Online Poker Kings Get Cashed Out

Killing livelihoods and a $2.5 billion industry, the feds attack Internet gambling

Wright was luckier than most. Only a few thousand dollars in his PokerStars account were frozen by the feds. Others saw tens of thousands confiscated in the raids.

But Wright was now stuck in North Carolina, out of a job, and 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.

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 without luck. That's when senators Bill Frist (R-Tennessee) and Jon Kyl (R-Arizona) got the bright idea to stuff it in a port security bill as a last-minute amendment.

Businesses such as Michael Minkoff’s, which ships poker books and videos, have suffered in the wake of the feds shutting down online gambling.
Photograph by Bill Hughes
Businesses such as Michael Minkoff’s, which ships poker books and videos, have suffered in the wake of the feds shutting down online gambling.
After losing his source of income on April 15, Maxwell Fritz moved from gambling online another type of betting: Wall Street.
Photograph by Will Rice
After losing his source of income on April 15, Maxwell Fritz moved from gambling online another type of betting: Wall Street.

In true Washington fashion, most legislators never read the final bill. Many didn't even know an anti-gambling measure was in it. But in one secretive stroke, the two senators had declared war on poker.

The amendment 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 meant a huge backlash. Instead, they targeted the financial institutions that handled the sites' money and made 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 American 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 on 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 because the feds were squeezing banks and credit-card companies, finding payment processors to handle their money grew increasingly difficult.

"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. Representative Barney Frank (D-Massachusetts) 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 especially were multiplying. Believing their 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 their payment processors' funds, the company had no war chest to cover the losses.

By last March, Full Tilt's customers held $390 million in their accounts. But the business only had $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 amusement park. He had 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 profit, and that planted the seed for next summer's job. It had to pay better than minimum wage.

Fritz made $10,000 after school let out, so he continued during the school year. Over an 18-month period, while still attending Princeton and working his teaching internship, he 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 was seized from his Full Tilt account.

He was among the fortunate to recover quickly. A fellow player provided a reference that allowed him to move from one kind of gambling to another: Wall Street.

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