Ahead of legalized online poker, casino and

online gambling
Ahead of legalized online
poker, casino and social
networking giants are cozying up
to offshore firms with a past
Wild
cards
By joseph menn
SPECIAL REPORT 1
online gambling wild cards
San francisco, MAY 14, 2012
T
o prime itself for the U.S. debut
of legal online poker, MGM Resorts International, owner of such
Las Vegas Strip monuments as the MGM
Grand, the Bellagio and the Mirage, wanted a partner that knew the ropes.
So last October it hooked up with Bwin.
Party Digital Entertainment Plc, a London-listed, Gibraltar-based specialist that
rakes in more from Web betting than any
other publicly traded company. MGM Resorts took 25 percent of a new venture 65
percent owned by Bwin.Party, with smaller
Las Vegas casino operator Boyd Gaming
getting the remaining 10 percent.
“We’ll be out of the gate as soon as
anybody,” MGM Resorts Chief Executive Officer Jim Murren boasted to investors in February.
Online-gambling expertise isn’t the only
thing that distinguishes Bwin.Party. In 2009,
an earlier incarnation of the company paid
$105 million while admitting to U.S. prosecutors it had run an illegal gambling operation and engaged in bank and wire fraud.
Among its principal backers: a California-born woman who made a fortune in
phone sex and Web pornography businesses that, like the pioneering online-gambling company that became Bwin.Party,
faced multiple allegations of wrongdoing.
MGM Resorts’ choice of Bwin.Party as
a partner while applying for online poker
licenses in Nevada might seem unusual.
It isn’t. The alliance reflects the calculated
risks that major casino operators, Native
American tribes and social-gaming giants
Zynga and Facebook are weighing as they
angle for a slice of a market valued at billions of dollars a year.
Caesars Entertainment Corp is prepping for online poker by tying up with an
Israeli company that in 2007 acknowledged
settlement talks with the U.S. Justice Department over alleged breaches of antigambling laws.
SAFE BET? MGM Resorts CEO Jim Murren says
his company’s online poker tie-up with Bwin.
Party, backed by onetime phone-sex and porn
entrepreneur Ruth Parasol, gives it a competitive
edge. REUTERS/ Bobby Yip
A group of Native American tribes in
California has signed up to use software
from another Israeli company, run by a man
who served prison time for stock manipulation and bribery. Another tribe last week
announced a deal with Bwin.Party.
Zynga, eager to convert some of its tens
of millions of virtual poker enthusiasts
into cash gamblers, also has been in talks
with Bwin.Party and others that have had
brushes with the law, according to people
familiar with the matter.
Meanwhile, offshore gambling outfit
PokerStars is considering buying its chief
offshore rival, Full Tilt, and making a run
at the U.S. market even though founders of
both were indicted by the Justice Department last year on charges of illegal gambling,
bank fraud and money laundering, according to people familiar with the situation.
All this comes as Nevada prepares to license the first online poker operators and
software suppliers late next month – and
as California, New Jersey, Iowa, Massa-
chusetts, Delaware and other states debate
similar moves.
Many of the cash-starved states, encouraged by intensive industry lobbying, have felt
freer to act since December, when the Justice
Department declared that one federal anti
gambling law, the Wire Act, would no longer be enforced beyond sports betting.
But casino operators, Indian tribes and
Internet powers bent on offering online
poker lack experience delivering it. Online
poker is a business that involves processing
billions of dollars worth of bets and battling
the fraudsters, cheats and robot-player software that can ruin the games. Hence the
casinos are cozying up to some tech-savvy
offshore partners whose pedigrees might
give regulators pause.
Most states have “suitability” rules designed to keep crooks out of the gambling
industry. Nevada requires that successful
license applicants and their large shareholders possess “good character, honesty
and integrity.” Nevertheless, the big casino
operators and their offshore partners are
betting that regulators will look favorably
on their license applications for two good
reasons: tax money and high-tech jobs.
Early indications are that they are right.
At a hearing on a Caesars deal with the
Israeli company last year, Mark Lipparelli,
chairman of Nevada’s Gaming Control
Board, said: “I don’t think as we look at
companies that we can have perfection as
the standard, because I think that would be
a disservice to the state in attracting business here.” The board unanimously recommended approval of the venture.
