Ahead of Legalized Online Poker, Casino and Social Networking Giants Are Cozying up to Offshore Firms with a Past Wild Cards by Joseph Menn

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Ahead of legalized online poker, casino and social networking giants are cozying up to offshore firms with a past Wild cards By joseph menn

SPECIAL REPORT 1 online gambling wild cards

San francisco, MAY 14, 2012 chusetts, Delaware and other states debate similar moves. o prime itself for the U.S. debut Many of the cash-starved states, encour- of legal online poker, MGM Re- aged by intensive industry lobbying, have felt Tsorts International, owner of such freer to act since December, when the Justice Las Vegas Strip monuments as the MGM Department declared that one federal anti Grand, the Bellagio and the Mirage, want- gambling law, the Wire Act, would no lon- ed a partner that knew the ropes. ger be enforced beyond sports betting. So last October it hooked up with Bwin. But casino operators, Indian tribes and Party Digital Entertainment Plc, a Lon- Internet powers bent on offering online don-listed, Gibraltar-based specialist that poker lack experience delivering it. Online rakes in more from Web betting than any poker is a business that involves processing other publicly traded company. MGM Re- billions of dollars worth of bets and battling sorts took 25 percent of a new venture 65 the fraudsters, cheats and robot-player soft- percent owned by Bwin.Party, with smaller ware that can ruin the games. Hence the Las Vegas casino operator Boyd Gaming casinos are cozying up to some tech-savvy getting the remaining 10 percent. offshore partners whose pedigrees might “We’ll be out of the gate as soon as SAFE BET? MGM Resorts CEO Jim Murren says give regulators pause. anybody,” MGM Resorts Chief Execu- his company’s online poker tie-up with Bwin. Most states have “suitability” rules de- tive Officer Jim Murren boasted to inves- Party, backed by onetime phone-sex and porn signed to keep crooks out of the gambling tors in February. entrepreneur Ruth Parasol, gives it a competitive industry. Nevada requires that successful Online-gambling expertise isn’t the only edge. REUTERS/ Bobby Yip license applicants and their large share- thing that distinguishes Bwin.Party. In 2009, holders possess “good character, honesty an earlier incarnation of the company paid and integrity.” Nevertheless, the big casino $105 million while admitting to U.S. pros- A group of Native American tribes in operators and their offshore partners are ecutors it had run an illegal gambling opera- California has signed up to use software betting that regulators will look favorably tion and engaged in bank and wire fraud. from another Israeli company, run by a man on their license applications for two good Among its principal backers: a Califor- who served prison time for stock manipu- reasons: tax money and high-tech jobs. nia-born woman who made a fortune in lation and bribery. Another tribe last week Early indications are that they are right. phone sex and Web pornography business- announced a deal with Bwin.Party. At a hearing on a Caesars deal with the es that, like the pioneering online-gam- Zynga, eager to convert some of its tens Israeli company last year, Mark Lipparelli, bling company that became Bwin.Party, of millions of virtual poker enthusiasts chairman of Nevada’s Gaming Control faced multiple allegations of wrongdoing. into cash gamblers, also has been in talks Board, said: “I don’t think as we look at MGM Resorts’ choice of Bwin.Party as with Bwin.Party and others that have had companies that we can have perfection as a partner while applying for online poker brushes with the law, according to people the standard, because I think that would be licenses in Nevada might seem unusual. familiar with the matter. a disservice to the state in attracting busi- It isn’t. The alliance reflects the calculated Meanwhile, offshore gambling outfit ness here.” The board unanimously recom- risks that major casino operators, Native PokerStars is considering buying its chief mended approval of the venture. American tribes and social-gaming giants offshore rival, Full Tilt, and making a run Gambling foes warn that states are put- Zynga and Facebook are weighing as they at the U.S. market even though founders of ting fiscal worries ahead of public safety, angle for a slice of a market valued at bil- both were indicted by the Justice Depart- exposing a huge and vulnerable population lions of dollars a year. ment last year on charges of illegal gambling, to the potential for compulsive betting. “The Caesars Entertainment Corp is prep- bank fraud and money laundering, accord- governments are so desperate for revenues ping for online poker by tying up with an ing to people familiar with the situation. that they will partner with these lawbreaking Israeli company that in 2007 acknowledged All this comes as Nevada prepares to li- outfits,” said Les Bernal, executive director settlement talks with the U.S. Justice De- cense the first online poker operators and of the nonprofit Stop Predatory Gambling partment over alleged breaches of anti- software suppliers late next month – and Foundation in Washington, D.C. “They will gambling laws. as California, New Jersey, Iowa, Massa- create addiction in order to feed off of it.”

