http://stream.wsj.com/story/latest-headlines/SS-2-63399/SS-2-238643/
[h=2]Online Gambling Bets on Return to U.S.[/h]<dir><dir>
</dir></dir>PokerStars, the largest online poker company in the world, is playing a difficult hand: Just two years after being shut down in the U.S. it wants to return to the table.
PokerStars is headquartered on the Isle of Man.
Alexandra Berzon/The Wall Street Journal
ONCHAN, Isle of Man—It takes an hour by plane and almost three by ferry to reach this island-country smack in the middle of the Irish Sea. Here, on top of a bluff with magnificent views, is a modern building shaped like a Victorian-era hotel that was once on the site.
It is the headquarters for PokerStars, the largest online poker company in the world by a wide margin. And it is from this unusual perch the company is playing a difficult hand: just two years after being shut down in the U.S., and with its founder living here with a warrant out for his arrest, it wants to return to the U.S.
Until a year ago, the U.S. Justice Department considered online gambling illegal, but PokerStars, arguing against that interpretation of the law, kept taking bets until the government filed a civil action against it. Now, the legal landscape has taken a surprising shift, and states like Nevada and New Jersey have passed laws allowing some forms of online gambling. PokerStars, which reached a $731 million settlement with the government but admitted no wrongdoing, wants back in
Normally, companies who have founders who are under indictments don’t go applying for gambling licenses,” said Nelson Rose, a gambling law professor at Whittier Law School, in Costa Mesa, Calif.
To some extent, analysts say, the PokerStars homecoming bid reflects the difficulties many states will face as they open their doors to a long-banned business, itself a groundbreaking development. A good number of PokerStars’ online competitors have had their own legal issues, or operate in countries that don’t license online casinos. “There aren’t pure companies,” said Clive Hawkswood, the chief executive of the Remote Gambling Association, a trade group for online gambling.
PokerStars says its business is legal, citing several legal theories and other countries that license it. Its 66-year-year-old founder, Isai Scheinberg, declined to be interviewed, but through the company denies the Justice Department’s charges against him, which are for money laundering, bank fraud and illegal gambling operations. The U.S. has been seeking his arrest for two years, but doesn’t have jurisdiction on this 220-square mile island.
Not surprisingly, such legal entanglements haven’t helped the company. Citing the Justice Department’s actions, the American Gaming Association is fighting PokerStars’ licensing efforts, saying it ran a “criminal enterprise.” Rival casinos, meanwhile, have pressed states—and convinced Nevada—to impose five-year bans on so-called “bad actor” companies. And the company has been recently stymied in its efforts to buy a New Jersey casino, needed for a license there.
Still, PokerStars said it remains confident it will get a seat at the U.S. table. And based on its sheer size, few analysts are willing to rule it out. Almost a quarter of a million people played in one of its annual tournaments this year, and millions more tune in to watch its live televised events. According to Pokerscout.com., which tracks industry data, PokerStars controls 54% of player market share. That is seven times its nearest competitor.
PokerStars can spend millions on advertising, and last year it hired a well-respected tennis pro, Rafael Nadal, as its global spokesman. In a rare move, it also recently invited a reporter for The Wall Street Journal to visit its operations on this island and in London. “We have to begin to explain that we’re a completely normal company,” said Guy Templer, PokerStars’ head of business development. “We’re not a backroom shop on a rock in the sea.”
The company is well stocked with strong legal and lobbying teams. In the U.S. the former Democratic congressman Richard Gephardt is helping it push for congressional legislation to legalize Internet poker nationwide, for which he is paid $600,000 a year, according to public filings. In an interview, Mr. Gephardt said he has “always been very impressed” by the company’s operations and “how they comply with regulations and the law.”
From here on the Isle of Man, a rocky outpost of 86,000 people that is known mostly as a tax haven, the company is a mystery even to some players, including one flown here by the company who says he noticed that Mr. Scheinberg’s photograph in Google’s information box is of someone else (PokerStars says it doesn’t considering fixing that a priority). Despite a global staff of 1,500 and annual revenue over $1 billion, PokerStars also doesn’t put its name on its headquarters. That reflects a prior lease agreement but also a corporate ethos of being “modest but confident,” says a company spokesman.
