DoJ Ups the Ante on Full Tilt Poker With Ponzi Scheme Allegations

The U.S. Department of Justice expanded its online gambling crackdown Tuesday when it filed a civil suit against the owners of the website Full Tilt Poker for defrauding thousands of members out of more than US$300 million in what it called a “global Ponzi scheme.”

The suit alleges that Full Tilt co-owners Christopher Ferguson and Howard Lederer, who double as celebrity poker players, engaged in fraud while running their gambling site.

A government crackdown in April shut the site to U.S. users. At the time, Ferguson, Lederer, Rafael Furst and other executives were running one of the world’s most popular gambling sites. The team had dodged legal obstacles in the past by using outside finance organizations to regulate payments and moving its operations from the U.S. to Ireland even before Congress declared it illegal for outside financiers to aid in online gambling.

Then more financial struggles set in. Government crackdowns left other gambling sites with which Full Tilt had working relationships unable to make large payments, and the company found itself locked in messy bank battles and complex lawsuits.

Meanwhile, hundreds of thousands of players spanning the globe continued using Full Tilt to gamble in online poker games. In March of this year, Full Tilt allegedly owed nearly $400 million in winnings to online gamblers worldwide but had just $60 million sitting in the bank. In June — after trying to maintain its lucrative image by announcing a partnership with Las Vegas casinos to legalize online gambling — Federer announced the amount in the bank was actually closer to $6 million.

Dropping the Hammer

While the company was supposed to be keeping the funds safe in its bank account to secure that all players received their deserved winnings, it instead doled out millions in salaries to the owners of the company, according to a statement accompanying the DoJ’s suit, which was filed Tuesday by U.S. Attorney Preet Bharara

In total, according to the DoJ, the 23 owners of the site received $444 million during its reign as a leading online gambling destination.

Neither of the legal teams responded to the E-Commerce Times’ requests for elaboration on the suits.

Attorney Who Cried Ponzi?

Bharara referred to the site’s complicated balance sheets as not just an example of poor financial management in an illegal sphere, but as a Ponzi scheme. However, it’s a moniker that might not technically apply in this case.

“Although it certainly has elements of a Ponzi scheme, such as misrepresentation and the illegal diversion of players’ money by the principals for their personal use, in my opinion it is probably not a true Ponzi scheme because it is my understanding the players were to generate returns based on their own efforts rather than the efforts of the perpetrators,” Michael Goldberg, an attorney with background in Ponzi schemes for Akerman, told the E-Commerce Times.

Had Ferguson, for example, promised investors that he would take their money and win big in Vegas, the lawsuit might be more applicable, said Goldberg. More specifically, had Ferguson promised he alone held the secret formula to securing a royal flush each night, it would be closer to a true Ponzi scheme. Instead, Goldberg said, the operation appears to more closely resemble an average theft.

“This is simply a case where people entrusted money to a third party and the third party stole the money. No real difference than if a banker absconded with a bunch of money in accounts,” said Goldberg.

Since the conviction of infamous Ponzi schemer Bernard Madoff and the emphasis placed on financial regulation that has accompanied the recession, prosecutors are sometimes quick to use attention-grabbing terminology when handling financial crimes, according to Philip Feigin, partner at Rothgerber Johnson & Lyons.

“The idea of classifying an illicit operation as a ‘Ponzi scheme’ has gotten way out of hand,” Feigin told the E-Commerce Times.

In trying the case, the defendants will probably attempt to bring charges down to theft in order to change the tone of the suit.

“The authorities are probably going to face the defense that ‘the promoters did not intend to permanently deprive the players of their funds; they were only borrowing them. This was a cash flow issue in a real business, not theft,'” predicted Feigin.

Still Pros and Cons to Online Gambling

The case could enliven conversation about the legal state of online poker. The U.S. has recently undertaken a series of crackdowns against illegal online gambling operations, but there are members of Congress, including Texas Republican Ron Paul and Massachusetts Democrat Barney Frank, who agree that online gambling, particularly in relation to poker, should have a legal place in the U.S.

Although Tuesday’s allegations could cast another unseemly shadow on the business of online poker, it could also be argued that legalization and regulation would help prevent instances of malfeasance.

“The bottom line message for average citizens is that sending lots of money offshore to a foreign enterprise on the promise they will hold it for you so you can gamble online is a little crazy,” said Feigin.

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