SPECIAL REPORT 2 online gambling wild cards

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, his company’s 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 color- ful as Las Vegas. After earning a law de- gree, 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. MATCHMAKING: Bwin.Party co-CEO Jim Ryan says “suitability” is a chief concern among potential In North Carolina’s suit, the judge ordered partners of the London-listed online-gambling company. REUTERS/ Beck Diefenbach a company she co-founded to pay $270,000 in damages. Then Parasol put her money behind In- for most of the past decade, declined re- for about $400 million of global annual on- ternet Entertainment Group, which gained quests for an interview. line poker revenue of nearly $5 billion, or notoriety for releasing an early Pamela An- In 2005, PartyGaming’s IPO became 8 percent. Depending on how many states derson sex video and promising an initial the largest London had seen in four years, ultimately legalize online cards, that share public offering that never happened. Em- valuing the company at more than $8 bil- could rise to as high as 28 percent in five ployees accused the company of routinely lion. Just then, debate over the U.S. legal years, the company says. overbilling customers, and Chief Executive status of online gambling flared. PartyGaming’s problems didn’t end Seth Warshavsky fled to Thailand as au- The Justice Department had long argued when it left the United States. In 2008, co- thorities investigated. Warshavsky didn’t that Internet poker violated the Wire Act founder Anurag Dikshit pleaded guilty to respond to an interview request. and other federal and state laws. Despite gambling via the wires in federal district Parasol managed to emerge unscathed, the success of PartyGaming and other off- court in New York. He forfeited $300 mil- and in 1997 founded Starluck Casino in the shore companies, no U.S.-based companies lion and agreed to cooperate with prosecu- Caribbean, providing online gambling to cus- offered alternatives for fear of prosecution. tors, leading PartyGaming itself to settle tomers in the U.S. and elsewhere. Renamed In 2006, Congress clarified the matter in 2009. The company paid $105 million PartyGaming, the company had a big hit by passing the Unlawful Internet Gambling to avoid prosecution for pre-UIGEA vio- with its PartyPoker website, which became Enforcement Act, or UIGEA, explicitly lations. Dikshit couldn’t be reached. His the dominant force in U.S. online cards. barring processing interstate or international lawyer didn’t return calls seeking comment. Parasol, who has been living in Gibraltar poker transactions where state laws forbade In 2010, prosecutor Arlo Devlin-Brown such gambling. PartyGaming responded by told the court that the probe was continu- In the 1990s, Parasol put her money pulling out of the U.S., leaving two-thirds of ing and referred to documents under seal. behind Internet Entertainment its players behind to be claimed by privately He recently told Reuters he could not com- Group, which gained notoriety held offshore companies. ment further, leaving open the possibility for releasing an early Pamela The law didn’t snuff out online poker in that Parasol could be charged if she returns Anderson sex video and promising the U.S. as players migrated to other off- home to the United States. shore providers. Research firm H2 Gam- PartyGaming’s fortunes recovered as an IPO that never came. bling Capital estimates the U.S. accounts it began to focus on non-U.S. customers.

SPECIAL REPORT 3 online gambling wild cards

Last year it bought rival Bwin Interactive to offer Internet poker software and services. gambling website was among the top 10 of Austria and changed the merged compa- Co-CEO Ryan said the joint venture will buyers of banner ads aimed at U.S. home ny’s name to Bwin.Party, with annual rev- handle all U.S. games where players pay to Internet users, reaching more than 10 per- enue of 691 million euros, or $902 million. play and can cash out their winnings. cent of them in a single week, according to During the merger talks, the regulatory In the meantime, he said, Bwin.Party will Nielsen/NetRatings. suitability of PartyGaming and Parasol promote its brands through a social game, to In 2007 the company acknowledged it was became an issue. Parasol and her husband, be announced soon, without the ability to in settlement talks with the Justice Depart- Russell DeLeon, agreed that the board cash out. Ryan said negotiations with Face- ment over suspected breaches of pre-2006 could force them to restructure their more book, a likely game platform, are continuing. anti gambling laws. No charges were filed. than 13 percent stake in the merged com- Facebook declined to comment. MGM The 888 deal with Caesars that Ne- pany or sell it if “required by any gaming did not respond to repeated interview re- vada regulators approved last year was a regulatory authority in connection with quests about its choice of Bwin.Party. trial run of Caesars-branded online poker business opportunities,” according to merg- in the British market, where such games “PRETTIEST GIRL IN TOWN” er documents filed with regulators. have been legal for years. Caesars, opera- That clause wouldn’t apply, however, if One of Bwin.Party’s top rivals is also listed tor of the Strip’s Caesars Palace, Harrah’s the licensing process is “more burdensome in London but based in Israel. That com- and Rio, has since expanded its relationship to the principal PartyGaming shareholders pany is 888 Holdings, founded by a den- with 888, agreeing to use its software in the than the licensing requirements currently tist inspired to put poker on the Net after United States once states approve. imposed by the state of Nevada.” That a 1996 trip to Monte Carlo. The late Aha- Ambitions are running high at 888. means the couple’s stake could, in effect, ron Shaked and his brother Avi mortgaged “The most exciting market opportunity for block deals in states with tougher stan- their homes to fund the company, and their the industry must be that of the States, and dards. Bwin.Party’s Ryan said he couldn’t families and a co-founding family still have we are definitely the prettiest girl in town, imagine the couple standing in the way. majority control. with everybody keen to have discussions DeLeon couldn’t be reached for comment. In 2006, 888 joined PartyGaming in with us,” 888 Chief Executive Officer Brian Now partnered with MGM Resorts, pulling out of the U.S. market. But for a Mattingley told investors last month. Of- Bwin.Party has applied for a Nevada license time before that, 888’s Casino-on-Net ficials 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 BEYOND VEGAS: Casino operators on the Strip are angling for some of the billions of dollars online Full Tilt Poker, based in the Channel Is- poker players are expected to spend without ever setting foot in a gaming room. REUTERS/ Steve Marcus lands, which together snapped up most