Warwick Bartlett, a local gambling consultant here, says he got a taste of that modesty when he says a PokerStars executive asked him to not publicize a sizable donation it made to the local library. (The company said it didn’t disclose the donation, but an estimate has been publicized.) “They’re very secretive,” he said. “If you’re going to win licenses and influence people, then you have to be more available.”
Less than 12 years old, the brand was launched, in an unfortunate happenstance, on Sept. 11, 2001. (Like some companies, PokerStars is actually a brand, run by several linked corporations.) The son of Holocaust survivors raised in Lithuania, Mr. Scheinberg got the idea to create poker tournament software when he was an IBM software engineer playing in poker clubs in Toronto, PokerStars says. He recruited his son, Mark, a college dropout backpacking in Latin America at the time, who is now the company’s 39-year-old CEO.
It takes only pennies to play on its site, but early on, PokerStars promoted a convincing message that online playing could lead to jackpot winnings. It did so by enrolling its own online players to play—and often win—more traditional world poker events. Ultimately, its own special events became alluring as well, including its annual “Turbo Championship of Online Poker,” which offered $24 million in prize money this year.
Other sites have pioneered similar strategies. But some industry insiders credit PokerStars’ stealth marketing with helping expand poker in country after country. Among many moves, it placed its own sponsored pros on a version of the TV show “Survivor” in Belgium, and convinced a Russian detective show to use poker to solve crimes. It also spends heavily promoting a benign message about a game once associated with smoke-filled rooms and illicit betting. In one online video, Mr. Nadal practices the art of bluffing by trying to pose as a golf club receptionist.
The result has been a global poker boom that is only now subsiding, with global revenues of $4 billion, according to market researcher H2 Gambling Capital. “Everyone has benefited from that strategy,” said Brian Balsbaugh, a Las Vegas agent for celebrity poker players.
But critics say there are other sides to the PokerStars success story, including its behavior in the U.S., where the company says it once drew a sizable chunk of its business.
For years, the Justice Department had maintained that the 1961 Wire Act—passed as tool to crack down on illegal betting on sports and horse racing handled by wire—also applied to Internet casinos, and that states couldn’t legalize online gambling. That position, though, was the subject of significant legal debate, and federal courts produced mixed rulings on the matter. To help the government, Congress passed a law barring banks from making financial transactions related to illegal online gambling; on a practical level, that prevented most of the major online firms from operating in the country anymore.
PokerStars, along with a few other poker sites, continued to take bets. It argued—and still does—that poker is a game of skill rather than chance, and therefore legal. Among other things, it now points to a federal-court decision last year that backs that viewpoint. It has also argued it operated legally by using computer servers that were only in licensed countries.
But in its civil filing against PokerStars, and criminal indictments against Mr. Scheinberg and others, the Justice Department charged that the company and the individuals used “fraudulent methods” to circumvent gambling laws and “trick” financial institutions into processing payments. PokerStars says it wasn’t aware of any deceptive practices.
The case was part of a broader action the department took to shut down online poker in the U.S. Two smaller companies forfeited their assets to the government and admitted to no wrongdoing. Eight individuals, including former PokerStars executive Nelson Burtnick, and officials from other poker sites and financial contractors, pleaded guilty to various criminal charges. Paul Tate, who is still working for the company on the Isle of Man, hasn’t appeared in U.S. court, but the company says he denies the charges.
The action against the industry—which included the U.S. seizing the domain names of the major poker firms operating here—was quickly dubbed among poker players “Black Friday.” But within six months, yet another twist would change the direction of online gambling: At the behest of states asking for clarification about online lotteries, the Justice Department surprisingly ruled that its own criminal department was “incorrect.” Except for sports betting, it said, the Wire Act in fact didn’t prevent states from legalizing online gambling.
Seeing a sea change, and feeling vindicated, PokerStars promptly settled the civil action, and began its march toward U.S. legitimacy. Today, its executives argue that it is really only industry rivals fighting its return, with false accusations. “There continues to be a gross misrepresentation of our conduct and the values with which we run our business, which we feel obliged to correct,” said Mark Scheinberg, in email to the Journal.
