from bwin.party mentions the possibility of a state-by-state strategy being adopted. Unlike the federal JV, if the US goes state by state, “[t]he shareholders and shareholdings in a State NewCo may vary, depending on the state concerned and reflecting the contributions to be made by each shareholder. In addition to bwin.party, shareholders in State Newco may include MGM, Boyd and other partners.” Bwin.party seems to be leaving its options open, which is smart for them at this stage.

The various media stories also suggest that the deals are contingent on regulatory approval, i.e., sign-off from Nevada gaming regulators, who are expected to be key regulators under a federal ipoker regime. Will Nevada conclude that bwin.party is a suitable partner? It’s unclear. Bwin.party says it’s “preparing to enter into a suitability review with the Nevada Gaming Control Board in order to secure an advanced finding of suitability in anticipation of future US-facing real money poker opportunities.” Presumably it’s confident that it will succeed.

Bwin.party accepted wagers from US residents pre-UIGEA enactment. In 2009, its predecessor, PartyGaming Plc, signed a non-prosecution agreement with the US Department of Justice, pursuant to which Party is to still paying off $105M in forfeiture ($30M to go – to be paid out next year). (Interesting side note: Does the non-prosecution agreement apply to bwin.party, i.e., to the merged entity with the bwin side of the business rolled in by reverse-takeover? In a prospectus filed in anticipation of the merger, Party took the view that it does. The non-prosecution agreement states that “the protections provided to PartyGaming by this Agreement shall not apply to any successor entities, whether the successor’s interest arises through a merger or plan of reorganization or otherwise, unless and until such successor formally adopts and executes this Agreement.” The real issue is whether additional forfeiture is required in respect of the former bwin. On this point, the prospectus states (page 111): “It is therefore conceivable that, after Completion, the USAO could seek additional forfeiture from the Combined Group in respect of services provided by members of bwin’s group of companies in the US prior to the enactment of UIGEA … [T]he Company would object to that suggestion, but in any event, any such forfeiture would not be expected to be significant in view of the limited revenue bwin generated in the US prior to the enactment of the UIGEA.” So basically: no additional forfeiture obligations, but if we’re wrong, they’re not “significant.”)

This may or may not be enough. Kentucky still has a problem with bwin.party – witness the commonwealth’s civil action against the enterprise, among others, related to the Internet domain name seizure action started a few years ago. The point is that a federal non-prosecution agreement – if it applies the same way to the successor and is capped at $105M – may not matter when it comes to Nevada’s assessment of suitability. True, Nevada approved 888 Holdings as a suitable partner of Caesars earlier this year, but that was in respect of 888 as a supplier where gaming was to be conducted outside of Nevada. This is different. Here, a JV majority-owned by bwin.party will seek to do business in the US, including with Nevadans. I’m not clear on what Nevada will do here.

There’s already been the inevitable commentary about who wins and loses from this deal. It’s been in the works for almost 18 months, which is not to say that people can’t make mistakes after working on something for years, but picking winners and losers here is premature and very difficult without seeing the transaction agreements. If, for example, MGM and Boyd get an aggregate 35% of profits from a JV that doesn’t even leverage their own brands, that could well be a good deal for them and increase shareholder value.

This is actually an important point and not clear from some of the media coverage. In the MarketWatch release from yesterday, it’s confirmed that the JV will offer games under the bwin.party brands and Jim Murren (MGM’s CEO) says that he would be “very interested” in using bwin.party’s technology to operate sites under MGM’s brands, which seems to imply that’s not part of the deal. In the Review-Journal piece and in Forbes, however, the licence to MGM and Boyd to leverage technology from bwin.party to flog their own brands is part of what was put together and announced yesterday. Helpfully, the bwin.party release goes into more detail on this point and expressly references 15-year B2B agreements between bwin.party and each of MGM and Boyd pursuant to which the latter two may offer real-money online poker in the US under their own brands on the bwin.party technology platform. Bwin.party says that it “will receive a share of the online poker revenue generated by those services.”

This matters. It goes to what everybody is getting out of the transactions. Without knowing the revenue share (for example), it’s very difficult to know who’s getting the short end of the stick or, indeed, if anyone is. It could be a good deal for all parties, including US players.

Now Congress just needs to legalize Internet poker.

I have read the amended complaint and the exhibits, all of which are available on PACER. Two of the bigger allegations in the amended complaint – I won’t call them “new” – as they relate to Full Tilt are that Tilt: a) didn’t hold player funds separately from operating funds, contrary to its public statements; and, b) distributed money to its insiders when the enterprise was insolvent. The two allegations are discrete but connected; player funds being co-mingled with operating funds set the stage for the alleged misappropriation of ‘easy money’ by the principals.