SPECIAL REPORT 4 online gambling wild cards

of the U.S. market after the 2006 law was We don’t want whoever made the game one of Zynga’s top earners passed and PartyGaming ran for the exits. we pick to just create more and opened the company’s eyes to the po- Last year, on an April day known in on- nightmares down the road.. tential of the real thing. line poker circles as Black Friday, federal Lazard Capital Markets said in March prosecutors unsealed indictments alleging Joaquin Fletcher that it expected Zynga to move “aggres- illegal gambling, bank fraud and money President, Pechanga Development Corp, sively” and capture an extra $100 million in laundering against the founders of Pok- owner of the Pechanga Resort and annual profit by offering online poker with erStars and Full Tilt. Preet Bharara, U.S. Casino in Temecula, California. cash payouts and prizes. Attorney for the Southern District of New Zynga has held talks with Bwin.Party, York, said Full Tilt had operated as a Ponzi tribe’s Harrah’s casino and is hoping to build 888, multiple California tribes and card scheme, relying on new players’ deposits to on that with software from 888. rooms, and the big brick-and-mortar ca- cover payouts to older customers while ex- A coalition of tribes and card rooms sinos, people familiar with the discussions ecutives and advisers took hundreds of mil- known as the California Online Poker said. The company might experiment first lions of dollars from player accounts. Association has signed up to use software with poker in well-regulated overseas mar- The indictments prompted Wynn Re- from Playtech Ltd, a London-listed British kets such as the United Kingdom, they said. sorts Ltd to drop a weeks-old “strategic company. About 40 per cent of Playtech is Zynga declined to comment. relationship” with PokerStars. The main owned by Teddy Sagi, an Israeli billionaire The gambling majors have seen the owner of Station Casinos, which serves who pleaded guilty to stock manipulation promise of social networking as well. Las Vegas locals at 11 casinos off the Strip, and bribery in 1996 in a scandal known as MGM Resorts, like Bwin.Party, is plan- abandoned a similar tie-up with Full Tilt. the Discount Affair. He was sentenced to ning its own game without cash payouts Neither Nevada company returned calls nine months in prison. Playtech didn’t re- but with social networking built in. Caesars seeking comment. spond to a request for comment. recently bought game application developer Full Tilt has shut down while it negoti- The tribes are aware of the risks of Playtika, which has a popular free slot ma- ates with the Justice Department. But Pok- choosing partners that won’t satisfy the chine app on Facebook called Slotomania, erStars remains the biggest site worldwide, state Justice Department, which the cur- and it launched a Caesars-branded casino with what others in the industry believe rent bill would empower to approve li- game suite there, too. tops $1 billion in annual revenue. It harbors cense applications. Despite the enthusiasm, the risks of a hopes that a deal with prosecutors could “We are very, very concerned about pro- regulatory, legal or public-relations setback pave the way for a return to the U.S. bity,” said Joaquin Fletcher, president of the for Zynga and Facebook are substantial, People familiar with the situation say Pechanga Development Corp, owner of the even if they partner well. that as part of the settlement talks with the Pechanga Resort and Casino in Temecula, With millions of free players, “it’s very Justice Department, PokerStars is consid- California. “We don’t want whoever we likely these people can be converted” to ering buying Full Tilt and refunding U.S. pick to just create more nightmares down playing for real money, said one longtime players hundreds of millions of dollars the road.” offshore poker executive. “But do they want missing from their accounts. PokerStars Similar concerns are on the minds of so- a headline saying some kid lost $10,000 confirmed the settlement talks but declined cial media companies. playing poker on Facebook?” to comment on Full Tilt or its American Zynga, the dominant provider of recre- aspirations. Full Tilt officials couldn’t be ational games on Facebook, has 36 million Editing by John Blanton reached for comment. monthly average users of its Texas HoldEm Poker, the second most popular game on FOR MORE INFORMATION: “CONCERNED ABOUT PROBITY” Facebook after its CityVille, according to Joseph Menn In California, casinos and gambling-software market research firm AppData. [email protected] companies already are scurrying for deals The card game doesn’t require regulation John Blanton, Enterprise Desk Editor with the tribes and others that would be eli- because players don’t receive cash payouts, [email protected] gible for direct licenses under a bill pending in though they often pay for extra chips to Michael Williams, Global Enterprise Editor the state senate. Caesars manages the Rincon play with. Those virtual chip purchases have [email protected]

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