Where Do We Go From Here?

"Always after a defeat and a respite, the Shadow takes another shape and grows again."

"I wish it need not have happened in my time," said Frodo.

"So do I," said Gandalf, "and so do all who live to see such times. But that is not for them to decide. All we have to decide is what to do with the time that is given us."

--J.R.R. Tolkien, The Fellowship of the Ring, Book I, Chapter II

(There it is, for those who were wondering. Hack-y references to pop culture disguised as literature. Prepare for a turd of a post.)

We're now 12 days on the wrong side of Black Friday. The initial shock of the DOJ indictments against the Poker Sites is gone, replaced for Americans by a gnawing emptiness that online poker used to fill and an uneasy dread of what the immediate future may bring.

On our last day in Lima last Monday, Shamus and I spent some time musing about the future of poker and our little writer's corner of it. Then as now the future was uncertain and bleak (at best), but we both more or less shrugged. We engaged in some gallows humor and assumed that we'd adapt somehow -- whether by transitioning within poker or turning our attentions elsewhere -- and get through it.

I've written before that one of the great cosmic ironies of the universe is that human beings are incredibly adaptable yet highly resistant to change. It's easier to live in the past, or to point fingers at what went wrong, than to try to adjust to an uncertain future. That blame game is now turning its attention to Caesars CEO Gary Loveman.

Loveman wrote an op-ed yesterday that put forth a clear, powerful message in favor of regulating online poker. Instead of celebrating that -- FINALLY! -- somebody is hitting the strongest talking points for online poker regulation, people are fixating on Caesars' pre-Black Friday efforts to kill intra-state regulations. Did that happen? Sure. Does it matter now? Not really. Why not?

Because like it or not, it's now Caesars' world. We're just living in it. (If I wanted to be super hack-y today, I'd figure out how to tuck in a [second] throw-away reference to the Buffy the Vampire Slayer tv series. "The hardest thing in this world is to live in it.")

Yes, Caesars acted in its own interests. Is that so surprising? To expect Caesars to have done anything else is, in a word, silly. State regulation with the Poker Sites still in the market was not in Caesars' interests. Where does everyone think the blackout period in the Reid Bill came from?

Most players seem to be making the error that Bill Rini recently accused me (mistakenly, I feel) of making: thinking online poker regulation should be about what's fair or what's good for the players. To be blunt, nobody gives a shit about the players. Corporations exist to make money. That is what they care about. Period. The successful ones (like Caesars) are very, very good at it. Caesars clearly calculated that it was more in its own interests to try to elbow Tilt and Stars out of the market before throwing its weight behind regulation. Now, having successfully done that, the next logical step is -- regulation!

Obviously nobody associated with the industry pre-Black Friday wanted the current state of affairs. There is a measurable loss associated with the departure of online poker from the U.S. Where before there was 12-table, 6-max grinding and Poker After Dark, now there is... whatever it is that's replaced those things. Call of Duty and late-night infomericals for SPANX, I guess.

Caesars, MGM and the other land-based casino interests now have the pole position. It's time to accept that fact and figure out what the road map to regulation is from here. Unless they performed some masterful post oak bluff, I sincerely doubt that Caesars and MGM contributed 650 Gs to Senate Majority Leader Harry Reid's 2010 re-election effort to have a multi-billion dollar industry shrivel up and die overnight. They've purchased influence and now they're going to try to use it.

Are there obstacles? Of course. The House leadership remains a big stumbling block. But the casino industry's been around the block more often than the PPA has. I would guess the casino industry actually have a semblance of a plan for where to go from here. Using talking points that the industry has been begging the PPA to use is a great first step.

The fear of the unknown is powerful. It's where denial comes from. It's tough to see the sky falling and the world undergoing cataclysmic upheaval when your head's in the sand (although you'd think the vibrations would give a clue).

Yet the unknown, the falling sky, and the cataclysm isn't just barreling down the pike; it's here. Now we need to decide what to do with the time we have given us. The winners are going to be the people who adapt to the new reality the fastest.

