The United States Government forced online poker sites to the fringes of the financial system. The U.S. government has long argued that online poker gambling is illegal under the Wire Act, a 1961 law that explicitly prohibits sports betting conducted over electronic communication. In 2006, Congress made it illegal for financial institutions to process funds for online gambling.
It should be no surprise that an online poker site would run into legal problems. The complaint against Full TItle Poker caught my eye because
“By March 31, 2011, Full Tilt Poker owed approximately $390 million to players around the world, including approximately $150 million to United States players. However, the company had only approximately $60 million in its bank accounts.”
Many Ponzi schemes started off as legitimate enterprises. When funding shortfalls or an unexpected loss hits, the managers try to hide the bad news. This creates a spiraling downfall leading from poor management to criminal behavior. In this case, Full Tilt was having trouble moving the cash around the financial system to collect wagers from players and make payments to the winners. It sounds like Full Tilt was funding winnings without withdrawing initial bets from the player accounts.
But was it a Ponzi scheme? While there is no official definition of a Ponzi scheme, these are what I think are the elements:
(1) A promise of financial reward.
(2) Current contributions to the scheme are not invested, but are spent to make good on returns promised to earlier contributors.
(3) The manager of the scheme maintains his ability to pay the returns only by getting other contributors.
(4) The contributors think the manager is investing their contributions to make the return (not necessarily in a fully legal way).
(5) If future contributors do not arrive in sufficient numbers, the Ponzi scheme will have too little money to pay current returns/redemption.
Full Tilt was not an investment scheme. Sure you can argue about whether poker success is based on skill or luck, with luck being a key element of gambling. (I think it’s a combination of both.) But it’s not an investment and you are not buying a security. The contributors did not think the manager was doing anything with the money other than keeping it safe. They were winning or losing based on the hands the contributors played.
It does seem that current winnings were being paid from new contributions. According to the complaint, the mangers were taking more cash out than the business could support. The company had a funding shortfall because it was having trouble moving the wagers and winnings through the financial system.
You would hope that a leading federal prosecutor would know the difference between different types of fraud. Full Tilt was not a Ponzi scheme. As good as you may be at poker, your wagers are not investments.
Sources:
- Feds: Full Tilt Poker site was Ponzi scheme, customer accounts were looted of $440 million in the Washington Post
- U.S. Alleges Poker Site Stacked Deck by Alexandra Berzon in the Wall Street Journal
- First Amended Complaint in US v. PokerStars, Full Tilt Poker, et al. (pdf- pages)
- Further Thoughts on Whether or Not Social Security is Ponzi Scheme by Don Boudreaux on Cafe Hayek
- Full Tilt Ponzi by Felix Salmon
- Press Release from the US Attorney for the Southern District of New York (.pdf – 3 pages)
Full Tilt was not a Ponzi scheme in the classic sense, but it certainly had Ponzi scheme characteristics in that future contributions by customers were expected to re-pay future winnings.