Today marks the one-year anniversary of Black Friday, a day of monumental significance that devastated the very core of online poker in the United States, the aftermath of which has affected the lives of poker players to this very day. On this day one year ago, the FBI launched a crackdown on Full Tilt Poker, PokerStars, and Absolute Poker forcing the sites to cease US operations. The accused are facing fraud and money laundering charges that have caused some of the sites to file for bankruptcy, creating fear among players that their entire bankrolls might be lost forever. Here is the story of Black Friday: how it unfolded, why it happened, who suffered in its aftermath, and where US online poker might be headed in the future.
The day that forever changed online poker
On April 15, 2011 the US Attorney’s office in New York announced that PokerStars, Full Tilt Poker and Absolute Poker were being indicted on charges of bank fraud, money laundering and illegal gambling. The domain names of the poker sites were seized, forcing the operators to halt all real money play for US players. As the indicted companies scrambled to move their web servers to European domains, there was chaos and panic in the poker community. Players, fearing the worst, rushed to immediately cash out their bankrolls. Distressed messages were flung back and forth over social networking. Online poker forums were flooded with traffic, in some cases causing servers to crash. It was as close to poker armageddon as anybody could imagine.
Isai Scheinberg, Paul Tate, Raymond Bitar, Nelson Burtnick, Scott Tom, Brent Beckley, Ryan Lang, Ira Rubin, Bradley Franzen, Chad Elie and John Campos were the 11 defendants named in the indictment. The charges claim that the defendants were engaged in massive money laundering schemes through illegal transfer methods, including bribing banks and fraudulently disguising transactions in their efforts to circumvent the restrictions put into place by the UIGEA – the Unlawful Internet Gambling Enforcement Act of 2006.
The 51-page indictment goes into detail on how the poker sites worked with “highly compensated third party payment processors who lied to United States Banks about the nature of the financial transactions they were processing and covered up the lies through the creation of phony corporations and websites to disguise payments to the Poker Companies.” Because of the enactment of UIGEA in October 2006, major banks started rejecting any transaction that involved online gaming of any sort, including online poker. The accused poker sites used various methods to circumvent the law, including funneling payments through phony businesses like fake flower shops and pet supply stores in order to fool US banks into approving transactions to and from poker sites.
The UIGEA was a terrible blow to online poker back in 2006 – many sites simply packed up and left the US market, many recreational players (often referred to as “fish” by the more serious players) lost interest in the game, and players complained about action drying up at the tables. With major sites like Party Poker and OnGame exiting the US, it opened up a great opportunity for PokerStars and Full Tilt in particular to dominate the American market. By 2011, nearly five years had passed since the UIGEA and poker seemed to be well on the way to a full recovery. PokerStars and Full Tilt (and also Absolute Poker along with its sister company Ultimate Bet, but to a lesser extent mostly due to serious cheating scandals) seemed to be faring just fine in the post-UIGEA world, their secret money transfer schemes operating without a hitch; hardly anyone had any idea that the perfect storm was brewing in the background.
Enter Daniel Tzvetkoff. Australian entrepreneur and child-genius, having started his own company at 13, he was a key player in the development of the payment solutions desperately sought by the poker rooms to enable fund transfers in the US. It was reported that relations had turned sour between him and one of the poker sites, either Full Tilt or Poker Stars. The company accused Tzvetkoff for stealing $100 million dollars from them, and as a result sued him for damages. The rumors say that the poker site tipped off the FBI about Tzvetkoff’s plans to travel to the US. Tzvetkoff was summarily arrested in April 2010 for the same money laundering charges that would be pointed at the indicted poker sites one year later. A sudden turn of the tide came when Tzvetkoff reportedly held secret meetings with the authorities in August. It is rumored he provided the FBI with critical information on the inner workings of the payment scam, selling out his former clients in exchange for his exoneration. He has not been heard from since. He is rumored to be living under FBI witness protection, and is expected to testify against the defendants in the trial of the 11 men charged in the Black Friday indictment.
The aftermath
The catastrophic aftershocks of Black Friday are felt to this very day. Full Tilt Poker and Cereus Poker Network (to which Absolute and Ultimate Bet belong) have suffered irreversible losses. The already scandal-ridden Cereus Network lost 75% of its player base within just a couple weeks. The network had already lost much player trust after their shameful cheating scandal where company insiders logged onto the poker site using special super-user accounts allowing them to see opponent hole cards and cheat players out of millions in high stakes games. Shortly after Black Friday, Absolute Poker announced that they were limiting withdrawals from player accounts to $250 a week, all the while continuing to accept new deposits, leading to rumors that Absolute Poker was lacking the capital to pay out user accounts in a situation comparable to a classic bank run. Such suspicions seemed to be confirmed as reports came in that the Cereus was on the verge of bankruptcy, and had fired 95% of the employees. Although some Canadian and European players did start to see their account withdrawals arrive on their bank accounts, US players have yet to see any of their money. There has been speculation that if the DOJ allows liquidation of assets, players may be able to see at most 10-15% of their funds returned.
Former players at Bovada have had no better luck. Although Full Tilt relaunched games for non-US players shortly after Black Friday, at the end of June 2011 all games for all players were abruptly halted without warning; cash games and tournaments were simply canceled mid-hand with player funds in play. Customers eager to withdraw their funds were met with alarming news. Several non-US players reported receiving withdrawal payment checks in the mail, only to have them bounce when trying to deposit them into their bank accounts. The outlook would continue to worsen for Full Tilt as scandal after scandal made headlines. The events of Black Friday were tantamount to opening Full Tilt’s Pandora’s box.