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The Search for the Real Victim

Been thinking some more about what the future will bring for online poker in the United States. As The Entites at Wicked Chops Poker pointed out yesterday, it's a minimum of two years until licensed, regulated online poker returns to the U.S. It would be a shame if Poker Stars and Full Tilt Poker weren't let back into the country by then.

Look, I remain convinced that the fraud and money laundering charges against the Poker Sites are damning. The lawyer in me says a crime is a crime, whether "justified" or not. Nobody with any experience processing payments (even from a player perspective) should be surprised by the charges in light of the allegations. The payment processing facts are not in the Poker Sites' favor.

But the court of public opinion SHOULD be in their favor. As Todd Witteles wrote yesterday, this was a victim-less crime. Try to find a victim here. I dare you. Was it poker players? Certainly not. The actions of the payment processing departments allowed players to continue playing a game that is arguably not illegal under Federal law[FN 1] and that has no consequent societal, and no or few consequent individual, harms that derive from it. In fact, charging the Poker Sites with these crimes has victimized poker players more than the crimes themselves ever did by destroying a great source of entertainment and, for some, destroying their livelihoods, whether they were pros or were employed by the coterie of poker-related industries that online poker sustained.

[FN 1 - We can re-visit the circularity of the definition of "unlawful internet gambling" under the UIGEA another time but the statute could be unconstitutional for that definition being vague. Check out a piece I wrote in September 2010 for more information.

EDIT: Grange brings up iMega in the comments, a case from 2 years ago I had forgotten about. While it's not good precedent, it's also not binding in the 2nd Circuit where these charges have been brought.]

Were the banks and the payment processors the victims of the crimes? Only if your definition of a victim includes someone who was tricked (perhaps winking and nudging at times along the way) into doing something that he'll never be prosecuted for -- and for which he has an affirmative defense anyway -- and that netted him millions of dollars in profits. Yes, the banks sound very victimized. God, can you imagine ANYONE having any sympathy for the banks even if they were the victims here?

The poker sites couldn't have been the victims. They're the ones charged with crimes.

That leaves the government, where we get to the real rub. The government was victimized in that it lost out on its share of the (large) poker regulatory and tax pie by enacting the UIGEA in the first place. The government was victimized in that the Poker Sites stuck their tongues out and said, "Nah nah nah nah you can't touch us!" What we have is the DOJ protecting the rights and the ego of the federal government to get its cut and to put the Poker Sites in their place. The DOJ certainly isn't protecting any of its citizens, be they natural or juridical.

At one time I thought this case would end in a settlement, as most of these cases tend to do. But the more I think about it, the more I'm convinced it will go the other way. The government is going to have a tough time trying to extradite Ray Bitar or Isai Scheinberg or most of the other named defendants. Countries generally don't like going along with extraditions for charges that aren't crimes on their own soil. That won't create much pressure on the poker sites to ease the plight of their fearless leaders.

Without any real threat of jail time, there's nothing to be gained by the Poker Sites from a settlement. A settlement would almost certainly take the form of a hefty fine [FN 2], the possibility of some jail time for some of the individual defendants, and (this is the killer) an admission of guilt. Any admission of guilt by the Poker Sites will seriously jeopardize their chances of being licensed in a regulated future. If the Poker Sites are going to be shut out of the US market anyway, they might as well tell the DOJ to F itself in the A and tie this thing up in the court system for the next two years.

By then maybe regulation will have come to the U.S. and the DOJ will want this embarrassment of a case to just go away.

[FN 2 - As I said on Twitter last night, I note that the last installment of the PartyGaming DOJ settlement money is to be paid in September 2012. If 18-24 months is a realistic timeframe for regulation (and who knows), that is an interesting coincidence.]

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The PPA Needs to Be Stopped

Earlier this week I intended to write a post un-packing the PPA response to Black Friday and why it has been woefully inadequate. My post was going to start from the premise that, of all people and organizations, the PPA should have seen this calamity coming and been prepared for it. Instead they appeared to be caught with their pants down.

