By Eric Wargo and Ryan M. Rodenberg
The term “Ponzi scheme” has made its way into the sports, entertainment, and gaming world. Between Bernard Madoff’s indirect involvement with the New York Mets and Nevin Shapiro’s affiliation with the athletic department at the University of Miami, the words “Ponzi scheme” have rolled across the bottom line of ESPN often in the past twelve months. Commonly defined as an fraudulent investment predicated on payment of earlier investors from funds collected from subsequent investors (as opposed to any real profit or gain), the phrase “Ponzi scheme” was most recently used by federal prosecutors to describe Full Tilt Poker (“FTP”), a prominent online poker website.
In April 2011, FTP, along with PokerStars and Absolute Poker/Ultimate Bet, were shut down by federal law enforcement in what was later labeled “Black Friday” for the online poker industry in the US. All three websites currently include prominent messages notifying visitors that the portals have been seized. Logos from the Department of Justice and the Federal Bureau of Investigation are included. The recent Ponzi scheme-related allegations were contained in a 100+ page amended complaint filed September 20, 2011 in US District Court for the Southern District of New York. The detailed allegations are vast and multi-faceted.
From November of 2006 to April of 2011, FTP and its board members (Raymond Bitar, Christopher Ferguson, Rafael Furst, and Howard Lederer) allegedly deceived US banks by creating false websites and corporations in order to process payments to and from customers. FTP allegedly committed bank fraud, wire fraud, illegal gambling, and money laundering. The complaint also alluded to millions of dollars that were not paid out to FTP’s online poker players. Specifically, the complaint references that FTP may have owed $390 million to players worldwide, with $150 million of that owed to US-based players. However, only $60 million was in the company’s bank accounts. Meanwhile, board members allegedly distributed $443,860,529.89 to themselves and others affiliated with FTP. As a result, FTP allegedly began paying off players with “phantom money.” Taken together, the complaint includes four charges.
The first cause of action involves FTP’s purported illegal gambling, with the company operating overseas via its Ireland headquarters. FTP is allegedly in violation of illegal gambling under 18 USC §1955, a charge that defines “illegal gambling” as:
“(i) a violation of the law of a State or political subdivision in which it is conducted; (ii) involves five or more persons who conduct, finance, manage, supervise, direct, or own all or part of such business; and (iii) has been or remains in substantially continuous operation for a period in excess of thirty days or has a gross revenue of $2,000 in any single day.”
The second claim brought against FTP is that it conducted illegal bank fraud. As alleged in the complaint, two FTP executives processed billions of dollars in payments through fake companies and websites in order to deceive banks into accepting payments from their players online. As a way of avoiding facilitating illegal online gambling activity made illegal by the Unlawful Internet Gambling Enforcement Act of 2006, credit card companies, such as Visa or MasterCard, are required to flag and block payments from sites such as FTP. In order for FTP to continue doing business in the US, the company had to find alternative ways to process payments from American players. Allegedly helping the company accomplish this deceit were “poker processors” Ryan Lang, Bradley Franzen, Ira Rubin, and Chad Elie. For example, Rubin allegedly deceived the banks by creating phony companies and websites such as www.petfoodstore.biz and www.bedding-superstore.tv so that credit card companies would be tricked into processing and accepting payments to these companies when in reality they would be paying FTP.
The third cause of action against FTP was money laundering. The founders of FTP are accused of laundering millions of dollars though methods that were, on their face, unrelated to gambling. One method allegedly used by FTP and its owners was the use of e-checks in which accounts were named as “Arrow Checks” or “TLC Global.” This method was apparently used once other channels were interrupted. The amounts supposedly owed by each FTP executive/owner are as follows: (i) $40,954,781.53 for Bitar; (ii) $41,856,010.92 for Lederer; (iii) $25 million for Ferguson; and (iv) $11,706,323.96 for Furst.
The final cause of action brought against FTP and its owners was wire fraud. The defendants allegedly committed wire fraud as they knowingly facilitated transactions that served to transfer money from player’s accounts to their own accounts in deception of US banks and law enforcement. In doing so, prosecutors allege that FTP was in violation of 18 U.S.C. § 981(a)(1)(C).
Absent guilty pleas and the payment of restitution, it is likely that at least a year or two will pass before any jury renders a verdict or judge issues a dispositive ruling. In the interim, however, it is apparent that this action has the potential to impact online sports books in at least two ways. First, offshore sports books with “liquidity problems” that accept wagers from Americans now know that federal law enforcement is prepared to aggressively pursue online portals with a bevy of charges including fraud and money laundering. Such charges are considerably more serious than gambling-related allegations. Second, the implications of the FTP’s amended complaint could be seen in the growth of action being (re-)directed towards the regulated sports books in Nevada. Several British-based wagering companies as well as Cantor Gaming have made recent investments in Nevada’s legal sports books and casinos. A significant decrease in the number of Americans playing poker and betting on sports offshore via online books could result in renewed interest in portable and in-person wagering offered (legally) in Nevada.
Eric Wargo is an undergraduate student at Florida State University. Ryan M. Rodenberg is an assistant professor at Florida State University.
