Online Poker in the United States
Online Poker: Gambling on Smartphones
by Thomas Peele. He is an investigative reporter for the Bay Area News Group. (2013)
With online poker now legal in Nevada, state lawmakers are playing catch-up in the race to regulate — and tax — gambling on smartphones. But is this really a good idea?
In October 2012, the only legal way to play online poker in the United States was without betting money. (…) But poker proponents like to say the question isn’t whether real-money wagering online will become legal, but when. In Nevada, it already is. (See Nev. Rev. Stat. §§ 463.745-463.780.) By the end of last year, gaming regulators in the Silver State had approved more than 15 online poker licenses. The sites were expected to begin offering real-money games early in 2013 – the catch being that players must be physically in Nevada to participate.
Just-for-fun websites like the DoubleDown are the early bet that online poker will soon become legal nationwide, either through federal legislation or state-by-state laws. International Gaming Technology – a giant, Nevada-based company – bought DoubleDown last year from a Seattle company for $251 million.
As online gambling spreads to other states, IGT’s clients – including casinos and Indian tribes that already offer free games through DoubleDown – will have a built-in base of loyal customers. The games will convert from “No winnings or losses” to real-money wagering with a few mouse clicks. Or, as IGT stated in an SEC filing last year, DoubleDown’s just-for-fun status “may change depending on the circumstances surrounding the substance or nature of transactions.”
Online poker appears ready for a breakout year:
Zynga, a struggling San Francisco-based social gaming company that launched just-for-fun Zynga Poker, has applied for a Nevada gambling license
PokerStars.com – the world’s largest poker website, based on the Isle of Man – is negotiating to buy an Atlantic City casino because New Jersey has proposed rules limiting online poker licenses to owners of the state’s casinos.
Betable, a startup based in London, is vying with other global gambling companies to develop mobile applications.
There are boatloads of money to be made, even as federal and state lawmakers struggle to pass regulations. “No question, California is the Holy Grail. It’s huge,” says Roxanne Christ, a partner in the Los Angeles office of Latham & Watkins. And poker, she adds, is only “the low-hanging fruit” of the gaming market.
But as Congress and state legislators wrestle with how to regulate online poker – and possibly Internet betting on everything from roulette to social games like Zynga’s Farmville – there’s one question I can’t seem to shake:
Is it really a good idea to let everyone carry around a virtual casino in their pocket?
In 2011 Preet Bharara, the U.S. Attorney for the Southern District of New York, announced the indictment of eleven men, including the founders of the three largest Internet poker companies doing business in the United States: PokerStars, Full Tilt Poker, and Absolute Poker. The defendants were charged in an elaborate scheme to launder gambling profits by tricking bankers into believing that the cash won by poker players in offshore casinos was instead “payments to hundreds of nonexistent online merchants purporting to sell merchandise such as jewelry and golf balls.” More than 70 banks in 14 countries were restrained from moving the alleged poker money, and the government seized the poker companies’ Internet domain names. The websites – based, respectively, in the Isle of Man, Ireland, and Costa Rica – were shut down. (United States v. Scheinberg, No. 10-CR-336 (order issued Apr. 18, 2011).)
The federal charges stemmed from a 2006 law, the Unlawful Internet Gambling Enforcement Act (UIGEA), which made it illegal for gambling businesses to “knowingly accept” most forms of payment “in connection with the participation of another person in unlawful Internet gambling.” (31 U.S.C. §§ 5361-5367.)
In other words, the crime in question wasn’t the poker game itself but the associated wire transfers. And though the poker world reeled at the so-called “Isle of Man indictments” (televised poker games are filled with ads for the offshore websites), they were merely a setback for online gambling, not a defeat.
Though the feds have made other efforts to alter human behavior – the Volstead Act and marijuana laws come to mind – Congress left regulation of Internet gambling up to the states. So UIGEA exempts betting that is “initiated and received or otherwise made exclusively within a single state.”
States remain free to permit – and, of course, to tax – such online gambling. A few months after the Isle of Man indictments, the U.S. Justice Department’s criminal division issued a clarification that selling lottery tickets online to in-state adults through out-of-state transaction processors would not violate the Wire Act. (18 U.S.C. § 1084.)
