Vested interests: Stars and California

Vested interests: Stars and California

Arguments in favour of including a “bad actor” clause in California iPoker legislation are clearly driven by interests vested in keeping PokerStars out, writes online gaming consultant Matt Kaufman.

Published 29th June 2014

On April 23, the California State Assembly Committee on Governmental Organization held a public hearing titled “The Future Public Policy and Fiscal Implications of Authorizing iPoker Gaming in California.” Committee Chairman Isadore Hall III stressed in his opening remarks that the conversation should be framed by two guiding principles: 1) to do what’s right for California, and 2) to do what’s right for Californians.

With the exceptions of a few special interest groups and Las Vegas Sands’ Andy Abboud, the majority of those in attendance seemed to agree that passing iPoker legislation is in the best interest of both California and Californians. They also seemed to agree, mostly, on what that legislation should look like.

There is, however, one enormous point of disagreement: whether or not the legislation should contain a “bad actor” clause which would prohibit certain companies from entering the market based on specific past behaviours. In other words, whether or not to prevent PokerStars from getting a licence.

The 800-pound gorilla
The Rational Group, parent to PokerStars and Full Tilt Poker, is far and away the leader in the global online poker market. Between both sites, their cash game traffic is roughly 10 times that of their nearest competitor and they’re the leader in tournaments by an even wider margin.

On April 15, 2011, “Black Friday,” the Rational Group was one of three companies indicted by the Department of Justice for operating illegally within the United States. Enormous scandals emerged at Full Tilt Poker (not yet a Rational Group brand) and Ultimate Bet, and neither site was able to pay customers their account balances.

In stark contrast, roughly one month after their indictment PokerStars received authorisation to issue refunds to their players. They began sending out those payments in full almost immediately. PokerStars eventually negotiated a deal with the DOJ.

For the price of $731 million, they purchased Full Tilt Poker and settled their own charges without admitting to any wrongdoing. In the press release related to the settlement, PokerStars Chairman Mark Scheinberg made it crystal clear why that was important. “[We] … secured our ability to operate in the United States of America whenever regulations allow.”

A few weeks ago, the Rational Group inked a deal with the Morongo Band of Mission Indians, the Commerce Club, the Hawaiian Gardens Casino and the Bicycle Casino to provide those brick & mortar properties with the PokerStars online poker platform when legislation is passed in California. As one might imagine, those entities form the group fighting against any bad actor clause which would prevent PokerStars from entering the California market.

In favour of the bad actor clause seems to be everyone else with a horse in the race, out of fear that PokerStars would be such a dominant force in the market that legislation would really only help those who manage to partner with them.

“One particular company”
As the Assembly Committee continued, several tribal leaders including Chairman Mark Macarro of the Pechanga Band of Luiseño Indians and Chairman Bo Mazzetti of the Rincon Band of Luiseño Indians alluded to their desire for any legislation to prevent bad actors from receiving benefits for having operated illegally in the US.

When Robert Martin, Chairman of the Morongo Band of Mission Indians, began speaking, the PokerStars issue shifted to centre stage, despite the company never being mentioned by name.

“The bad actor ban some folks are advocating deviates from California’s proven system. Instead of allowing open competition and allowing state regulators to continue to do their job, it seeks to change California’s gaming policy and its regulatory system. So let’s call that what it really is – that’s just a smokescreen that is designed to block a single vendor from entering the California online market just to give a competitive advantage to others.”

Martin also made the argument that the bad actor clauses being considered are based on an arbitrary date – December 31, 2006 – when advocates “inaccurately believe the UIGEA took effect. UIGEA actually became effective in October of 2006, and it didn’t change the legal status of online gaming one bit.”

“So,” Martin continued, “why not 2005 or 2004? Because those earlier dates would disqualify vendors who are trying to secure an edge in the California market by supporting this anti-competitive language.” It is noteworthy that during his testimony, a PokerStars press releas was sent out officially announcing their aforementioned partnership with the Morongo et al.

