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Black Friday: How the Feds Shut Down Online Poker
$2.5 billion industry cut off, taking livelihoods with it
Wright was luckier than most. Only a few thousand dollars in his PokerStars account was frozen by the feds. Others saw tens of thousands confiscated in the raids.
But now he was stuck in North Carolina, out of a job, living with his in-laws, with no way to provide for a family of four. Their financial troubles accelerated. When the first opportunity came for his wife to take the bar, they didn't have the money to pay for the test.
PHOTO BY BILL HUGHES
Michael Minkoff’s business, which shipped the poker books and videos sold on gambling websites, was moving 1,000 books a month. Now it barely sells 50.
PHOTO BY WILL RICE
Hardly anyone noticed when the Unlawful Internet Gambling Enforcement Act passed in 2006. Moralists and casinos, who were trying to protect their turf, had been pushing it for years, with no luck. That's when senators Bill Frist, R-Tenn., and John Kyl, R-Ariz., got the bright idea to stuff it in a port security bill as a last-minute amendment.
In true Washington fashion, most legislators never read the final bill. Many didn't even know it contained an anti-gambling measure. But in one secretive stroke, the two senators had declared war on poker.
The bill didn't actually outlaw online play. Kyl and Frist preferred their attack on the American pastime to remain surreptitious. Going after individual players would have created a huge backlash. Instead, the bill targeted the financial institutions that handled the sites' money, making it illegal to deal in gambling proceeds.
Party Poker, the world's largest site, decided to cash in its chips. It agreed to pay a $105 million fine and leave the U.S. market in exchange for not being prosecuted.
That left the world's most lucrative market up for grabs. PokerStars and Full Tilt, also-rans at the time, were quite willing to step into the breach, despite the legal risks.
Why not? PokerStars, based on the Isle of Man, and Full Tilt, headquartered in the U.K.'s Channel Islands, figured they were outside the reach of U.S. prosecutors. It wasn't long before the two companies had cornered some 70 percent of the American market with revenues of nearly $2 billion a year.
But as the feds squeezed banks and credit card companies, it became increasingly difficult for the poker sites to find payment processors to handle their money.
"By early 2007, suddenly the payment options are becoming much more tricky for PokerStars and Full Tilt," says Melinda Sarafa, a New York lawyer who has represented gamblers. "That's where they're starting to look into alternative providers."
The feds' squeeze was working. By 2009, an audit of Absolute Poker revealed that almost one-third of its revenue went to disguising the money trail.
Says Sarafa: "The allegation is that the companies tried to find banks that were essentially in distress, providing them with a very lucrative lifeline, and that the transactions were disguised as other types of transactions so it wouldn't raise regulatory eyebrows."
Some in Congress tried to fight back, realizing that playing a few hands of poker after work wasn't exactly the height of fiendishness. Rep. Barney Frank, D-Mass., authored a bill to legalize online games.
But while that measure was winding through the House, the U.S. Attorney's Office of the Southern District of New York was pressing ahead. In 2009, it filed charges against Allied Systems and Account Services for processing poker money. The feds seized $34 million owed to 27,000 players.
The sites reimbursed their customers and rolled on. PokerStars and Full Tilt discovered that SunFirst, a struggling Utah bank, was willing to handle the payments in exchange for fees and an investment.
But the feds killed that deal a year later. They also quashed Full Tilt's attempts to make similar arrangements with two Illinois banks.
Full Tilt's problems were multiplying. Believing its revenue stream would soar eternally, its owners had pulled $444 million in profit from the business over the previous four years. But when the feds began seizing its payment processors' funds, the company had no war chest with which to cover the losses.
By March 2011, its customers held $390 million in their accounts. But Full Tilt had only $60 million in the bank to cover those accounts. When the feds seized its assets a month later, American players alone were owed $150 million. The feds accused the company of running a "global Ponzi scheme."
On that Black Friday, the Justice Department killed a $2.5 billion industry.
Four summers ago, Maxwell Fritz was making minimum wage serving cotton candy and curly fries at a Portland, Ore., amusement park. He'd just finished his first year at Princeton, where he was studying to become a math teacher.
Fritz had played poker online casually with friends back in high school. He'd managed to turn a few hundred dollars in profit, and that planted the seed for next summer's job. It had to pay better than minimum wage.
He made $10,000 after school let out, so he continued during the school year. Over an 18-month period, while attending Princeton and working his teaching internship, Fritz managed to take home $100,000. Over the next six months, he would grab another $200,000.
Then Black Friday hit. Suddenly, Fritz had not only lost his income but also $65,000 seized from his Full Tilt account.