Illegal transfers, the opinion states, involve wagering on a “sporting event or contest” – not pick sixes and mega balls. Applying the Wire Act to lottery wagers, according to the DOJ, “would create a counterintuitive patchwork of prohibitions.” (Mem. of Opn. for the Asst. Attorney General, Crim. Div. (2011 WL 6848433).)
Poker, of course, is not a sporting event or contest. Neither is roulette, blackjack, or craps. The AG’s opinion, then, indicates that state-sanctioned online gaming doesn’t violate the Wire Act.
Latham’s Christ notes that UIGEA already contained “a number of safe harbors” that would permit the state Legislature to propose intrastate gambling in California. Still, she says, the DOJ made “a huge U-turn” in policy. “The opinion will be incredibly difficult to overturn.”
Online poker got another boost last year when a federal trial court in Brooklyn, New York, reversed the conviction of a small-time gambler charged under the federal Illegal Gambling Business Act. (18 U.S.C. § 1955.) District Judge Jack Weinstein held that poker games – in this case, Texas Hold’em – are not purely games of chance.
“Bluffing, raising and folding require honed skills to maximize the value of the cards dealt by Lady Luck,” he wrote. “(S)kill … makes the difference between winning and losing in poker.” (United States v. Dicristina, 2012 WL 3573895 (E.D.N.Y. filed Aug. 21, 2012).)
Card room owners couldn’t have said it better.
“Millions of Americans” already gamble online in offshore casinos, says Judy Patterson, executive director of the American Gaming Association (AGA) in Washington, D.C. And they didn’t stop making bets after the Isle of Man indictments, any more than they stopped drinking during Prohibition when revenue agents raided a gin joint. U.S. gamblers simply moved on to the next website that offers what they want. Their main risk is that some online casino in Aruba or the Cayman Islands will disappear with their money.
Representing the big casinos, the AGA wants a federal law that permits interstate online poker – opening the rest of the 49 states outside Nevada to giant companies that have acquired that state’s gambling licenses. The association’s logic is simple: People play online poker, and they will continue to play it regardless of prohibitions. Regulate it, tax it, and protect the consumer.
Senate majority leader Harry Reid (D-Nevada) introduced a bill last year to do just that. But in mid-December Reid declared the measure dead for the session. This year, however, his bill faces opposition from the National Governors Association, which notified Reid by letter that the proposal “would preempt emerging state regulatory authority.” The governors noted that gambling proceeds enable states to “derive significant revenues critical to help fund programs for education, senior citizens, [and] military veterans.”
Gaming lawyer David R. Arrajj, a partner in the Las Vegas office of Brownstein Hyatt Farber Schreck, says the governors just want to protect their own stakes. Some, he claims, believe their state lotteries could provide online poker directly, and possibly cut out casino companies entirely. “Their position is, ‘Why should it be the casinos? Why shouldn’t it be us?’ ” Arrajj says. “Does that muddy the waters? Yeah.”
The AGA is set against opening up the game. “We believe that the more time passes without federal legislation, the more risk that all forms of online gambling will be permitted by the states,” Patterson tells me. “It’s very important that Congress pass a clear regulatory framework – you want to look to an industry that has a track record.” She’s talking about Nevada.
California’s Indian casinos also oppose providing seats at the table for additional players. Indeed, “[o]ur biggest fear is that the feds will open California before the state can enact its own rules,” says Leon Acebedo, executive director of the California Nations Indian Gaming Association in Sacramento. “Everybody understands that Internet gambling is here. Everybody is looking to California.”
I. Nelson Rose, one of the state’s top experts on gambling law and a professor at Whittier Law School, sees an urgent need for state rules. “California should have passed a law five or six years ago,” Rose says. But the state still has “a problem with how to do it.”
The most difficult question is whether the Legislature should make California gambling licenses available to the big Nevada casinos. “This is a political fight based on money,” Rose says. “New Jersey will regulate [online poker] and give the licenses to owners of the Atlantic City casinos. But we don’t have big casinos in California, and the little card clubs and Indian tribes don’t have the money [to develop them]. There are big opportunities here for Nevada companies and Europeans to get in.