Despite its careful planning, the company has had some early setbacks. Lawmakers in Nevada, for example, were ultimately convinced by casino lobbyists that firms that stayed after Congress’s act got an unfair business advantage, prompting the bad actors provision. Delaware passed on PokersStars’ application without public comment. And after it announced plans to buy the Atlantic Club in New Jersey, the company and the casino became entangled in a contract dispute, with Atlantic Club expressing reservations in a court filing about PokerStars’ ability to win a license
Backed by a state judge’s ruling last week, the casino can now seek other buyers. But the fight in New Jersey isn’t over. A PokerStars spokesman said it was deciding on its next step but would continue to seek a license there and elsewhere. “We absolutely expect to be a player in the U.S. market,” said the spokesman.
Along with Nevada, which approved online poker, and New Jersey and Delaware, where other casino gambling passed as well, four states have pending legislation. Despite objections from several camps about allowing more gambling into the home, most gambling officials and analysts say they believe the high-tech transition will only grow. Opinion on how regulators should proceed on individual cases, though, is varied and heated.
If regulators grant PokerStars a license, you are essentially trading your credibility away, said Mark Lipparelli, the former chairman of the Nevada Gaming Control Board, who does consulting for rival gambling companies and others. You may as well not have a licensing process.
At some point, analysts say, the company is likely to face scrutiny not only over its past in the U.S., but over what has become a reality of online gambling: the so-called gray market. About a dozen countries, including France, Spain and Italy, and many offshore jurisdictions, have set up systems for licensing online gambling. But most have not and some openly oppose Internet casinos.
In Russia, government prosecutors convinced its Supreme Court last year to order an Internet provider to block access to online gambling sites, but PokerStars, like other online firms, continues to draw Russian customers from other sites. Indeed, the company says the country is one of its largest markets, with 34,000 Russians enrolling in its annual Turbo championship this year. “We follow legal advice that offering our services doesn’t violate Russian law,” the company said.
As Mr. Rose, the gambling law professor, sees it, many of the issues regulators will face are reminiscent of the gambling industry’s difficult past, when Nevada first gave licenses to people formerly involved in prohibited gambling operations. Nevada and Delaware have approved at least one firm that operates in gray markets. The PokerStars conundrum only ups the ante, he says. “This whole question is, in effect, are we going to grant general amnesty,” said Mr. Rose. “The trend is to forgive and forget.”
Write to
Alexandra Berzon at alexandra.berzon@wsj.com
[h=2]Online Gambling Bets on Return to U.S.[/h]<dir><dir>
</dir></dir>PokerStars, the largest online poker company in the world, is playing a difficult hand: Just two years after being shut down in the U.S. it wants to return to the table.
PokerStars is headquartered on the Isle of Man.
Alexandra Berzon/The Wall Street Journal
ONCHAN, Isle of Man—It takes an hour by plane and almost three by ferry to reach this island-country smack in the middle of the Irish Sea. Here, on top of a bluff with magnificent views, is a modern building shaped like a Victorian-era hotel that was once on the site.
It is the headquarters for PokerStars, the largest online poker company in the world by a wide margin. And it is from this unusual perch the company is playing a difficult hand: just two years after being shut down in the U.S., and with its founder living here with a warrant out for his arrest, it wants to return to the U.S.
Until a year ago, the U.S. Justice Department considered online gambling illegal, but PokerStars, arguing against that interpretation of the law, kept taking bets until the government filed a civil action against it. Now, the legal landscape has taken a surprising shift, and states like Nevada and New Jersey have passed laws allowing some forms of online gambling. PokerStars, which reached a $731 million settlement with the government but admitted no wrongdoing, wants back in
Normally, companies who have founders who are under indictments don’t go applying for gambling licenses,” said Nelson Rose, a gambling law professor at Whittier Law School, in Costa Mesa, Calif.
To some extent, analysts say, the PokerStars homecoming bid reflects the difficulties many states will face as they open their doors to a long-banned business, itself a groundbreaking development. A good number of PokerStars’ online competitors have had their own legal issues, or operate in countries that don’t license online casinos. “There aren’t pure companies,” said Clive Hawkswood, the chief executive of the Remote Gambling Association, a trade group for online gambling.
PokerStars says its business is legal, citing several legal theories and other countries that license it. Its 66-year-year-old founder, Isai Scheinberg, declined to be interviewed, but through the company denies the Justice Department’s charges against him, which are for money laundering, bank fraud and illegal gambling operations. The U.S. has been seeking his arrest for two years, but doesn’t have jurisdiction on this 220-square mile island.