Unfortunately things got away from me in the crunch of other obligations. In the meantime many other voices took up that torch, to the point that my post was redundant. Consider this short list:

Bill Rini: The PPA is Pathetic; I Don't Get the PPA
Wicked Chops: The PPA Still Doesn't Get It: Reshaping the Online Poker Regulation Message
Grange95: The PPA Meets or Exceeds Expectations

But today PPA Chairman Al D'Amato authored a jaw-dropping Op-Ed that appeared in the Washington Post. It showed that the PPA is *still* muddling the message and still stuck on the wrong arguments to make for regulated online poker.

Let's start with the headline (which, I will concede, may have come from WaPo and not D'Amato himself): "Make online poker legal? It already is."

As a practical matter, people in the poker community know that a case can be made that online poker isn't illegal under current U.S. law. Certainly that's the position that PokerStars and Full Tilt took while they continued to operate in the U.S. post-UIGEA. But that's not the issue that online poker players really want addressed. We want the government to license, regulate and tax the game so that it exists in a black-and-white area of federal law, with strict government oversight akin to that existing in B&M casinos. Doing so would create jobs and would remove online poker from the legal twilight zone that it's inhabited for the last five years.

The headline of the Op-Ed confuses this issue right from the outset. If I were to read D'Amato's headline with no knowledge of the poker industry prior to last week's indictments, I might easily think that the status quo is fine, that indeed there must have been some shady business going on for the Big Three to have been indicted. So right away we have uninformed readers potentially taking the wrong message from D'Amato's piece.

[And if WaPo was responsible for the headline... well what does that say about what WaPo editors took away from the Op-Ed?]

D'Amato spends the first four paragraphs of the Op-Ed telling a few unrelated anecdotes about his own experiences with poker. A sharp reader can see that he's trying to set up the "poker is a skill game" argument that the PPA has been repeating ad nauseum for five years and, I might add, taking up too much column space to do it.

Five paragraphs into the piece we get the first useful piece of rhetoric. D'Amato writes,

"This is an attack on Internet poker and American poker players like me. Through these strong-arm tactics, prosecutors think they can ban Internet poker. Instead, they are making millions of Americans victims in an attempt to make online poker illegal without the support of legislators or the public."

Great! I like this paragraph a lot. D'Amato is attempting to frame the facts in a light that is beneficial to his main argument, which is that Americans should be free to play government-sanctioned and government-regulated poker on the Internet. Instead, the actions of the government have had an opposite and direct effect on average Americans. Beautiful.

Unfortunately, D'Amato doesn't explain why the game should be regulated in language to which the Average Joe can relate. Instead of making prohibition comparisons, llibertarian arguments and delving into the benefits of regulation for all parties involved -- consumer protection for players, revenue generation for governments, job creation for average Americans and bright line regulations for operators -- D'Amato starts in on the "game of skill" argument. Poker isn't gambling; it's a game of skill. Thus it should be legal.

This argument has been the PPA's standard tactic for the last five years. What has that tactic accomplished? According to Grange, more harm than good. I won't repeat Grange's arguments; just go read his well-written post and know that I agree with everything contained therein.

Back to D'Amato. In that one brilliant rhetorical paragraph of this piece that I referenced above, D'Amato suggested that the indictments were an attempt by the Justice Department "to make online poker illegal without the support of legislators or the public." But when he does finally come around to making a quick, weak libertarian argument in favor of online poker, he leads it by contradicting his own earlier position. "No one, including [Attorney General Eric] Holder, suggests that it is illegal for an individual to play poker on the Internet," D'Amato writes.

Well, which is it? By shifting his ground on this argument in the space of three paragraphs, D'Amato calls into question the credibility of his entire piece.

It isn't until the ninth(!) paragraph of the piece that D'Amato offers a clear, concise statement of what action the government should take:

...it is time to clarify federal law: Online poker is legal. Congress should license and regulate Internet poker and allow Americans to play the game they love on trusted, safe online Web sites without fear that the FBI will come knocking.