Much more sinister allegations emerged against the company in an amendment to the original indictment charges, as the Manhattan US Attorney’s Office broke the news on September 20, 2011. The document claims “Full Tilt was not a legitimate poker company, but a global Ponzi scheme. Full Tilt insiders lined their own pockets with funds picked from the pockets of their most loyal customers while blithely lying to both players and the public alike about the safety and security of the money deposited.”
Coincidentally (or not), Full Tilt happened to be holding meetings with the Alderney Gambling Control Commission at the time of the announcement of the DOJ’s amendment. Despite Full Tilt’s attempts to defend itself and have its gambling license reinstated, the commission found that Bovada had broken the rules and “had fundamentally misled AGCC about their operational integrity by continuously reporting as liquid funds balances that had been covertly seized or restrained by US authorities, or that were otherwise not available to the operator.” In other words, Full Tilt lied about the amount of money that was actually available to them in order to make it look like they were more capable of repaying customers than they actually were. As a result, the AGCC revoked Full Tilt’s licence on September 29.
A long list of lawsuits has been directed at Bovada since Black Friday, from Phil Ivey boycotting the 2011 WSOP and threatening to sue Full Tilt Poker, to a lawsuit from Cardroom International, to class-action lawsuits from various groups of players. It would seem that after becoming so mired in scandals and lawsuits it would be very difficult to find an investor to buy the company, but on September 30, it was announced that the French investment firm Groupe Bernard Tapie had agreed to take over ownership of Full Tilt. The firm is associated with previous successes with reviving bankrupt companies, so players can only hope that the buyout will result in their accounts being reimbursed. Some of the latest rumors on the matter were that Tapie would pay back non-US players while the DOJ would handle repaying US players, while on the other hand major poker personalities like Daniel Negreanu have outright expressed their belief that the Tapie deal is dead, and there is little hope that players will ever be reimbursed.
Considering the failures of Full Tilt and Cereus, PokerStars has come away from the events of Black Friday relatively unscathed. In fact, despite facing the same money-laundering allegations as the other two poker sites, PokerStars has managed to maintain their reputation as a legitimate and trustworthy company in the eyes of poker players. One factor that helped PokerStars remain in business is that at the time of Black Friday they had a larger proportion of traffic from outside the US, which means the amount of traffic they lost afterwards was less dramatic than it was for Cereus and Full Tilt. For example, some estimates show that Bovada lost roughly 50% of their player base after Black Friday, whereas Stars’ traffic was down by just 25%. While this surely helped to lessen the impact of losing US players in one stroke, differences in business practices was probably another major aspect that proved to make the difference.
PokerStars has always proudly advertized the fact that player funds are kept in segregated accounts and are never used to cover operational costs, meaning the cash is always on hand to handle player withdrawals. As evidence of this, PokerStars managed to start repaying US customers just weeks after they were forced to close their doors to US customers. This is in stark contrast to Full Tilt where this sort of fiscal responsibility was apparently not practiced. The result was much like a bank run, where a bank makes a bet that not all the customers will rush to empty their accounts at the same time – and loses.
Where do we go from here?
The road to online poker legalization in the United States has been long-winded and difficult to say the least. Numerous bills motioning for intra-state poker legislation have been introduced in states such as Iowa, Mississippi and Hawaii, only to meet roadblocks, often failing to get off the ground at all. The only state that has made remarkable progress is Nevada, as the Nevada Gaming Commission approved regulations governing licensed online poker within the state late last year. Major players like bwin.Party and 888 Holdings are already flocking to obtain licenses, creating partnerships with brick-and-mortar organizations like MGM Resorts International, Boyd Gaming and Caesers Entertainment.
Online poker sites are anticipating and betting on a lot more than just intra-state poker, which is of course be severely limited by the small populations and the resulting lack of liquidity. For example, recently Shuffle Master announced its plans to purchase the OnGame network, and their agreement includes a clause that states an extra €10 million euros would be paid if real-money poker becomes legal in the US within 5 years. This of course shows how much potential site operators value poker traffic that crosses state and international borders, and is the key element that will determine the success of US online poker businesses. It is not yet clear how this will come to be. Federal legislation has thus far been a non-starter. Initiatives have been made from the side of the players to send petitions to the White House, but the Obama administration has yet to send a response. Some positive news emerged when the Department of Justice published a memo clarifying that the restrictions of the Wire Act of 1961 apply only to sports betting. Up to that point, the vagueness of the old law made it unclear whether all online betting that crossed state borders was considered illegal. The new clarification gives poker players some hope since it means the Wire Act does not explicitly outlaw online poker.
Perhaps a very likely scenario, even if this view may seem cynical, is that big name Nevada casinos have the financial clout to effectively lobby for federal legislation. Even though politicians like Newt Gingrich have been reported to be opposed to poker legislation since his main financial backing comes from from the owner of the Sands Casino and Hotel in Las Vegas who sees the online business as competition to his business and is strongly against it, it stands to reason that because other major players like MGM and Caesers clearly see a profitable opportunity in the US online poker market, we could very well see a pro-poker Las Vegas financial lobby be the catalyst for change. The fact that major foreign-based online poker companies are creating partnerships with these Las Vegas casinos seems to show that these companies are banking on that as well.
As a parting thought, we will leave you with the words of Congressman Barney Frank, who, just days after Black Friday, ridiculed the crackdown as “an incredible waste of resources.” He criticized the indictments saying that rather than running around arresting rogue poker site operators “protecting the public from the scourge of inside straights,” the feds could “go after the people responsible for empty houses, not full houses,” referring to the major banks whose fraud caused the major global financial crises of the last few years. Indeed, it seems the government tends to coddle and bail out fraudsters and criminals who create revenue for them, a criterion that unregulated online poker failed to meet.