United States v. Scheinberg


United States v. Scheinberg, No. 1:10-cr-00336, is a United States federal criminal case against the founders of the three largest online poker companies, PokerStars, Full Tilt Poker and Cereus, and a handful of their associates, which alleges that the defendants violated the Unlawful Internet Gambling Enforcement Act and engaged in bank fraud and money laundering to process transfers to and from their customers. A companion civil case, United States v. PokerStars, et al., 11 Civ. 2564, included Full Tilt and Cereus as defendants and seeks the recovery of forfeiture equalling approximately $3 billion in assets belonging to the companies. After the indictment was unsealed on April 15, 2011, a date quickly dubbed Black Friday by the online poker community, PokerStars and Full Tilt stopped offering real money play to their United States customers.
Three years after the start of the poker boom in 2003, the U.S. Congress passed UIGEA to extend existing gambling laws into cyberspace. The law made processing payments for illegal online gambling a crime; however, the defendant companies remained in the U.S. market in the belief that the law did not cover poker. A former payment processor for the companies turned state's evidence after initially being charged with violating UIGEA himself. On September 20, the civil suit was amended claiming individual fraud by Messrs. Howard Lederer, Chris Ferguson and Rafael Furst.
The U.S. Department of Justice seized the.com internet addresses of the three online gambling sites, replacing them with a takedown notice, but let Full Tilt and PokerStars use them again once they pledged to no longer serve the U.S. About 76 bank accounts in 14 countries were frozen, including an unknown amount of player funds. The prosecutors are seeking jail sentences for the 11 criminal defendants including site founders and executives, U.S. payment processors, and an executive of a small Utah bank, who prosecutors maintain were engaged in an elaborate criminal fraud scheme, using the bank in Utah to mis-code transactions with other banks to bypass UIGEA restrictions.
Antigua and Barbuda officials considered action in the World Trade Organization. The companies ceased their U.S.-facing ad campaigns, resulting in cancellations of poker-themed television shows. In June, Full Tilt's eGambling license was suspended, which halted all of its remaining online play. The Alderney Gambling Control Commission on the British Channel Islands later revoked its license on September 29.
On July 31, 2012, US government dismissed "with prejudice" all civil complaints against all PokerStars and Full Tilt Poker companies after coming to a settlement with PokerStars which includes PokerStars purchasing Full Tilt. PokerStars and Full Tilt admitted no wrongdoing as part of the settlement, which ends all litigation between the government and the poker companies. The criminal indictments remain in place for the named individuals.

Background

Growth of poker

In 2003, ESPN expanded its coverage of the World Series of Poker. Between 2003 and 2006 the number of contestants in the $10,000 No Limit Texas hold'em Main Event grew from 839 to 8773. After the UIGEA was passed the World Series of Poker main event decreased in size, to 6358 players in 2007. In 2015 6420 players participated.

Changes in gambling laws

On October 13, 2006, the United States Congress passed Unlawful Internet Gambling Enforcement Act of 2006, which makes it a federal offense, punishable by up to five years in prison, for a gambling business to "knowingly accept" payments "in connection with the participation of another person in unlawful Internet gambling." However, according to syndicated columnist Jacob Sullum, the law did not define or alter the definition of unlawful gambling, which under Federal law only applies to sports betting via the Wire Act.
Nevertheless, Party Poker, at the time the largest provider for U.S. demand, decided to withdraw from servicing the United States poker market. The United States Department of Justice later indicted them for services provided prior to 2006 in violation of the Wire Act, a case they settled out of court in the hopes of being allowed to serve the U.S. market at a later date. Also in 2006, several other online poker service providers withdrew from the market, including Sportingbet's Paradise Poker, 888 Holdings' Pacific Poker, and the iPoker Network's CD Poker.
Several other sites continued to facilitate the demand for online poker in the U.S., which had been growing about 20% per year.
A 2006 law passed in Washington state that made it a felony to play online poker was upheld as constitutional by the Washington Supreme Court in September 2010. PokerStars immediately withdrew from Washington's market, and Full Tilt soon followed suit, but both sites continued to provide services to players in the other 49 U.S. states.
This case was preceded by a 2009 seizure of $34 million worth of winnings in transit U.S. poker players.

Basis for the case

Since Federal law says nothing specifically about online poker, or any gambling other than sports betting, Preet Bharara, the U.S. Attorney for the Southern District of New York, bases his case on a New York law that makes it a Class A misdemeanor, punishable by up to a year in prison, to run a game of chance where bets are placed within the state. Although none of the sites are actually run out of New York, he was able to obtain a felony indictment for UIGEA violations. In addition to the 2006 UIGEA, the defendants were charged with violating the Illegal Gambling Business Act.
Additionally, in April 2010, the former head of Intabill, a defunct payment processor in Australia, Daniel Tzvetkoff, was arrested in Las Vegas by the FBI. He was charged with money laundering, bank fraud, and wire fraud. PokerStars and Full Tilt had previously claimed that Tzvetkoff cheated them out of at least $100 million. However, he was quietly let go a few months later in August 2010. He reportedly turned state's evidence after being threatened with a 75-year prison sentence for alleged UIGEA violations.
The indictment also alleged that the executive officers of the sites had sought investment in SunFirst Bank in Utah, which they were using to obtain and pay out player funds by allegedly mis-coding transactions. Although no one was actually being defrauded per se, and money from an otherwise legal operation cannot be "laundered", these actions formed the basis for the fraud and money laundering charges. This case marks only the second time that the Department of Justice has alleged violations of the UIGEA, after the indictment of Daniel Tzvetkoff.
A grand jury handed down a sealed indictment on March 10, 2011.