Gambling foes warn that states are putting fiscal worries ahead of public safety,
exposing a huge and vulnerable population
to the potential for compulsive betting. “The
governments are so desperate for revenues
that they will partner with these lawbreaking
outfits,” said Les Bernal, executive director
of the nonprofit Stop Predatory Gambling
Foundation in Washington, D.C. “They will
create addiction in order to feed off of it.”
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online gambling wild cards
PORN AND CARDS
Jim Ryan, co-chief executive officer of
Bwin.Party, acknowledged in an interview
that when the company was looking for
U.S. partners, his company’s history was a
chief concern of MGM Resorts and other
U.S. companies.
“Suitability is the very first question on
all of their minds,” he told Reuters during a
recent business trip to San Francisco.
It’s easy to see why.
Bwin.Party grew out of PartyGaming,
a brainchild of San Francisco-area native
Ruth Parasol, who has a history as colorful as Las Vegas. After earning a law degree, Parasol first prospered in the 1990s
through 1-900 phone-sex and other services that were sued by multiple states for
aggressive billing and collection practices.
In North Carolina’s suit, the judge ordered
a company she co-founded to pay $270,000
in damages.
Then Parasol put her money behind Internet Entertainment Group, which gained
notoriety for releasing an early Pamela Anderson sex video and promising an initial
public offering that never happened. Employees accused the company of routinely
overbilling customers, and Chief Executive
Seth Warshavsky fled to Thailand as authorities investigated. Warshavsky didn’t
respond to an interview request.
Parasol managed to emerge unscathed,
and in 1997 founded Starluck Casino in the
Caribbean, providing online gambling to customers in the U.S. and elsewhere. Renamed
PartyGaming, the company had a big hit
with its PartyPoker website, which became
the dominant force in U.S. online cards.
Parasol, who has been living in Gibraltar
In the 1990s, Parasol put her money
behind Internet Entertainment
Group, which gained notoriety
for releasing an early Pamela
Anderson sex video and promising
an IPO that never came.
MATCHMAKING: Bwin.Party co-CEO Jim Ryan says “suitability” is a chief concern among potential
partners of the London-listed online-gambling company. REUTERS/ Beck Diefenbach
for most of the past decade, declined requests for an interview.
In 2005, PartyGaming’s IPO became
the largest London had seen in four years,
valuing the company at more than $8 billion. Just then, debate over the U.S. legal
status of online gambling flared.
The Justice Department had long argued
that Internet poker violated the Wire Act
and other federal and state laws. Despite
the success of PartyGaming and other offshore companies, no U.S.-based companies
offered alternatives for fear of prosecution.
In 2006, Congress clarified the matter
by passing the Unlawful Internet Gambling
Enforcement Act, or UIGEA, explicitly
barring processing interstate or international
poker transactions where state laws forbade
such gambling. PartyGaming responded by
pulling out of the U.S., leaving two-thirds of
its players behind to be claimed by privately
held offshore companies.
The law didn’t snuff out online poker in
the U.S. as players migrated to other offshore providers. Research firm H2 Gambling Capital estimates the U.S. accounts
for about $400 million of global annual online poker revenue of nearly $5 billion, or
8 percent. Depending on how many states
ultimately legalize online cards, that share
could rise to as high as 28 percent in five
years, the company says.
PartyGaming’s problems didn’t end
when it left the United States. In 2008, cofounder Anurag Dikshit pleaded guilty to
gambling via the wires in federal district
court in New York. He forfeited $300 million and agreed to cooperate with prosecutors, leading PartyGaming itself to settle
in 2009. The company paid $105 million
to avoid prosecution for pre-UIGEA violations. Dikshit couldn’t be reached. His
lawyer didn’t return calls seeking comment.
In 2010, prosecutor Arlo Devlin-Brown
told the court that the probe was continuing and referred to documents under seal.
He recently told Reuters he could not comment further, leaving open the possibility
that Parasol could be charged if she returns
home to the United States.
PartyGaming’s fortunes recovered as
it began to focus on non-U.S. customers.