Some have spoken about the prosecutor’s characterization of this as a Ponzi scheme. This appears to have been mentioned twice in the press release from the US Attorney’s office: once in the headline and once in the second paragraph of the release. There’s no doubt that use of this term was designed to get maximum media exposure, but it wasn’t a true pyramid scheme. A Ponzi scheme needs investors seeking returns and payouts to older investors using newer money. Here, there were players depositing money – not investing – and, while some of the funds may have been paid out to players cashing out, it seems that they were mostly used to line the pockets of the insiders. I wouldn’t have used the term, but the allegations point to something conceptually akin to a pyramid scheme, i.e., an inherently unstable financial structure perpetually relying on new funds to keep it going, so I’m not put out by use of the term “Ponzi scheme,” even if it was done for political reasons.

Without responses from some of the parties added to the amended complaint, which will come in the fullness of time, there’s not much that I can say that hasn’t been said – and said quite well – elsewhere. As with the rest of this case, there continues to be a great volume of quality online commentary available. The effects of the lies and of the plundering of the enterprise (if proved) are and will be terrible, both in terms of money that people lost on Tilt and to the extent that Internet poker will get another black mark in the eyes of the wider public. I expect the parties and as-yet unnamed plaintiffs to fight hammer and tong with the government and among themselves about who gets what part of any funds that can be traced and recovered.

On a related point, the American Gaming Association picked yesterday to release its Code of Conduct for U.S. Licensed Online Poker Companies. It was happenstance that it came on the same day as the DOJ’s actions, but it’s welcome. The Code of Conduct is an interesting document and it provides a good summary of key principles that many US players, policymakers, and operators can back. The AGA has its own agenda, and that must always be remembered. And yes, it’s plugged in with Senator Reid, whom some online poker stakeholders don’t seem to trust. But a lobbyist – sorry: trade association – can have its own axes to grind and still help push the debate in a fruitful direction, if sometimes only in a small way. It’s with that kind of perspective that I look at the Code of Conduct. There’s a great deal of sensible talk coming out of the AGA these days, even if it’s political.

If and how the Manhattan indictment will affect legalization by Congress (when it happens) is still unclear, but both tracks continue to be worth watching.

Right now, there is a great deal of frustration – even anger – at the prospect of the proceedings continuing behind closed doors. That’s understandable. Players are going on minimal information and want answers about what happened to their funds and when (if) they’ll be paid back. They also want to know if and how the AGCC could have monitored Tilt more closely.

Balanced against this are the facts that two alleged principals of Full Tilt are facing serious federal charges in the United States. Counsel to Tilt will do everything possible to avoid prejudicing those individuals’ interests in the SDNY proceedings. Furthermore, if there are – and I hope there are – negotiations to purchase assets and (crucially) assume player liabilities, there are likely confidentiality provisions embedded in those discussions. The confidentiality clauses are likely drafted such that they don’t apply to information ordered to be disclosed under applicable law by a court or administrative tribunal of competent jurisdiction. (If they’re not, the confidentiality provisions may be inapplicable, in part.) Let’s assume that the Alderney regulators fit this definition. Even so, counsel to Tilt can hardly be blamed for wanting to keep this outside of the public eye unless and until there’s a deal to report out.

I’m sympathetic to those who want this to continue in full view of an interested and informed public. I think the bottom line, however, is that I don’t necessarily see public hearings as being conducive to a transaction (again, if one is in the works). Unfortunately, I believe that the best hope for players getting paid back is for someone else to step in and cover the bill. If that means a private hearing to give a confidential update to the AGCC for now, we should endorse that – not happily, or enthusiastically, but in order to be realistic about the facts as we find them right now.

If this goes forward in camera and it turns out there’s no deal in the works or it turns out to be a stalling tactic, I expect that the Gambling Control Commission will throw this back into a public hearing, among other actions that they can take. For now, I think we should respect the process. There are some who feel that the AGCC can’t be trusted and is discredited for ‘allowing’ things with Tilt to get to this stage in the first place. I’m also sympathetic to that line of argument, but I don’t think that the possibility that US players’ interests will be served by having these proceedings go forward behind closed doors should be dismissed out of hand.

This letter, from two senators coming from very different camps on the Internet gaming issue, is a very interesting document both for what it says and for what it doesn’t say.

What it says is that the Department of Justice has been lax in pursuing foreign private Internet gaming operators and that this has “led to a signficant and growing perception … that the Department of Justice thought that the case [against operating Internet poker and other Internet gambling websites] was uncertain enough that it chose not to pursue enforcement actions.” The senators state that it’s important for the DOJ to pursue “illegal Internet gambling” in the United States “aggressively and consistently.” Most notably in this paragraph, Senators Kyl and Reid assert that Internet poker websites have been offering online play to Americans for many years “with apparently no repercussions.”

