By Joseph Menn
SAN FRANCISCO, May 14 (Reuters) – To 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 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 anti-gambling laws.
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, Massachusetts, 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.”
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, its 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. The company had a big hit
with its PartyPoker website, which became the dominant force in
U.S. online cards, and then renamed itself PartyGaming.
Parasol, who has been living in Gibraltar 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, co-founder 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. 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 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 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 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?”
