The Fight Of Federal Crackdown On Online Poker

Indicted Banker and Payment Processor Fight Federal Crackdown On Online Poker With Powerful Legal Papers
Nathan Vardi, Forbes Staff
Following the money trail

A payment processor and a banker, who were indicted by federal prosecutors in April as part of a sweeping crackdown on the online poker industry in the U.S., have filed strongly-worded legal papers to fight the government’s charges, arguing online poker businesses like PokerStars and Full Tilt Poker were not gambling businesses.

John Campos, a former vice-chairman of a Utah bank that allegedly accepted a cash infusion in return for handling online poker transactions, and Chad Elie, a payment processor who is accused of deceptively facilitating the flow of funds between U.S.-based players and online poker companies, filed separate motions to dismiss all counts filed against them in federal court in Manhattan. It is the first direct assault on the April case the U.S. Attorney in Manhattan, Preet Bharara, has brought against online poker’s biggest firms, which includes the indictment of 11 individuals.

For years online poker entrepreneurs and their lawyers bet that the Department of Justice would never mount a direct case against the online poker operators offering for-money U.S. play because of the perceived vagueness surrounding whether online poker violated U.S. law. The Justice Department has long argued that offering for-money online poker play does violate U.S. law, but that position has never been put to the test. By filing four memorandums of law supporting their motions to dismiss, Campos and Elie are highlighting the obstacles the government is facing in litigating an online poker prosecution and giving the first glimpse of the battle ahead.

Campos and Elie are fighting government accusations that they violated the Unlawful Internet Gambling Enforcement Act, the Illegal Gambling Business Act and conspired to commit money laundering. Elie is also facing a bank and wire fraud conspiracy charge. Both men point out that the companies involved in the April indictment, PokerStars, Full Tilt and Absolute Poker, charged a fee, known as a rake, for facilitated poker betting on their web sites that was related to a peer-to-peer game in which players competed against each other and were not part of house-banked games.

“PokerStars and Full Tilt are not ‘illegal gambling businesses’ under IGBA because they are not ‘gambling businesses’ at all,” says one of the legal filings. “To be ‘engaged in the business of betting or wagering’ requires that the business has a stake in the outcome of gambling contests, and the Indictment here fails to allege that the poker companies had any such stake.”

In a 33-page memorandum, Campos, who was vice-chairman of Sun First Bank, claims the Unlawful Internet Gambling Enforcement Act charges against him must be dismissed because the law exempts financial transaction providers like a Utah bank and those working on their behalf. For his part Elie filed three different memorandums supporting his motions to dismiss all charges filed against him, which he claims are part of a “flawed attempt” by the government.

The legal filings made by Campos and Elie both spend a lot of ink arguing the government’s case is baseless because poker is a game of skill and not chance—and therefore poker is not gambling. They point out that the Illegal Gambling Business Act lists nine activities regarded as gambling that do not include poker or any other card game, and claim that poker does not have much in common with the games the law cites, such as lottery or house-banked games in which the bettor has no role in the outcome like bookmaking, roulette or slot machines. “Online poker is a game in which the outcome depends to at least some degree on skill,” one of the court filings says.

Both Campos and Elie take a poke at U.S. Attorney General Eric Holder, who in congressional testimony in March said he did not know if poker was a game of chance or skill. “The common man is at a loss,” Elie argues in one of his memos. “Indeed, the Attorney General himself has commented that determining whether poker is a game of chance is ‘beyond [his] capabilities.’”

The legal filings also make jurisdictional arguments, saying PokerStars and Full Tilt Poker conducted their businesses offshore and not in the state of New York, where the indictment is filed. The only conduct in New York was the betting and accepting of bets from the state of New York, which is not sufficient to be seen as conduct carried out in the state, they claim. Elie hammers home this point in one of his court filings, saying the government is improperly using New York state law to bring federal charges of violating the Illegal Gambling Business Act. Campos and Elie argue the money laundering conspiracy charges must be dropped because they are based on bogus allegations of illegal gambling business activity.

Another notable argument can be found in Elie’s effort to undermine the government’s claim that he conspired to commit bank and wire fraud by getting banks and financial firms to process online poker transactions, disguising them to look like they were unrelated to online poker. The April indictment filed by federal prosecutors in Manhattan, which includes charges against two founders of PokerStars and Full Tilt, rely to a large degree on this kind of alleged financial wrongdoing. In a 13-page memorandum, Elie says that to make its case the government has to prove the alleged deception would have caused the banks harm or loss while the transactions in question actually profited the banks. Elie, who is alleged to have started committing bank fraud in 2009, makes a big deal over the fact that he and his partner made a $3.4 million investment in struggling Sun First, which earned $1.6 million in fees processing transactions with Elie’s payment processing firm. “Elie invested in and paid fees to banks, causing them actually to gain money as a result of the payment processing activities.”

In filing their legal arguments in federal court, Campos and Elie have become unlikely warriors in the long battle over online poker in America, making one of the most direct challenges ever against the Justice Department’s position on online poker.