I can’t know what the senators meant to convey by this language, but as drafted, some of these claims are puzzling. Yes, the DOJ has perhaps not been as consistent in its pursuit – or not – of various Internet gaming operators. This owes as much to the fragmented nature of law enforcement in the US as anything else. (The Attorney General could convene a unit or task force to pursue Internet gaming across the various federal districts, but this seems unlikely. I don’t think that’s what the senators are after here, anyway.) But: a lack of aggression? Apparently no repercussions? Setting aside all state actions against Internet gaming, federal prosecutors across the United States, and taken as a whole, have been pretty busy. They have hounded operators, and those working with them, that are taking what the DOJ perceives to be illegal bets and wagers. There are the current federal indictments in New York and Maryland. There have been previous indictments in New York, Utah, and Missouri. There have been forfeiture orders sought and granted in federal courts in New York, Washington, Maryland, Missouri, and California, to name a few. The DOJ has collectively taken highly aggressive steps to disrupt operators’ businesses in the United States, with huge repercussions for those operators (many of which have decided to leave the US), payment intermediaries (many of whom have been indicted and/or shut down), and players (who have huge difficulties getting their money, if they can get it at all). No-one can deny that federal law enforcement has had a huge impact on the US-facing industry since 2006. It seems strange to me to call this a lack of consequences or aggression when the opposite appears to be true.

The Kyl-Reid letter goes on to cite concerns that the senators have with “the spread of efforts to legalize intra-state Internet gambling and the spread of efforts to offer such intra-state gambling through state-sponsored lotteries.” They call the efforts by intra-state gambling advocates and boasts about the DOJ’s “effective consent” by unnamed officials from various state lotteries “troubling.” They finish by asking the Attorney General to work with them to strengthen penalties for those who break the law, to see what modifications would be helpful to the DOJ in its fight against Internet gambling, and to either: a) reiterate the DOJ’s longstanding position that federal law prohibits gambling over the Internet (including intra-state gambling); or, b) if the DOJ’s position has changed, to consult with Congress before finalizing such a new position.

The request to restate the DOJ’s position is an empty one. Cleary the DOJ’s position has not changed. The New York and Maryland indictments both rely on the Illegal Gambling Business Act and respective predicate state law violations. The indictments in Maryland don’t rely on UIGEA (the New York indictments do), but the affidavit in support of the seizure warrants in Maryland relies on both UIGEA and the Wire Act. Some believe that the New York indictments signal that the DOJ knows that the Wire Act doesn’t prohibit Internet poker or casino games from being offered. If true, that’s as far as the DOJ will go, i.e., they just won’t invoke it, without comment one way or the other. The DOJ has consistently taken the position that the Wire Act applies to all Internet gambling, irrespective of the In re Mastercard decision, and this letter won’t change that. This in spite of the fact that, as many have pointed out before, the UIGEA expressly allows intra-state gaming, a point that is unsurprisingly not addressed by the senators. (That carve-out likely only gets intra-state gaming out of the UIGEA, not the Wire Act, but the point should still be addressed.)

What do the senators not say in this letter? They don’t say that the DOJ’s position “that all forms of Internet gambling are illegal” is the law of the land or that they agree with it. They clearly state that it’s the DOJ’s view. They also say precisely nothing about efforts to regulate and tax poker at the federal level.

What is the upshot of this correspondence to the Attorney General? I think it’s this: the senators are letting the DOJ know that it is to continue with its current policy. Kyl and Reid don’t necessarily endorse that blanket view of the application of the Wire Act (for example), but it suits their purpose to endorse tough “enforcement” from the DOJ. So what is their purpose, then? I suspect it’s to remind the DOJ that the legislative branch is calling the shots on the development of Internet gaming policy and, further to that power, to warn the states away from adopting their own intra-state gaming programmes. Kyl and Reid may also be signalling that they will support an Internet poker bill in Congress, perhaps even this year. Reid and the AGA already appear to be on board with a poker-only bill, and Kyl seems to be lining up with them. I agree with Jon Ralston’s conclusion on this (here); I just disagree with him that Reid and Kyl want an explanation for the Maryland and Manhattan federal indictments. They want nothing of the kind. In fact, I think the senators would be fine with further indictments being pursued.

The timing of the enactment of such a bill, if it happens, is still highly uncertain. Some colleagues of mine in the US that I greatly respect seem to believe that it has a better-than-even chance of happening this year, which I initially found surprising, but they could be right. Any federal i-poker bill could use one of three vehicles currently before the House of Representatives – the Barton, McDermott, or Campbell bills – but it will likely look very different from any of those drafts by the time it passes. Reid and Kyl will be the ones co-ordinating and signing off on the drafting of such a measure, for as long as Kyl is around, at least.

If my read on this is right, it affirms that pronouncements by politicians in general – and by Harry Reid in particular – are rarely what they may at first seem.

1. that Tiltware breached its contract with him on a number of fronts;
2. that certain contractual covenants are over-broad, oppressive, and contrary to public policy; and,
3. that Full Tilt’s actions separate and apart from the contractual breach have damaged Ivey’s reputation.

For this, Ivey essentially wants in excess of $150,000,000 in damages and a declaration that the non-competition covenants in the contract are void. Ivey’s contract with Tiltware is not included with the filings, which isn’t unusual, but presumably a copy will come out if this action grinds on long enough; that should be a compelling read when it surfaces.