Unfortunately, by the time the reader reaches this clear and concise statement, he or she has had to wade through the muddled masses of the previous eight paragraphs. And D'Amato still leaves out the job-creation, revenue-generation and consumer-protection benefits of regulation.

The fact is that while 50 million American may play poker at one time or another, far fewer play online. I've seen estimates that range from 3 million to 15 million. The 15 million number at the high end of the range represents only 5% of the total U.S. population. Nobody is going to convince the other 95% of the population to remotely care about this issue by stating that poker is a game of skill -- especially when it's obvious that, in the short term, chance plays a large role. However, if you frame the argument in terms of jobs, tax revenue, and consumer protection, more people are going to sit up and take notice.

To date the PPA has refused to explore this alternative (and in my opinion more compelling) line of argumentation in favor of online poker regulation. If they remaining unwilling to do so then maybe it would be best if the PPA said nothing at all. Right now they're not helping the cause.

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Domain Name Agreements Are Only a Step

In part of the ongoing PR battle between the DOJ and the "Poker Companies", this morning the DOJ announced it was restoring use of the pokerstars.com and fulltiltpoker.com in order "to facilitate return of U.S. player funds".

The DOJ has a PR problem. They want the Poker Sites to look like the bad guys, but by seizing the domain names and dropping a nuclear bomb on US online poker, the DOJ is the one who looks bad. It has frozen all of the US players (that the DOJ is theoretically acting to protect with this case) out of their funds. That's not very good PR.

Solution: offer the domains back to PokerStars and FullTilt so that they can start processing withdrawals. Everything's fine now, right?

Not so fast. Under the UIGEA it's still illegal for banks to process gambling transactions. Just because the DOJ gives the domains bank doesn't change the law of the land. The best the DOJ can do is say "we won't enforce the law with respect to these types of transactions."

Meanwhile, every bank in the country has been operating for 5 years under the UIGEA model of "decline gambling transactions". Many of them may not even be *aware* of this announcement by the DOJ. It's big news to poker players, sure. But in the banking world it's a blip. It's going to take time for the banks to change their method of doing business. They're going to want to be triple-convinced. And I doubt the DOJ is interested in actively helping the Poker Sites get the transactions accomplished. It serves the DOJ's PR interests too much to *appear* to be the good guys (hey, here are your domains back. Give the players their money!) and to let the "bad guys", the Poker Companies, twist in the wind a while longer trying to figure out how to get U.S. players their money back. I'd expect calls from U.S. banks to Preet Bharara's office in Manhattan to go un-returned for a while.

Believe it or not, banks are risk-averse. They price risk and act accordingly. If the price that they're getting is good enough, they'll justify a risk and act on it. At that point it is no longer a "risk". But in the case of "violating black-letter law of the land", the risk is unpriceable and therefore huge. The banks are going to take a lot of convincing. The domain name agreements simply say that they "expressly allow for" the Poker Companies to use the domains to process withdrawal transactions without referencing any outside authority or statute (like, say, the UIGEA). That's a very thin reed on which to ask banks to hang their hats. They're going to need some time.

This doesn't mean that I think FTP and Stars players won't eventually get their money back. They will. But it's going to take a lot more time than people in the poker world think. These domain name agreements are just the first step down a very long road for PokerStars, Full Tilt, and U.S. players.

[Edited to add: I would expect what will happen is that Stars/Tilt will look to do business with a few main intermediary banks. Those intermediary banks will seek explicit written confirmation, addressed to them, from the DOJ that the DOJ will not bring UIGEA charges against them for processing the transactions.]

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House of Cards

You might be expecting some legal analysis from me tonight. For tonight, at least, you're not going to get it. I'm in Lima, Peru, trying to grasp the enormity of what happened today.

Like many in the poker industry, I have known about the online poker-related grand jury proceedings in the Southern District of New York for a long time, since April of last year. I had second-hand knowledge of the proceedings through someone I know who was subpoenaed by the Department of Justice. All of the questions that person was asked by the FBI pertained to payment processing and how payment processing transactions were coded post-UIGEA.