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online gambling wild cards
Last year it bought rival Bwin Interactive
of Austria and changed the merged company’s name to Bwin.Party, with annual revenue of 691 million euros, or $902 million.
During the merger talks, the regulatory
suitability of PartyGaming and Parasol
became an issue. Parasol and her husband,
Russell DeLeon, agreed that the board
could force them to restructure their more
than 13 percent stake in the merged company or sell it if “required by any gaming
regulatory authority in connection with
business opportunities,” according to merger documents filed with regulators.
That clause wouldn’t apply, however, if
the licensing process is “more burdensome
to the principal PartyGaming shareholders
than the licensing requirements currently
imposed by the state of Nevada.” That
means the couple’s stake could, in effect,
block deals in states with tougher standards. Bwin.Party’s Ryan said he couldn’t
imagine the couple standing in the way.
DeLeon couldn’t be reached for comment.
Now partnered with MGM Resorts,
Bwin.Party has applied for a Nevada license
to offer Internet poker software and services.
Co-CEO Ryan said the joint venture will
handle all U.S. games where players pay to
play and can cash out their winnings.
In the meantime, he said, Bwin.Party will
promote its brands through a social game, to
be announced soon, without the ability to
cash out. Ryan said negotiations with Facebook, a likely game platform, are continuing.
Facebook declined to comment. MGM
did not respond to repeated interview requests about its choice of Bwin.Party.
“PRETTIEST GIRL IN TOWN”
One of Bwin.Party’s top rivals is also listed
in London but based in Israel. That company is 888 Holdings, founded by a dentist inspired to put poker on the Net after
a 1996 trip to Monte Carlo. The late Aharon Shaked and his brother Avi mortgaged
their homes to fund the company, and their
families and a co-founding family still have
majority control.
In 2006, 888 joined PartyGaming in
pulling out of the U.S. market. But for a
time before that, 888’s Casino-on-Net
BEYOND VEGAS: Casino operators on the Strip are angling for some of the billions of dollars online
poker players are expected to spend without ever setting foot in a gaming room. REUTERS/ Steve Marcus
gambling website was among the top 10
buyers of banner ads aimed at U.S. home
Internet users, reaching more than 10 percent of them in a single week, according to
Nielsen/NetRatings.
In 2007 the company acknowledged it was
in settlement talks with the Justice Department over suspected breaches of pre-2006
anti gambling laws. No charges were filed.
The 888 deal with Caesars that Nevada regulators approved last year was a
trial run of Caesars-branded online poker
in the British market, where such games
have been legal for years. Caesars, operator of the Strip’s Caesars Palace, Harrah’s
and Rio, has since expanded its relationship
with 888, agreeing to use its software in the
United States once states approve.
Ambitions are running high at 888.
“The most exciting market opportunity for
the industry must be that of the States, and
we are definitely the prettiest girl in town,
with everybody keen to have discussions
with us,” 888 Chief Executive Officer Brian
Mattingley told investors last month. Officials at 888 declined interview requests, as
did those at Caesars.
Lipparelli, the Nevada Gaming Control
Board chairman, said scrutiny of the initial
Caesars venture was lower than what it
would have been for a U.S. venture. He said
current investigations of Bwin.Party, 888
and more than 20 other license applicants
would be far more rigorous than anything
the overseas outfits had experienced in
their home countries. “Some will probably
not make it through,” Lipparelli said.
He said confessions of pre-2006 wrongdoing wouldn’t automatically prevent licensing, though. Gambling executives say they
expect smooth sailing in Nevada because
regulators want to add local technology jobs.
Concern about past lawbreaking “has all
gone away,” one casino executive said.
One big test could come in the case of
PokerStars, based in the Isle of Man, and
Full Tilt Poker, based in the Channel Islands, which together snapped up most
SPECIAL REPORT 4
online gambling wild cards
of the U.S. market after the 2006 law was
passed and PartyGaming ran for the exits.
Last year, on an April day known in online poker circles as Black Friday, federal
prosecutors unsealed indictments alleging
illegal gambling, bank fraud and money
laundering against the founders of PokerStars and Full Tilt. Preet Bharara, U.S.