He was among the fortunate few to recover quickly. A fellow player provided a reference that allowed him to move from one kind of gambling to another: Wall Street.
9 comments
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Great information. Thank you for shedding light on this story! I'm glad you are providing information on the tragedy that was our Black Friday. It is well past time to license and regulate this industry in the US. Most of the world is able to play this game of skill and strategy online and Americans, of all people, should be free to play as well.
This article is journalistically shabby and, frankly, would be laughed out of any college journalism course.
1. It merely gives us anecdotal accounts of people who have managed to make online poker work, but it does not discuss how many thousands, tens of thousands, hundreds of thousands, etc, may have lost substantial sums gambling online.
2. It blithely blames the religious nuts for the shutdown of online poker in the U.S. However, there is zero direct evidence provided in this article of this. There are no statements, for example, from the usual suspects in the evangelical or other faith based crowds. Mere name calling with no evidence is not journalism.
3. It is fine to go after Kyl and Frist, two clowns who I don't particularly like myself, for this, but where this article REALLY fails is to discuss if there was any Abramoff-style lobbying by casinos in the U.S. to have their online competitors taken out. To read this article, it was almost as if Kyl and Frist just one day got up on the wrong side of the bed and decided to take it out on online poker sites. Now the combination of this kind of lobbying, if it happened, and pressure from the religious nutbars could have been the hammer that made the crackdown happen, but this piece just does not give us any clear picture as to whether that is, in fact, what happened.
4. The article thus reads too much like it was written by a public relations firm for the online providers. The online poker sites are cast, in a very simple way, as victims here without any sense of skepticism on the part of the writer that the truth may be more complex than that. Consequently, this article is little more than glorified spam---Make Money Gambling Online! should have been the real header here.
One of the things dogging the mainstream media is that it has gotten so lazy it often rips, reads and reprints corporate press releases as worthy news articles when they are anything but. The L.A. Weekly has thus fallen into that same lazy habit, or so it appears.
- Thanks for this informative article about online poker and what the government did to it. An entire industry was destroyed last year. This is the first article that really illustrates the situation. We need federal legislation that licenses and regulates online poker in the U.S. and brings back an industry. -
Mr.Parker:
You really, REALLY don't get it.
When someone builds a car, or grows some wheat, or performs a cabaret act on the Sunset Strip, there is an exchange of cash for goods and/ or services. Gambling is not like that. It is not an "industry" employing people as you suggest, it's nothing more than shuffling money around from one set of hands to another, with no product or service provided. If one person such as Walter Wright, Maxwell Fritz or Michael Minkoff can make enough money from their activities to provide for a lavish lifestyle, it's because they understand card counting or some other version of an inside track that is sapping the life from other households-- there is no free lunch. If someone gets rich by building fancy furniture, or selling push-up bras or cleaning carpets, it's because someone got something in exchange for that money; when Mr. Fritz gets rich playing cards, it is only because someone else is getting poor playing with him, thinking he, too, can ride a gravy train. But whenever anyone wins in gambling, it's because someone else is losing... and getting nothing out of the deal but a bit closer to bankruptcy, or divorce, or Gambler's Anonymous.
When I buy junk food from a fair-- cotton candy, as in the story-- it might eventually give me diabetes, but I at least get something for my money. All I might get from Mr. Fritz is the wrong lesson-- that I need to learn to play better, and waste my money on Mr. Minkoff's books so that next time, Mr. Fritz will be the one who can't pay his mortgage, not myself.
There is no winning in gambling... not overall. There is only money shifted from one soulless sap's pocket to another.
These men are all obvuously more intelligent than normal in some way or another. I hope that Fritz and others like him can use their greater ken of numbers, averages, odds or whatever to find other outlets for their talents that actually provide benefits for someone besides themselves-- that's the difference between win-win, and win-lose. It's also what defines personal satisfaction-- when you're getting someone else's money because you're helping him, it's much easier to sleep at night than knowing you have his money just because you beat him AND HIS FAMILY with a deck of cards.
There is definitely winning in poker. Ever hear of entertainment? There is no reason why I shouldn't be able to play a $3.30 tournament from my home. That $3.30 tournament on a Friday night is my entertainment (I'm disabled and don't get out much). And I usually win enough to not have to re-deposit. Sometimes I even win enough to withdraw, which is quite the headache right now. We need licensing and regulation in the U.S.
That's a very informative article about what happened to online gambling. I like your work, Chris Parker. To any law makers paying attention: I favor legalizing online poker; I vote.
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