“We have so much legal gambling in the country already,” he adds. “Everyone thinks Internet poker is great – as long as they are the ones who get to run it.”
I like to think I know a little bit about gambling. For nearly seven years in the ’90s, I covered Atlantic City as a New Jersey newspaper reporter. Every day I would run into the despair that government-endorsed gambling seemed to create – broken lives, people jumping to their deaths from parking garages or just letting the ocean take them away.
There was always a lot of money in town, but it always seemed to belong to someone else. When Donald Trump yelled at me over the phone, or Atlantic City’s mayor stormed away from me in a huff, I knew I was asking the right questions about all that misery.
The first casinos legalized outside of Nevada came to Atlantic City in the mid-’70s to save a dying community. They saved nothing; they only created endless agony. When I was last in Atlantic City, about nine months before Hurricane Sandy swamped it, the place still felt like you could get infested with fleas while strolling on the Boardwalk.
In recent years some cities have opened casinos as a last desperate attempt at urban renewal: Detroit. New Orleans. Philadelphia. Pittsburgh. By the end of 2011, the American Gaming Association reported some form of legalized gambling in all but twelve states, including 445 privately owned and 459 tribal casinos. If the AGA’s lobbying efforts succeed, if major gambling companies can offer interstate online poker, then counting casinos will become irrelevant: Every smartphone will be a potential poker hall.
I asked Robert Jacobson, executive director of the California Council on Problem Gambling, what would be the potential effect if casinos were – well, everywhere. “There really is no research because [online gambling] hasn’t been legal,” he says.
Still, this state is already very heavy on gambling. Jacobson’s organization estimates that one million Californians are pathologically compulsive gamblers, with “full-blown clinical addictions, who can’t stop without help.”
People who live within 50 to 60 miles of a gambling establishment – whether it is a card room or a tribal casino – are two to three times more likely to have gambling impact their lives, he says. That description covers roughly 95 percent of the state’s population – close to 36 million people – even as expansion into legal online gaming looms.
Will it happen? I ask Jacobson.
“Yes,” he says. “There is too much money at stake.”
The California Grand Casino is a poker club in the East Bay enclave of Pacheco, located just off I-680. It’s a boxy, antiseptic place, brightly lit. On a Monday night last fall it was packed, dozens of large, oblong tables crowded with people playing Texas Hold’em, Pai Gow poker, blackjack, and more. Others line nearby couches, anxious to be called to an open seat like hospital patients awaiting an MRI scan.
My first impression is that the Grand would make Dean Martin and the rest of the Rat Pack laugh. But it’s part of the significant archipelago of card clubs and Indian casinos scattered across California that make it the nation’s biggest gambling state.
I’ve ventured here to meet Scott Willis, a soft-featured 27-year-old poker lover who sometimes plays at the Grand. We go to the bar, where Willis, wearing a green T-shirt with a breast pocket, declines my offer of a drink. There’s a football game on the TV.
Willis tells me he started playing poker online when he was 16 or 17, drawn in by televised poker tournaments. The commercials touted online poker, and the players would wear caps pitching poker websites.
Even though he was a minor at the time, Willis was able to open accounts online and start playing. “They didn’t actually check,” he says. “All you had to do was pay money.” He visited sites like PokerRoom.com. It worked. “If I won $2,500, I got $2,500,” he says. “I tried to stretch my money, but I played four or five hours at a time, four or five times a week. It didn’t sound that bad at the time.”
When the Isle of Man indictments came down, Willis stopped playing – he’d been to all the sites that were closed. (“I always got my money,” he says.)
Up until then, he says, playing in those virtual casinos seemed safe because they were wide open, advertised on television and in poker magazines. They appeared to be legit. But Willis quit once they shut down, instead of switching to other offshore sites.
“It just doesn’t feel right any more. I don’t feel as secure,” he says. “There was always a question, ‘Would I get my money back?’ ”
If online poker were legal in California, would Willis give up places like the Grand Casino?. “Absolutely.”
State Sen. Roderick Wright (D-Ingleside) is the politician most likely to give Willis what he wants. In 2010 Wright introduced SB 45, which would have legalized “any gambling game” played online in California. But the bill languished, with no hearings, and it never got out of committee.
Last year, Wright joined Senate president pro tem Darryl Steinberg (D-Sacramento) to sponsor SB 1463, an online poker bill that would limit gambling operations to existing license holders – card rooms, Indian casinos, horse racing associations, and providers of advance-deposit wagering at the state’s race tracks – but would let them bring in outside partners. In June, however, Wright pulled the bill from a scheduled hearing as opposition mounted, and it twisted in the political winds until the session ended.
Wright plans to reintroduce the measure this year, since he considers it “better than nothing.” But he thinks California is being provincial by not going all in on games people could bet on – Modern Warfare, Farmville, and the Madden football series – and then seeing what works.
State poker regulations will “capture money that’s [now] leaving” California, Wright predicts, but he thinks players of other games will go elsewhere. “There’s a whole cohort of young people playing social games,” he says. “We need to see beyond what is right in front of our faces. You don’t want to start online gaming and limit it to some shit – like poker – that’s 300 years old.”
The senator argues that people are going to gamble online regardless of the rules, be it hacking through Nevada’s computer firewalls or playing games offshore. State regulations, he adds, would “protect the California players and their winnings” and make sure the game is fair. “If the feds change one word – intrastate to interstate – then California gets screwed.”
The big sticking point is who should get an online gambling license: Any company that passes a background check and ponies up an application fee expected to run $30 million? Or just card rooms and Indian casinos that already have licenses?
For the California Nations Indian Gaming Association, Acebedo says, the key legal question will be whether online poker is treated as an expansion of gambling, or simply a new game that compact holders can offer their customers. If it’s an expansion that opens the business to new entrants, he says, “the tribes will fight tooth and nail to keep what they have.”
Attorney Christ agrees with that assessment, predicting that whatever the Legislature does will have to appease the gaming tribes. “They are huge stakeholders,” she says. “Their interests will have to be dealt with.”
But is there enough political will to keep the major gambling companies out of the state? In October a coalition of gaming tribes and card rooms – the California Online Poker Association – disbanded, leaving the scattered holders of state gaming licenses without a united front.
Wright anticipates that the big gambling companies with Nevada licenses will target California. “They didn’t put up all that money [to lobby Congress] because they are nice people,” he says.
My talk with Wright makes me think of the Sunday morning I won all that fake money at the DoubleDown Casino.
What if the household grocery budget runs short one month? I don’t consider myself a great poker player, but I’m certainly not a bad one, either. And flipping just $25 or $30 up to $100 in a low-stakes game could mean better food on the table.
I live maybe a ten-minute drive from the Oaks Card Club, a large poker room in the East Bay’s Emeryville. But even ten minutes might be enough time to fight back an impulse. It is online gambling’s nearly instant access that makes it seem so frightening.
Wright represents hundreds of thousands of poor and working-class people in his Los Angeles County district, which extends from Compton to Long Beach. He has to see the downside of enabling desperate or problem gamblers to place a bet in the time it takes to press “Enter.”
“It is always a risk,” Wright acknowledges. “We might place limits on what people can do. [Online gambling accounts] could limit you to $300.”
Maybe this is all out of his hands anyway. Once Nevada goes live, what’s the assurance that people in California – or anywhere else – won’t be able to hack their way into an online game?
Both Wright and Acebedo say that’s likely to happen. Tech-savvy gamblers could rig proxy servers to convince gaming websites they are really in Nevada.
I took the question to Scott Willis who, besides being pretty good at poker, is finishing up a computer programming degree at Cal State East Bay. If millions of Americans have figured out how to gamble from their computers in offshore casinos scattered around the world, I ask him, how long would it take a computer wizard like Willis to hack into a Nevada poker game?
Not long, he says. Maybe half an hour or so. Really?
“Absolutely,” he replies softly. “There is no question about it. I’m sure it will be very easy.”
Gambling apps – for wagering real money – may be available soon on your smartphone.