Attorney for the Southern District of New
York, said Full Tilt had operated as a Ponzi
scheme, relying on new players’ deposits to
cover payouts to older customers while executives and advisers took hundreds of millions of dollars from player accounts.
The indictments prompted Wynn Resorts Ltd to drop a weeks-old “strategic
relationship” with PokerStars. The main
owner of Station Casinos, which serves
Las Vegas locals at 11 casinos off the Strip,
abandoned a similar tie-up with Full Tilt.
Neither Nevada company returned calls
seeking comment.
Full Tilt has shut down while it negotiates with the Justice Department. But PokerStars remains the biggest site worldwide,
with what others in the industry believe
tops $1 billion in annual revenue. It harbors
hopes that a deal with prosecutors could
pave the way for a return to the U.S.
People familiar with the situation say
that as part of the settlement talks with the
Justice Department, PokerStars is considering buying Full Tilt and refunding U.S.
players hundreds of millions of dollars
missing from their accounts. PokerStars
confirmed the settlement talks but declined
to comment on Full Tilt or its American
aspirations. Full Tilt officials couldn’t be
reached for comment.
“CONCERNED ABOUT PROBITY”
In California, casinos and gambling-software
companies already are scurrying for deals
with the tribes and others that would be eligible for direct licenses under a bill pending in
the state senate. Caesars manages the Rincon
We don’t want whoever
we pick to just create more
nightmares down the road..
Joaquin Fletcher
President, Pechanga Development Corp,
owner of the Pechanga Resort and
Casino in Temecula, California.
tribe’s Harrah’s casino and is hoping to build
on that with software from 888.
A coalition of tribes and card rooms
known as the California Online Poker
Association has signed up to use software
from Playtech Ltd, a London-listed British
company. About 40 per cent of Playtech is
owned by Teddy Sagi, an Israeli billionaire
who pleaded guilty to stock manipulation
and bribery in 1996 in a scandal known as
the Discount Affair. He was sentenced to
nine months in prison. Playtech didn’t respond to a request for comment.
The tribes are aware of the risks of
choosing partners that won’t satisfy the
state Justice Department, which the current bill would empower to approve license applications.
“We are very, very concerned about probity,” said Joaquin Fletcher, president of the
Pechanga Development Corp, owner of the
Pechanga Resort and Casino in Temecula,
California. “We don’t want whoever we
pick to just create more nightmares down
the road.”
Similar concerns are on the minds of social media companies.
Zynga, the dominant provider of recreational games on Facebook, has 36 million
monthly average users of its Texas HoldEm
Poker, the second most popular game on
Facebook after its CityVille, according to
market research firm AppData.
The card game doesn’t require regulation
because players don’t receive cash payouts,
though they often pay for extra chips to
play with. Those virtual chip purchases have
made the game one of Zynga’s top earners
and opened the company’s eyes to the potential of the real thing.
Lazard Capital Markets said in March
that it expected Zynga to move “aggressively” and capture an extra $100 million in
annual profit by offering online poker with
cash payouts and prizes.
Zynga has held talks with Bwin.Party,
888, multiple California tribes and card
rooms, and the big brick-and-mortar casinos, people familiar with the discussions
said. The company might experiment first
with poker in well-regulated overseas markets such as the United Kingdom, they said.
Zynga declined to comment.
The gambling majors have seen the
promise of social networking as well.
MGM Resorts, like Bwin.Party, is planning its own game without cash payouts
but with social networking built in. Caesars
recently bought game application developer
Playtika, which has a popular free slot machine app on Facebook called Slotomania,
and it launched a Caesars-branded casino
game suite there, too.
Despite the enthusiasm, the risks of a
regulatory, legal or public-relations setback
for Zynga and Facebook are substantial,
even if they partner well.
With millions of free players, “it’s very
likely these people can be converted” to
playing for real money, said one longtime
offshore poker executive. “But do they want
a headline saying some kid lost $10,000
playing poker on Facebook?”
Editing by John Blanton
FOR MORE INFORMATION:
Joseph Menn
[email protected]
John Blanton, Enterprise Desk Editor
[email protected]
Michael Williams, Global Enterprise Editor
[email protected]
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