The complaint describes Tiltware as a supplier of “software and related support for the conduct of legal online poker.” Ivey endorsed Tiltware’s product with his name and likeness, and the software was then provided to Full Tilt Poker (not named – yet – in the suit). According to Ivey, then, he only endorsed the software, and not the site itself, although the upshot of the arrangement was that Ivey “became widely recognized as being associated with Defendant, with Defendant’s product, and with Full Tilt Poker.” Quaere whether Ivey’s endorsement was ever limited to the software produced by Tiltware, and not “Full Tilt Poker” itself, but let’s ignore that factual issue for now. (The use of “Defendant” in the complaint, though undefined – unlike “Plaintiff,” which is defined as Ivey - presumably means Tiltware, even though there are several defendants.)

Without a copy of the endorsement contract, it’s impossible to say whether or not Ivey’s claims have traction or not. According to Ivey, ”Defendant asserts that for the entire existence of the Company [again, presumably Tiltware], Plaintiff is prevented from owning, acquiring, assuming or participating in any investment or interest that is adverse or otherwise in conflict with the Defendant’s business or prospects, financial or otherwise, without prior written consent of the Board of the Defendant, which consent may be withheld in the Boards’ [sic] sole and absolute discretion.” If that’s what the contract says, then it may well be overly broad and contrary to public policy on its face. Non-competition clauses aren’t supposed to preclude one’s ability to earn a living forever.

However, the alleged contractual breach based on what Tiltware, Full Tilt, and Ivey apparently knew about the legality of the US poker market is potentially more interesting. Ivey claims that neither Tiltware nor Full Tilt advised him of the “repeated warnings and clear notice that their conduct was illegal in the United States,” nor “that Full Tilt Poker was allegedly using ‘fraudulent methods’ to avoid banking restrictions.” Ivey may very well not have known about the bank fraud alleged to have been orchestrated by Full Tilt and others. The “repeated warnings and clear notice” is also vague. The complaint recapitulates the US Attorney’s press release on this point, but from whence the warnings and notice? The Department of Justice? Full Tilt’s lawyers? The players themselves?

Setting that aside, it strains credulity that Ivey didn’t have constructive notice of the alleged illegality of Full Tilt’s conduct in the United States. (And, for now, that illegality is still just alleged. The purported illegality is what Ivey complains caused him the harm.) Full Tilt consistently took the position that offering Internet poker was not illegal in the United States (except in Washington state, which it eventually shut off). If Full Tilt believed that assertion but was just wrong about it, what does that mean for Ivey? Did he honestly have no view on the matter? Did he and his lawyers consider all of the arguments and also decide that Internet poker was okay in the States? Ivey’s a brilliant guy and one of the best poker players in the world. It’s hard to conceive of a scenario in which he wasn’t aware of the arguments that Internet poker wasn’t legal in at least some states and therefore potentially under federal law. It just seems like wilfull blindness.

At the same time, Full Tilt’s public response to the lawsuit was less than edifying. There are vague references to Ivey helping and enriching himself at others’ expense. Assuming without deciding that Ivey has a valid claim against Tiltware and others, it may be that Full Tilt has to pay back the players and its disgruntled pro, irrespective of their trying to spin the matter into a zero-sum game of “we can pay back the players or we can pay Ivey, but not both.”

It will be interesting to see how this case shakes out. At the time of writing, Ivey is still listed as part of Team Full Tilt on www.fulltiltpoker.com. One has to expect that to change soon. One theory about why this action was started is that Ivey simply wants to take steps to publicly distance himself from Full Tilt, which I think is rational on his part. If that’s true, then the merits hardly matter; what’s important is the display of Ivey getting his narrative into the public record.

***

May 23, 2011

10 Recommendations for reform of government control of the U.S. commercial gaming industry

Ten recommendations for reforming state regulation of the U.S. commercial gaming industry were announced today at the IMGL Spring Conference in Napa Valley, California, by members of a panel on “Reforming Regulation of the Gaming Industry – Mission Impossible?” The recommendations were selected from a number generated by the panel’s survey of experts in the fields of gaming control, gaming operation and gaming law.

The panelists are Randolph Townsend, a member of the Nevada Gaming Commission and a former Nevada state senator; Lee Amaitis, President and CEO of Cantor Gaming; Mark Lerner, Senior Vice President for Law & Government and General Counsel, Bally Technologies; Thomas Auriemma, Vice President/Chief Compliance Officer, Penn National Gaming; and Bob Faiss, Chair of the Gaming Law Practice Group, Lionel Sawyer & Collins.

Jurisdictions that have taken the lead in improving gaming control systems were applauded by the panel.

The 10 recommendations (not in any order of importance) are:

- Appoint regulators who have some experience in or knowledge of the gaming industry. Treat the gaming industry as a legitimate business to be regulated, not an evil to be suppressed.