Not surprisingly, such legal entanglements haven’t helped the company. Citing the Justice Department’s actions, the American Gaming Association is fighting PokerStars’ licensing efforts, saying it ran a “criminal enterprise.” Rival casinos, meanwhile, have pressed states—and convinced Nevada—to impose five-year bans on so-called “bad actor” companies. And the company has been recently stymied in its efforts to buy a New Jersey casino, needed for a license there.
Still, PokerStars said it remains confident it will get a seat at the U.S. table. And based on its sheer size, few analysts are willing to rule it out. Almost a quarter of a million people played in one of its annual tournaments this year, and millions more tune in to watch its live televised events. According to Pokerscout.com., which tracks industry data, PokerStars controls 54% of player market share. That is seven times its nearest competitor.
PokerStars can spend millions on advertising, and last year it hired a well-respected tennis pro, Rafael Nadal, as its global spokesman. In a rare move, it also recently invited a reporter for The Wall Street Journal to visit its operations on this island and in London. “We have to begin to explain that we’re a completely normal company,” said Guy Templer, PokerStars’ head of business development. “We’re not a backroom shop on a rock in the sea.”
The company is well stocked with strong legal and lobbying teams. In the U.S. the former Democratic congressman Richard Gephardt is helping it push for congressional legislation to legalize Internet poker nationwide, for which he is paid $600,000 a year, according to public filings. In an interview, Mr. Gephardt said he has “always been very impressed” by the company’s operations and “how they comply with regulations and the law.”
From here on the Isle of Man, a rocky outpost of 86,000 people that is known mostly as a tax haven, the company is a mystery even to some players, including one flown here by the company who says he noticed that Mr. Scheinberg’s photograph in Google’s information box is of someone else (PokerStars says it doesn’t considering fixing that a priority). Despite a global staff of 1,500 and annual revenue over $1 billion, PokerStars also doesn’t put its name on its headquarters. That reflects a prior lease agreement but also a corporate ethos of being “modest but confident,” says a company spokesman.
Warwick Bartlett, a local gambling consultant here, says he got a taste of that modesty when he says a PokerStars executive asked him to not publicize a sizable donation it made to the local library. (The company said it didn’t disclose the donation, but an estimate has been publicized.) “They’re very secretive,” he said. “If you’re going to win licenses and influence people, then you have to be more available.”
Less than 12 years old, the brand was launched, in an unfortunate happenstance, on Sept. 11, 2001. (Like some companies, PokerStars is actually a brand, run by several linked corporations.) The son of Holocaust survivors raised in Lithuania, Mr. Scheinberg got the idea to create poker tournament software when he was an IBM software engineer playing in poker clubs in Toronto, PokerStars says. He recruited his son, Mark, a college dropout backpacking in Latin America at the time, who is now the company’s 39-year-old CEO.
It takes only pennies to play on its site, but early on, PokerStars promoted a convincing message that online playing could lead to jackpot winnings. It did so by enrolling its own online players to play—and often win—more traditional world poker events. Ultimately, its own special events became alluring as well, including its annual “Turbo Championship of Online Poker,” which offered $24 million in prize money this year.
Other sites have pioneered similar strategies. But some industry insiders credit PokerStars’ stealth marketing with helping expand poker in country after country. Among many moves, it placed its own sponsored pros on a version of the TV show “Survivor” in Belgium, and convinced a Russian detective show to use poker to solve crimes. It also spends heavily promoting a benign message about a game once associated with smoke-filled rooms and illicit betting. In one online video, Mr. Nadal practices the art of bluffing by trying to pose as a golf club receptionist.
The result has been a global poker boom that is only now subsiding, with global revenues of $4 billion, according to market researcher H2 Gambling Capital. “Everyone has benefited from that strategy,” said Brian Balsbaugh, a Las Vegas agent for celebrity poker players.
But critics say there are other sides to the PokerStars success story, including its behavior in the U.S., where the company says it once drew a sizable chunk of its business.
For years, the Justice Department had maintained that the 1961 Wire Act—passed as tool to crack down on illegal betting on sports and horse racing handled by wire—also applied to Internet casinos, and that states couldn’t legalize online gambling. That position, though, was the subject of significant legal debate, and federal courts produced mixed rulings on the matter. To help the government, Congress passed a law barring banks from making financial transactions related to illegal online gambling; on a practical level, that prevented most of the major online firms from operating in the country anymore.
