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.