- Review gaming regulatory policy in the context of modern circumstances and redefine regulatory control as justified by that review. For every regulatory requirement, rule, regulation and policy, assess its regulatory benefit in comparison to the burden imposed on the licensee. If there are ways to lessen the regulatory burden without compromising the regulatory benefit, those should be considered. For every regulatory requirement, rule, regulation and policy, consider whether the gaming control process would be harmed by its repeal.

- Recognize the force and future of online wagering and make plans to deal with it.

- Make it a priority to have approval of gaming technology keep pace with technology development. With regard to gaming devices and systems: (a) Focus resources on streamlining the approval of them and (b) develop uniform standards for them.

- Eliminate unnecessary redundancy among gaming regulatory systems that require license applicants to begin at ground zero in each jurisdiction they seek to enter, no matter how many times they have been licensed elsewhere.

- Allow an applicant/licensee to set up an electronic data room, wherein the company places all the appropriate information (articles of incorporation, bylaws, minutes, litigation matters, etc.) and then grants access to regulators as appropriate to view such materials. This would relieve a company from having to make submission of the same materials to the different regulators.

- Work to maintain stability of regulation. The gaming industry deserves some degree of predictability as it makes decisions on ventures, mergers and acquisitions.

- Develop reciprocity agreements among jurisdictions for the licensing/approvals of individuals and entities and for approved gaming devices and systems that have been approved in another jurisdiction and meet the uniform standards.

- License natural persons, including officers and directors, as individuals for a fixed period of time (3 or 5 years) rather than by position. These licensees could be required to notify the licensing agency within a certain time of any change in their employment or positions held. Such changes would not trigger new applications or licensing.

- Reduce mandatory filings of documents to only those actually utilized by the agency.

For now, I’ll share the podcast that Sarah Klaphake Cords put together last week in Tulsa. Sarah did her usual wonderful job. Her first guest, Jason Lowry, Senior Director of Casino Operations at the Hard Rock in Catoosa, gave a great interview and had some fascinating thoughts on the dynamics of his local casino market. Sarah and I then chatted about the panel I was on in Tulsa later that day and on the current state of the Canadian gaming market, but Jason was a tough act to follow!

If you can’t get the embedded player to work, the interview is on the CEM site here. Enjoy.

1. Will the indictments and the fallout foreshadow an exodus of Internet poker players from the United States that wish to continue playing online?
2. Should Canada be a destination country for any online players considering such a move?

Now that I’ve set up my own questions, I must confess that I can’t fully answer either of them. At least the first one is empirical. While emigration can be objectively measured, it’s too soon to say if players will actually move to pursue what for many has been a full-time and lucrative occupation. Brad Polizzano has told me that he knows people that are already in the process of leaving. I respect Brad’s opinion and I’m sure he’s right; it’s just that, to date, I have heard more equivocation in my talks with people about this. Shane Schleger wrote a good piece in Slate last week indicating that he’s considering emigrating from the US, which is a useful perspective from a bona fide professional.

The second question is more difficult to address. Should one leave one’s home – in many cases, the land of one’s citizenship – to continue playing Internet poker? It’s an intensely personal question and, at least right now, a raw one.

Still, I want to frame the issues in a way that is true to the discussions I’ve been having with people over the last couple of weeks, and to get my thoughts out in a discrete post on the topic. As I mentioned to @ckbwop, I’m not interested in a sales pitch for Canada. As anyone who knows me well will hopefully attest, I retain an abiding skepticism about many aspects of my home country; Canadians are congenitally anti-American, we can be smug, and the political discourse at home is often picayune. However, there may be some factors about Canada worth considering if any player is seriously thinking about relocating outside of the US.

Factors

The three main factors I’ve addressed in the last little while are: a) the legality of play; b) taxes; and, c) immigration. I’ll look briefly at each.

a) Legality of Play

In the current environment, clearly this is the biggest concern. Is it illegal to play poker online in Canada? The short answer is that no-one knows for certain.

There are provisions in the federal Criminal Code that could theoretically ensnare an online poker player. (See page 41 of this article for a short discussion.) Also, cheating at play with intent to defraud under the Code was added to the list of “serious offences” under the Code last summer. While these provisions shouldn’t be considered lightly, it’s also true that the bulk of legal opinion in Canada believes that it would be difficult to sustain a successful prosecution of most Internet poker players under the current version of the Code. I share this view. More important, I’m not aware of any decided cases in which an online poker player has been prosecuted qua poker player or even of such a prosecution initiated by a Crown Attorney in Canada.

The legality of offering Internet poker as a business in Canada is more troublesome. Assuming that the Code applies to offshore private operators, most if not all forms of online poker that are not offered by the provincial lottery corporations are in breach of the Code. (There is a tension between the gaming provisions of the Code and the rights asserted by First Nations under the Charter of Rights, but that’s another post.)

I raise the point about operators because the shrewd player will surely – and fairly – ask: “If offering Internet poker is a legal grey area in Canada, what’s to stop the Canadian government from cracking down just like the US Department of Justice has?” While a full discussion of the differences between US and Canadian law enforcement is beyond the scope of a blog post, there are indications that the provincial and federal attorneys general are more concerned with operators that have a physical nexus within Canada (including game servers) that is outside of the Kahnawake Territory in Quebec.