PokerStars, along with a few other poker sites, continued to take bets. It argued—and still does—that poker is a game of skill rather than chance, and therefore legal. Among other things, it now points to a federal-court decision last year that backs that viewpoint. It has also argued it operated legally by using computer servers that were only in licensed countries.
But in its civil filing against PokerStars, and criminal indictments against Mr. Scheinberg and others, the Justice Department charged that the company and the individuals used “fraudulent methods” to circumvent gambling laws and “trick” financial institutions into processing payments. PokerStars says it wasn’t aware of any deceptive practices.
The case was part of a broader action the department took to shut down online poker in the U.S. Two smaller companies forfeited their assets to the government and admitted to no wrongdoing. Eight individuals, including former PokerStars executive Nelson Burtnick, and officials from other poker sites and financial contractors, pleaded guilty to various criminal charges. Paul Tate, who is still working for the company on the Isle of Man, hasn’t appeared in U.S. court, but the company says he denies the charges.
The action against the industry—which included the U.S. seizing the domain names of the major poker firms operating here—was quickly dubbed among poker players “Black Friday.” But within six months, yet another twist would change the direction of online gambling: At the behest of states asking for clarification about online lotteries, the Justice Department surprisingly ruled that its own criminal department was “incorrect.” Except for sports betting, it said, the Wire Act in fact didn’t prevent states from legalizing online gambling.
Seeing a sea change, and feeling vindicated, PokerStars promptly settled the civil action, and began its march toward U.S. legitimacy. Today, its executives argue that it is really only industry rivals fighting its return, with false accusations. “There continues to be a gross misrepresentation of our conduct and the values with which we run our business, which we feel obliged to correct,” said Mark Scheinberg, in email to the Journal.
Despite its careful planning, the company has had some early setbacks. Lawmakers in Nevada, for example, were ultimately convinced by casino lobbyists that firms that stayed after Congress’s act got an unfair business advantage, prompting the bad actors provision. Delaware passed on PokersStars’ application without public comment. And after it announced plans to buy the Atlantic Club in New Jersey, the company and the casino became entangled in a contract dispute, with Atlantic Club expressing reservations in a court filing about PokerStars’ ability to win a license
Backed by a state judge’s ruling last week, the casino can now seek other buyers. But the fight in New Jersey isn’t over. A PokerStars spokesman said it was deciding on its next step but would continue to seek a license there and elsewhere. “We absolutely expect to be a player in the U.S. market,” said the spokesman.
Along with Nevada, which approved online poker, and New Jersey and Delaware, where other casino gambling passed as well, four states have pending legislation. Despite objections from several camps about allowing more gambling into the home, most gambling officials and analysts say they believe the high-tech transition will only grow. Opinion on how regulators should proceed on individual cases, though, is varied and heated.
If regulators grant PokerStars a license, you are essentially trading your credibility away, said Mark Lipparelli, the former chairman of the Nevada Gaming Control Board, who does consulting for rival gambling companies and others. You may as well not have a licensing process.
At some point, analysts say, the company is likely to face scrutiny not only over its past in the U.S., but over what has become a reality of online gambling: the so-called gray market. About a dozen countries, including France, Spain and Italy, and many offshore jurisdictions, have set up systems for licensing online gambling. But most have not and some openly oppose Internet casinos.
In Russia, government prosecutors convinced its Supreme Court last year to order an Internet provider to block access to online gambling sites, but PokerStars, like other online firms, continues to draw Russian customers from other sites. Indeed, the company says the country is one of its largest markets, with 34,000 Russians enrolling in its annual Turbo championship this year. “We follow legal advice that offering our services doesn’t violate Russian law,” the company said.
As Mr. Rose, the gambling law professor, sees it, many of the issues regulators will face are reminiscent of the gambling industry’s difficult past, when Nevada first gave licenses to people formerly involved in prohibited gambling operations. Nevada and Delaware have approved at least one firm that operates in gray markets. The PokerStars conundrum only ups the ante, he says. “This whole question is, in effect, are we going to grant general amnesty,” said Mr. Rose. “The trend is to forgive and forget.”
Write to
Alexandra Berzon at alexandra.berzon@wsj.com