Domain name seizure

On April 15, the Department of Justice seized the.com internet addresses of the three online gambling sites, a total of five URLs: Pokerstars.com, Fulltiltpoker.com, Absolutepoker.com, Ultimatebet.com and UB.com.
On April 20, 2011, use of two of the domain names were returned to PokerStars and Full Tilt by the U.S. Attorney's office, "to facilitate the withdrawal of U.S. players' funds held in account with the companies"; in exchange the companies agreed to continue prohibiting United States residents from playing until the case was resolved. Ultimate control of the domains remains in the hands of US Attorney's office.
Because the charges against Absolute Poker and UltimateBet represent a much larger percentage of its revenues, their survival is in jeopardy. However, Cereus did eventually reach an agreement by which funds could be returned to United States players.
On July 31, 2012, US government dismissed "with prejudice" all civil complaints against all PokerStars and Full Tilt Poker companies after coming to a settlement with PokerStars which includes PokerStars purchasing Full Tilt. PokerStars and Full Tilt admitted no wrongdoing as part of the settlement, which ends all litigation between the government and the companies. The criminal indictments remain in place for the named individuals.

Accounts seized

About 76 bank accounts in 14 countries were then frozen, preventing players from accessing balances held by the companies, according to the FBI's New York office. That Full Tilt and Pokerstars accepted a total of $500 million in total player deposits is a conservative estimate.

Persons indicted

The indictment named eleven individuals who were each charged with four crimes. The persons named in the indictment are:
The prosecutors are seeking jail sentences for the indicted executives and $3 billion from the poker companies. When the U.S. Department of Justice pursued Party Poker in 2006, it led to a $300 million plea agreement by PartyGaming co-founder Anurag Dikshit and a $105 million settlement with the company itself in 2009. In the criminal case, "The maximum penalty for violation of the UIGEA and operating a gambling business is 5 years in prison and a fine of $250,000 or twice the gross gain or loss for each charge, for conspiracy to commit wire fraud is 30 years in prison and a fine of $1 million or twice the gross gain or loss, and for money laundering conspiracy is 20 years in prison and a fine of $500,000 or twice the amount laundered."

Government position

, the United States Attorney for the Southern District of New York, expressed his view when the indictment was unsealed:
As charged, these defendants concocted an elaborate criminal fraud scheme, alternately tricking some U.S. banks and effectively bribing others to assure the continued flow of billions in illegal gambling profits. Moreover, as we allege, in their zeal to circumvent the gambling laws, the defendants also engaged in massive money laundering and bank fraud. Foreign firms that choose to operate in the United States are not free to flout the laws they don't like simply because they can't bear to be parted from their profits.

FBI Assistant Director-in-Charge Janice K. Fedarcyk added:
These defendants, knowing full well that their business with U.S. customers and U.S. banks was illegal, tried to stack the deck. They lied to banks about the true nature of their business. Then, some of the defendants found banks willing to flout the law for a fee. The defendants bet the house that they could continue their scheme, and they lost.

In the amended complaint the government alleged that "Full Tilt Poker did not maintain funds sufficient to repay all players, and in addition, the company used player funds to pay board members and other owners more than $440 million since April 2007."
Furthermore, the amended complaint uses the term ponzi scheme prominently, including in its title.
A lawyer for Ferguson has denied the allegations, suggesting that the issues may have been the result of mismanagement not malice. A lawyer for some of the defendants issued a press release stating that the phrase ponzi scheme was inaccurate, unfair and disingenuous and that its use was counterproductive.
The parties reached a settlement on July 31, 2012, ending all litigation between the government and the PokerStars/Full Tilt companies.

Player response

"Along with everyone else in the poker world, I'm shocked," said Brandon Adams, a poker professional who has appeared in televised tournaments on NBC and ESPN. "The expectation was that there would be warning signs. These sites went from multibillion-dollar enterprises to on the ropes overnight." He added: "Some players have literally millions of dollars in their online poker accounts."
The Poker Players Alliance called upon poker players affected by the shutdown to contact their Congressional representatives.
Poker player and then-current U.S. Congressman Barney Frank, in an interview with The Hill, lamented that the Justice Department is more focused on prosecuting online poker sites than those responsible for the mortgage crisis and financial meltdown.
In an editorial in the Washington Post, poker player and former U.S. Senator Alfonse D'Amato, a long-time favorite of industry lobbyists, wrote: "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." He called on President Barack Obama to rein in the prosecuting attorneys in the Southern District of New York.

International response

officials considered action in the World Trade Organization saying that the United States violated global trade law by shutting down Internet gambling sites. