Full Tilt Poker Pros Named in Federal Civil Suit

Tuesday, September 20th, 2011

Full Tilt Poker partners and poker pros Howard Lederer and Chris “Jesus” Ferguson have been added to U.S. Attorney Preet Bharara’s  civil case against against the company.

The amended suit accuses Full Tilt of being a Ponzi scheme that paid executives with funds that were supposed to be reserved in player accounts. Skeptical as I generally am of the government in these cases, a cursory reading of the relevant information suggests to me that Full Tilt was at minimum guilty of making some really stupid and likely fraudulent business decisions. From what I can tell, in an effort to stay operational after the feds brought down the hammer, Full Tilt continued to pretend to process deposits from U.S. players, even though it hadn’t lined up a legal processor to conduct the transactions. (Because the feds had already arrested and charged the executives of any processing company that tried.) So they were crediting accounts without actually withdrawing money from the players whose accounts they were crediting.

Shortly after the indictments, the feds then barred the company from processing any more payments from U.S. players, but simultaneously told players they could still use the site to cash out their accounts. Full Tilt couldn’t come remotely close to covering the ensuing run. That isn’t really a Ponzi scheme. But if true, it’s certainly not on the up and up. If Full Tilt executives were misleadingly running the site like a (poorly run) bank, I’d imagine that’s a pretty good case for fraud. It’s also fraudulent (and crappy business practice) to pay out your executives and celebrity endorsers first, while knowing that you can’t pay your players the money you promised them was protected and kept separate from general operating expenses. (I’m sure it’s illegal, but unlike the allegations above, I can’t personally conjure up much moral outrage over the allegation that Full Tilt disguised billing codes to get around the Unlawful Internet Gambling Enforcement Act.)

How much Lederer and Ferguson knew about all of this remains to be seen. (Disclosure: I’ve met and like both, so I hope their involvement was minimal.)

I’m sure opponents of online poker will cite all of this as proof that they were right, that these sites are havens for fraud, money laundering, and all sorts of other criminal enterprise. But the reason offshore sites were so popular in the first place is that it was and is illegal for any company based in the U.S. to provide online poker to U.S. residents, despite the fact that millions of U.S. customers clearly want to play. Full Tilt was trying to fill that demand, first legally, then by operating in a legal gray area, and finally (allegedly) by trying to circumvent the law. That doesn’t excuse the company from defrauding its customers, if that’s indeed what happened. But the government has been standing between the millions of people who want to play poker online and the companies that want to provide them with that service legally. This is what happens when you create black and gray markets. It is entirely predictable.

I’ll reserve judgment for now on whether Full Tilt’s legal problems amount to intentional fraud or dumb mismanagement wrought in part by trying to stay up and running even as the feds continued to slam doors. My best guess is it’s mostly the latter, combined with a bit of the former as it became clear the gig was up. What is abundantly clear is that the federal government’s paternalistic efforts to “protect” online poker players from losing money to offshore gaming sites . . . was a colossal failure.

MORE: See this comment from Mike C., who says meshing of player accounts with operating expenses was going on well before last year’s indictments. I’ve also now read the full indictments, and from here it looks pretty bad all around for Full Tilt and its executives. Of course, we do have trials for this sort of thing. So we’ll see how they go about attacking the complaint when the time comes. But the feds depict some really shady stuff going on, well beyond just trying to figure out how to keep the site operational.

MORE: This post initially indicated that Lederer and Ferguson had been indicted. That isn’t true. They’ve been added to the fed’s civil complaint. I’ve changed the post to reflect this.

Digg it |  reddit |  del.icio.us |  Fark

18 Responses to “Full Tilt Poker Pros Named in Federal Civil Suit”

  1. #1 |  John Hall | 

    You’re the first commentator I’ve seen point out that this isn’t like a Ponzi scheme. If the allegations are true, it is fraud and theft (apparently also “lapping”), but that doesn’t make it a ponzi scheme. I’m baffled as to why so few people have pointed this out…

  2. #2 |  PoliticalHack | 

    I do hope the moral fascists* who claim gambling is their devil’s product take the “See what Full Tilt did!” banner and run with it. Full Tilt has become a prime example of a business run to cater to people’s relatively harmless desires, but run without proper regulation and regulatory oversight.

    If the U.S. government takes the clue, then hopefully in the near future we will have legitimate, legal online poker available to us. Sure, it will be regulated and taxed, but as adults we will be able to take part in an adult activity without the fear of breaking the law.

    Make it legal. Get oversight to protect the players and guarantee proper and non-onerous taxes are collected, and let us be. Does anybody think that Full Tilt could have co-mingled players’ deposits with operating funds if the equivalent of the Nevada Gaming Commission was watching over their shoulders? (Please ignore the banking fiasco of the past few years when answering that.)

    *I do not mean to pull a Godwin with that “moral fascists” phrase. But just because I did not mean to do it does not mean I didn’t….

  3. #3 |  AFL | 

    Sounds like US players involved understood the risks of gambling with an overseas operation and then got burned.

    We shouldn’t protect people from making their own bad decisions.

  4. #4 |  StrangeOne | 

    Ponzi scheme seems to be the buzzword of the moment, a lot of people seem to be using it without actually knowing what it means. Unfortunately the Justice Department shouldn’t be the kind of people who don’t know what it is.

    Hack, you think the government is going to learn its lesson? Its been 40 years on the War on Drugs and they ain’t letting that one die without a fight. It’s not about effectiveness, or whether or not they have the right to do this thing, or even if there is money in it (which there is, the brick and mortar casino’s went through a lot of trouble to try and kill the online competition). Our government has fully absorbed the imperial mindset. Everything they do is right and just, not based on some external set of morals, but based entirely on whether or not the government decides to do them.

    Re-legalizing online poker would be admitting that it was a mistake to make it illegal in the first place. That by itself means there’s next to no chance of it getting legalized. You can’t do this kind of thing honestly anymore, no one talks about who is hurt by a law or if the law is even necessary in the first place. The only way online poker is coming back is if some clever senator shoves a rider onto some Homeland Defense Bill in the middle of the night, and no one bothers to read it in the morning. You know the exact same laughably crooked way it was made illegal in the first place.

    *OFFTOPIC*
    I used to use the moniker “random_guy” or “random guy” but there seems to be a few people with very similar names going around so I’m switching up.

  5. #5 |  David | 

    We shouldn’t protect people from making their own bad decisions.

    The calculus is a bit different when people make bad decisions because the good decisions are illegal.

  6. #6 |  Wonks Anonymous | 

    “So they were crediting accounts without actually withdrawing money from the players whose accounts they were crediting.”
    So where does the stealing occur then?

  7. #7 |  Doug | 

    From what I understand (and I could be wrong in this) the big problem is that they didn’t run separate accounts for the player money and operating expenses.
    The way the sites should be run is that when I and others deposit our money to play poker it goes into Bank Account A. This account is strictly for the players money only and is used for all withdrawals and deposits that the players make.
    As the players play in tournaments and cash games, the rake, which for you non poker players is a small % of the pot or buy-in that the company takes for expenses, is transferred into Bank Account B and that is where the company handles all the company expenses such as payroll, IT costs, marketing, etc.
    This separation of accounts means that your personal money isn’t at risk as it is completely separate from the company fund. This is why sites such as PokerStars were able to pay their players back very quickly after the DOJ unfroze their accounts.
    What Full Tilt did was keep everything in a single account so everything was mixed, and then on top of that paid their investors exorbitant dividends, upwards of $400 million dollars. They then continued to pay those dividend ~10 million a month after Black Friday fell. So in addition to not paying their players, they continued to pay themselves after the lockdown.

  8. #8 |  Random_Guy_on_the_Internet | 

    Was Ferguson actually indicted? The article you cite says the US Attorney “filed a motion Tuesday to amend an earlier [bold]civil[/bold] complaint”. Criminal Indictment and Civil Complaint are not the same thing.

    You and Gillespie are the only ones I see claiming Jesus was indicted.

  9. #9 |  Mike C. | 

    Never found the occasion to post here before, but I’m a huge fan of your blog, Mr. Balko.

    Your timeline is a little off. Full Tilt didn’t just start pretending to process deposits after “the feds brought down the hammer” on 4/15/11. This process (of crediting players’ accounts with money that was never received) began more than a year ago, when US banks started blocking most Americans’ deposits to Full Tilt. By the time Full Tilt cut off access to American players on 4/15 in response to the US government’s actions, the discrepancy had reached over $100 million.

    The allegations of fraud are described in Doug’s post (#7). The regulations under which Full Tilt operated in Ireland required them to separate player accounts from operating expenses. Full Tilt continued to assert that these accounts were kept separate until well after 4/15, but it appears that this was almost certainly a lie, and that the accounts were illegally mixed since at least 3 or 4 years ago. Full Tilt simply paid their top executives 8-figure salaries directly out of the money that was legally required to be kept in segregated player accounts. Their executives — including your friends Mr. Lederer and Mr. Ferguson — should forfeit their assets and go to jail based on this alone.

  10. #10 |  Radley Balko | 

    Mike C. —

    Thanks for the clarification.

  11. #11 |  Bob Mc | 

    Here is the DoJ press release:
    http://www.justice.gov/usao/nys/pressreleases/September11/amendedfulltiltpokercomplaintpr.pdf

  12. #12 |  Bob Mc | 

    Here is the amended civil suit:
    http://online.wsj.com/public/resources/documents/FullTiltAmendSuit_Sept20_2011.pdf

  13. #13 |  Mark Anthem | 

    Long time reader, but I don’t see any mention of the 200 million seized from Full Tilt and its payment processors.
    I doubt most any business can survive Preet Bharara and his federal mafia once they start shaking you down.
    How is it this prosecutor born in India is allowed to destroy billions of dollars of American wealth?

  14. #14 |  EH | 

    This should make for some nice background work against Wikileaks.

  15. #15 |  Full Tilt Poker Professionals Called The Federal Civil Suit | Latest World And Tech News | 

    […] Continue reading […]

  16. #16 |  Michael | 

    There are a few things that make me a bit skeptical.

    1) They filed a civil suit. Ponzi schemes are criminal.

    2) They had several hundred million seized domestically, and the Feds pressured overseas banks to freeze their accounts as well.

    However, taking deposits without being able to get the money from depositors was incredibly dumb. Criminal? I don’t agree.

    But would they have had any problems without the DOJ? I don’t think that’s clear.

  17. #17 |  Bob | 

    I’ve had to explain to ostensibly smart people that things like this and Social Security aren’t Ponzi schemes by definition a lot lately, so it’s nice to see someone actually trying to get it right.

  18. #18 |  Steve | 

    Doug said above, “They then continued to pay those dividend ~10 million a month after Black Friday fell.” That is false. Para. 8 of the amended complaint: “Payments to the Full Tilt Poker owners stopped only after April 15, 2011.”

Leave a Reply