Offshore poker websites advertise openly in Canada (including sites like www.partypoker.com, which has been switched off to the US since 2006). At the same time, no-one should be overly sanguine about the Canadian authorities’ approach to online poker. Things could change quickly, especially as more and more provinces roll out interactive offerings that they feel are threatened by foreign “unlicensed” operators. The same brand of complacency caught many in the industry unawares on April 15th.

b) Taxes

Canadian taxes are a mixed bag. The current highest marginal tax rate on income (not capital gains or dividends) received by an individual in Ontario that is ordinarily resident in Canada is 46.41%. That includes federal and provincial income taxes. Those taxes pay for decent infrastructure, universal health care (which is not perfect – it’s rationed), and good public schools, among other things.

The picture may be better for individual poker players, depending on the player. There is a presumption against taxing gambling winnings in Canada, including poker. This is a key difference from the US where, at least federally, gambling winnings for professional and recreational players are presumptively taxable. If you are truly a professional poker player ordinarily resident in Canada and being a pro is your only business (inclusive of activity ancillary to your status as a professional – think of endorsement deals), then you will likely be taxed on that income in Canada as income from a business. However, the Canada Revenue Agency has historically been very careful not to extend this net too widely over poker players, likely because, once taxed, future net loss years attributable to poker will probably be deductible as against business and other source income and available for carry-forward and carry-back in the normal course.

If a US citizen immigrates to Canada, he or she must still file US tax returns; the United States levies taxes on the basis of citizenship, and not just on residency. Also: US residents living abroad for at least 330 days out of a 365 day period may be eligible to exclude up to US$91,500 of income earned abroad from US income tax. There are some caveats and further details to this exclusion (called the Foreign Earned Income Exclusion), but that’s the general rule. US residents who are professional poker players considering a move to Canada should consult a tax professional to ensure proper steps are taken, if possible, to qualify for the exclusion. There are potentially significant tax savings at stake.

c) Immigration

This is probably the single biggest challenge facing any poker player thinking of making the move up north. Canadian citizens have an automatic right to re-enter the country and settle. For non-citizens wishing to immigrate, there are investor programs that allow for permanent residency with certain conditions attached under what effectively amounts to an interest-free loan of $800,000 to the Canadian government.

What can US citizens do to immigrate to Canada outside of making such a large investment? As has been pointed out elsewhere, a job offer from a Canadian firm or a course of study may be sufficient. US poker players may be able to fit themselves into the immigration structure, or they may not. In each case, it will depend on an assessment of the individual’s circumstances.

Other Issues

Some have indicated that it may be possible to remain in the US and play on foreign sites. If that’s possible under local banking rules (i.e., you don’t have to lie to your bank to do this) and if permissible on the site(s) on which you play, then fine. Some particular issues that may crop up under such an approach are addressed on Bill Rini’s blog here.

A more fundamental issue is whether the sites caught up in the proceedings in New York – or, indeed, any poker sites – can convince their players that such drastic action as moving abroad will be rewarded by safeguarding player funds. This remains to be seen.

Final Thoughts

Leaving one’s home to move abroad can be a huge decision, especially so when that home is also where one is a citizen. Relocation can have financial, cultural, and political aspects and can profoundly affect one’s family and loved ones. This post is really an attempt to engage with some of the key issues that will interest poker players who are seriously considering leaving the US to continue their online play.

Stu Hoegner is a gaming attorney and accountant in Toronto, Canada. This week he’s in Las Vegas for the iGaming North America conference at the Monte Carlo doing a warm-up act for Dan Michalski. (Thanks to Brad Polizzano for his valuable thoughts and comments on this post.)

The warrant directs the .com registrar (VeriSign) to direct the name servers to the addresses specified in the warrant or such other name servers or IP addresses as directed by the FBI.

These domains have been locked by the registry (and by the registrar in the case of www.ultimatebet.com – this domain remains with GoDaddy pending a final disposition of the domain seizure case in Kentucky) and now cannot be moved without a court order or the consent of the Department of Justice. I understand that the rest of the domains (save and except for www.ultimatebet.com) are registered with foreign registrars.

I’ll make full disclosure up front: I have acted for a party that, in the past, had interests adverse to Cake. I have not acted for anyone involved with, and I have nothing to do with, this lawsuit.

Who’s suing whom and why? Two individuals, Ryan Bennett and Francois Piette, and their partnership and a corporation controlled by them are seeking damages from a number of parties apparently associated with Cake. These parties include Cake Poker (Canada) Inc. and certain of its alleged affiliates (including Cake Gaming N.V. and Yummy Interactive (Canada) Inc.). Also named as individual defendants are Nicholaos Mellios, Christopher Ruck, and Ian Winter, who purportedly own a “substantial interest” in the Cake Gaming network and are collectively alleged to be “responsible for all major decisions regarding” the network. Finally, some other individuals said to be direct or indirect shareholders in the network were added as defendants.

The basic claim is that, in 2001, Bennett and Piette formulated ”an advanced business [and] marketing model” unlike any other model then being used by an Internet poker site. This initiative by Bennett and Piette is called the “Legacy Project” in the statement of claim. Apparently, “[t]he Legacy Project included a network marketing component whereby customers/players are compensated for referring other customers/players to the Legacy Project and who then receive a portion of the referred customers’/players’ winnings. It also proposed using photo real images on the website. These were then unique ways to obtain and retain customers/players.” So: the plaintiffs claim that they invented what is essentially an affiliate model for Internet poker.

In 2004, Bennett and Mellios met to talk about how they could work together on the Legacy Project. After NDAs were exchanged and the project was outlined, it appears the parties decided to form a joint venture. Legacy Entertainment (Bennett’s and Piette’s partnership) would own 20% of the venture and would provide the poker knowledge and marketing strategy. On the other side, Yummy would own 80% of the JV and “provide all of the finances and technology for the software development to create and operate the Legacy Project.” These general terms were set out in an agreement in principle that was not attached to the plaintiffs’ claim. The agreement apparently called for a “formal binding agreement” to be concluded among the parties within two months. The plaintiffs claim that they “repeatedly” pestered Mellios for this further agreement, to no avail. This “formal agreement” was never provided or executed.

The claim goes on to set out a narrative of the plaintiffs eagerly providing their business concept, experience, and assistance, and then being gradually squeezed out by Cake and its principals. Both Bennett and Piette were eventually banished from Yummy’s offices. Piette apparently took a pay cut because “the Legacy Project was tight on cash” and Piette believed in the project and wanted to see it through. Cake Gaming N.V. was set up to operate and market the Legacy Project; Bennett and Piette didn’t receive what they say is their required 20% of the shares of that coropration. The plaintiffs allege that information about their investment (which eventually grew into the Cake Gaming network we now know) was withheld from them, that they were denied face-to-face meetings with Cake’s principals, and that they were completely excluded from the management of Cake.

The plaintiffs seek an accounting of all funds due to them from the Legacy Project, damages, dividends, and transfer of appropriate equity ownership to them. Their action is grounded in breach of contract, tort (negligent and fraudulent misrepresentation), and the provincial statutory oppression remedy in British Columbia, among other things. (This latter remedy provides a mechanism for shareholders and creditors of - and others connected with - a corporation, to seek redress for any action of the corporation that is oppressive or unfairly prejudicial to that shareholder or creditor. It’s tailor-made for minority shareholders that are being taken advantage of by a majority. Canadian courts tend to broadly construe the oppression remedy to safeguard minority shareholder rights.)

All of these allegations are just that right now. No defences or counterclaims have yet been filed. The allegations have not been proved or even backed up with evidence tendered to the court. Of course there’s another side to this story, which will come out if the Cake parties choose to defend (if the parties don’t settle their differences first). One of my first questions about this is why the plaintiffs took so long to launch a claim. The agreement in principle was signed 7 years ago. Perhaps the plaintiffs were given suitable payments since then to keep things going; Bennett and Piette acknowledge receiving “dividends” from Cake Gaming N.V., suggesting they are, in fact, shareholders of that corporation. Why didn’t alarm bells go off when the main agreement was slow-rolled in 2004? Maybe this will be addressed when the agreement in principle is placed before the court. Perhaps most important: was this really a new marketing and revenue model, even in 2004?

Still, given the interest that the poker community appears to have in the goings-on at Cake, (see here, here, and here, as only three examples), this little set-to is something that some may wish to watch unfold.

In each case it will depend on a factual determination of whether you are carrying on the business of being a poker player or a gambler.

Source Income

Very generally, the “income” in respect of which one is taxed in Canada is one’s “income from source” as set out in the Income Tax Act^[1] (the Canadian equivalent of the Internal Revenue Code). What is income from source? It is a productive source of revenue from an office, an employment, a property, a business, or (without limiting the generality of the foregoing) an “other source.” Income from betting or wagering isn’t from an office or employment, and it’s not conceptually like the rents, interest, royalties, or dividends that come from property. The courts in Canada have demonstrated a reluctance to extend tax liabilities to cover unenumerated sources (the “other source” referred to above) of income; it’s unlikely that any gambling activities would be included in unenumerated sources.

That leaves income from business. When one carries on business in Canada, whether as a resident or a non-resident, one is generally taxable on the profit associated with that business. So, can a gambler be carrying on the business of gambling? The answer is that it’s conceptually possible, but it’s not easy.