California State Assemblyman Brian Nestande took particular interest in the topic, and after a short discussion with some of the tribal representatives still seemed unsure about how he felt. “I’m just wondering why we want to be that specific when we’re talking about one particular company. Why would we want to be that specific to not allow that one particular company to engage?”

Regulation vs legislation
Gaming consultant Chris Grove believes that decisions regarding licensure are best left to the regulators. “Chairman Martin’s testimony effectively captures why bad actor clauses are bad policy: they put a responsibility traditionally reserved for regulators in the hands of legislators.

“The fact that you could just as logically draw a bad actor bright line at any number of points in the past - such as 2002, when the US Department of Justice informed Nevada that the Wire Act applied to online gambling - strongly argues for leaving this matter entirely in the regulator’s court.

“Regulators, not politicians, are best equipped to execute the subtle, nuanced weighing involved in suitability determinations. Regulations are preferable to statute for similar reasons.” Currently, California gaming laws have regulators determining suitability based on a variety of factors. PokerStars could be denied licensure if they aren’t determined to be “of good character, honesty, and integrity” or based on their prior activities or reputation.

Is UIGEA really an arbitrary line?
Although Chairman Martin is certainly correct in stating that the bad actor clause really only focuses on one company, one might also argue that this is purely out of circumstance rather than due to targeting PokerStars specifically.

Quite a few offshore casinos continued  to operate in the US after the passage of UIGEA. Of the ones that did, the majority could never attempt to enter the regulated US market anyway – PokerStars is simply the only company that is large enough to act as an interactive provider for major brick & mortar operations, operated in the after UIGEA, and no longer accepts US players today. So inherently, the debate ends up specifically being about them.

Although UIGEA may not have specifically changed the legality of online gaming, it certainly did act as a message to offshore operators to get out or face the consequences. 888 Holdings and PartyGaming each left the US market in response to its passage, moves that left them at a huge disadvantage for years compared to their competitors which chose to stay. Today, both companies have licences in the US, and arguably are the only two companies that are substantially helped by the proposed bad actor clause.

Attempts to enter the US
This isn’t PokerStars’ first attempt to enter the regulated US market. In December of 2012 they reached an agreement to purchase the Atlantic Club in Atlantic City. New Jersey passed online gaming legislation in February of 2013, and in late April the Atlantic Club managed to end the agreement by exercising a termination clause based on the fact that PokerStars had not obtained an Interim Authorization for a gaming licence by April 24th.

In July, PokerStars found a New Jerseybased partner in the Resorts Casino Hotel and applied for a licence in the state. In December, New Jersey regulators suspended that licence application due to the company’s history – to date, they remain unlicensed and unable to operate.

Even before Black Friday, PokerStars made attempts to change their black market operation into a white market one. In March of 2011, they entered a partnership with Wynn Resorts to try and get federal legislation passed, and they’ve historically been a large source of funding for the Poker Players Alliance, a non-profit organisation which has lobbied for federal legislation.

What to expect
What will happen and what should happen in this situation are likely not the same thing.

At this point I should probably reveal my own biases on the issue, although they’re quite divided. I work for Z4 Poker, a Las Vegas-based company developing online poker software. It would admittedly be great for us if a bad actor clause limits the number of offshore companies that can act as interactive providers for California based casinos.

However, I’ve also worked for affiliates of PokerStars and have at points in time played poker professionally. If you considered purely the treatment of their customers, describing PokerStars as a ‘bad actor’ would be nothing short of ludicrous, and as a former customer I have the utmost respect for the way they run their company.

Despite the fact that they’ve never officially admitted to any wrongdoing, it seems indisputable that PokerStars operated illegally after 2006.

A truly fair solution, as I see it, would be for the legislation to exclude all operators that ever took bets in the US, or to ignore a bad actor clause altogether and allow regulators to decidewho can get in. If the regulators decide that due to increased legal problems PokerStars is unfit for licensure but Party and 888 are fine, so be it.

That said, the entities in favour of the 2006 cutoff are numerous and powerful, which means, logic and fairness aside, PokerStars has their work cut out for them.