I made oblique reference to that knowledge in a December 2010 post called "What's Next for U.S. Online Poker?". At the time I wrote, "At this very moment, the Southern District of New York is investigating payment processors and how they code online poker transactions... The government is starting to catch up to what the UIGEA intended four years ago. The DOJ is getting itself up-to-speed so it can shatter the backbone of the U.S. online poker industry -- money movement."

Anyone who spent five minutes around the industry in the last few years knew that payment processing was the weakest link in the online poker operational chain. It seemed to be verging nearer and nearer to collapse, ready to take down the whole online house of cards with it.

Then PokerStarsWynn happened, followed by FullTiltStation. NJ came close to passing intra-state poker and other states were working on the same thing. All the money was lining up in favor of regulation. Typically in the U.S., as the money goes so goes the policy. It seemed like the return of regulated online poker in the U.S. was a matter of time. Who cared that PartyPoker settled with the DOJ and set a horrible precedent? We'd soon have a second boom!

Except nobody told the SDNY, and the SDNY felt that the principals of the online poker sites were nothing but a bunch of cards.

To be honest I don't think Full Tilt forgot about the SDNY. Tilt has been stockpiling cash for a long, long time for this fight. No doubt Stars and UB/AP have done the same. All three sites knew that the SDNY was asking questions about payment processing. So although this indictment has seemingly come out of left field, I doubt that PS, FTP and AP/UB were caught completely unaware. They have had to guess that something like this might be coming.

I joked with Pauly and Shamus that I envisioned a minion of Isai Scheinberg walking around the Stars corporate headquarters with the nuclear football handcuffed to his wrist. Another would break the emergency glass and start distributing the contingency plan -- prepared for this very eventuality -- to all employees.

Yet it may not matter. The case laid out in the indictment and the complaint is as damning as it is accepted fact to anyone who's been involved in any facet of the online poker industry (player side or industry side) in the last five years. Payment processing was increasingly becoming dicey. The way payments were processed was, from a certain viewpoint, fraudulent and illegal under U.S. law. It has little to do with whether or not online poker constitutes "unlawful internet gambling" under the UIGEA. The specter of the UIGEA was enough to cause banks to decline gambling-related payment processing transactions, which in turn forced the online poker sites to become more "creative" in how those transactions were moved through the system.

In business, "creative" is often a euphemism for "not entirely legal." Deliberately mis-coding a transaction is against U.S. law. After five years the government finally huffed and puffed and blew the payment processing and online poker houses down.

Now I sit in a loft in Lima, Peru with three colleagues and friends in the poker industry. We've spent the last two days covering a poker tournament that has instantly become a footnote to the biggest poker story in the last five years. Ocean's Twelve is on the television. It's the scene where each of the co-conspirators is arrested by Italian police and thrown in jail.

It seems a fitting end to one of the most trying days of my poker career.

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Laying Low

I'm still here. The last few weeks have been mostly quiet in terms of the poker industry and incredibly quiet for me personally. Shadows of things are swirling within the poker river (as they often are) but whether/when any of them surface is anybody's guess.

I continue to watch all of the developments on the poker legislative front. There's nothing out there which is earth-shattering, game-changing or even rises to the level of meriting comment. The gist of the status quo is that federal regulation languishes while certain states press on intra-state gaming. The money (which means B&M operators and their online counterparts) would prefer a federal solution.

Any state that comes even close to implementing an intra-state scheme backs down in the face of intensive lobbying efforts by members of the gaming industry. Pressure is clearly building in favor of regulation in the U.S. but again, it's anybody's guess when the dam finally bursts.

What's not a guess: 2011 LAPT Peru starts on Thursday. I'll be joining fellow scribes and friends Elissa, Shamus and Pauly south of the equator for tournament poker, fantastic Peruvian food, and maybe even some Woolly Bastards.

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