In order to carry on business as a gambler based on the decided cases, one has to carry on a business with a fairly high level of skill. The two most prominent cases where a person was found to be taxable on gambling winnings involved a professional golfer who made money wagering on his own performance in matches^[2] and a snooker player who hustled drunks in money games.^[3]

There is an old paragraph of the Act called “right to a prize” that provides as follows: “a taxpayer’s gain or loss from the disposition of (i) a chance to win a prize or bet, or (ii) a right to receive an amount as a prize or as winnings on a bet, in connection with a lottery scheme or a pool system of betting referred to in section 205 of the Criminal Code, is nil.”^[4] While this language appears straightforward, this paragraph is of limited assistance and raises more questions than it answers; section 205 of the Criminal Code was repealed in 1985.

Lotteries, Games of Chance & Sports Betting

It’s safe to say that a person in Canada winning a lottery prize or winning at a game of pure chance (e.g., craps, roulette, or slots) is not subject to Canadian income tax on those receipts and, in fact, no modern reported case that I am aware of has found such receipts to be taxable. This makes intuitive sense as it would be difficult to imagine anyone actually making a commercial living based on pure chance.^[5]

What about sports betting? In perhaps the leading case on the taxation of gambling winnings in Canada right now,^[6] these kinds of winnings were not held to be taxable. The taxpayers in that case played the provincial sports lotteries. Even though they were financially successful, devoted themselves to the activity full-time, and had an organized and systematic approach to playing the lotteries and comparing posted odds to the Vegas odds, the court concluded that they were compulsive gamblers “continually trying their luck at a game of chance.”

The Poker Situation

Poker, however, provides an interesting possible counterpoint. Again, for most people, and certainly for the casual player, there will be a presumption against taxation of poker winnings as they will not be from a business. But what of the professional^[7] poker player? Although there is no remotely recent case holding that a professional player is taxable on her profits from poker, it’s possible to see how such a case could be made by the government. Among other indicia, if a resident in Canada is successful in poker with solid and consistent profits from the activity over a number of taxation years, has no material income-earning occupation other than playing poker (or related to playing poker – sponsorships, for example), and is a student of the game and works at learning and improving her game, then it seems likely that that resident would be classified as carrying on the business of being a professional poker player and be taxable on her profits from the game.

Making an actual determination like this would be extremely difficult. Where is the tipping point at which a taxpayer makes the leap from an amateur player to a professional sufficiently devoted to poker, consistently winning, and making good money? These things are much easier to nail down in theory than in practice. This is part of the reason that the Canada Revenue Agency is reluctant to assess people as having income from carrying on the business of playing poker; if business profits are taxable, then business losses can be also used to reduce income from that business and (in the case of individuals) from other businesses or from employment. If the government gets overly aggressive with taxing poker players, it could eventually find that it results in a net drain on Canada’s tax revenues.

How could the tax laws in Canada apply in a land-based poker tournament being held in Canada pursuant to applicable provincial laws and regulations? This is an interesting question. An amateur player would likely not be taxable, but let’s assume that a professional poker player who is resident in Canada wins such a tournament. Again, based on an analysis that the player has the hallmarks of a professional poker player discussed above, those winnings would likely be included in the player’s income from a business.

What of a United States resident professional player winning such a tournament? Non-residents are generally taxable on income earned from carrying on a business in Canada, and “carrying on business” in this context is broadly defined.^[8] However, the Canada-US Income Tax Convention (the “Treaty”) provides that where a US resident is carrying on business in Canada, the business profits are taxable by Canada only if the US resident is carrying on business through a permanent establishment. Permanent establishment in the Convention is an inclusive definition, which means the examples given are not exhaustive – things can be permanent establishments even though they’re not specifically itemized. However, this enumerated list includes structures and relationships like a branch, an office, a factory, a construction site, and an agent in Canada habitually exercising authority to conclude contracts in the name of her principal. It’s highly unlikely that a non-resident coming to Canada and playing in one land-based tournament and then leaving the country would be seen to have a permanent establishment in Canada.

Therefore, it doesn’t appear that a US professional playing at a Canadian land-based tournament would be subject to tax in Canada under the terms of the Treaty, which also suggests that the tournament would not withhold on any payments to that non-resident. Indeed, there appears to be no withholding obligation for such a payment to a non-resident in the Act. (In each case of a non-resident, it will be important to know what her home country’s tax convention with Canada says, if in fact the two countries have signed one.)

Income Derived From an Illegal Source

Dissolution brings to an end all business before both houses of Parliament. All government bills and private members’ bills are terminated and, to be resurrected, will need to be re-introduced in the next Parliament.

The upshot is that Joe Comartin’s bill to liberalize sports betting laws in Canada, discussed here and here, is now dead. We will have to wait and see what the membership of the House of Commons looks like after the election and whether Mr. Comartin (if re-elected) will re-introduce the measure.

As mentioned in the press release by the House Financial Services Committee and in my blog post from this past Saturday (here), this version is the same as the version of H.R. 2267 as amended by the Committee last summer. Don’t get too excited about this version. Any federal law that passes regulating Internet gaming (and most likely only poker) will look very different from this draft. There is a broad consensus among AGA members that regulation needs to come at the federal level, but there are a lot of items yet to be negotiated among many different interests.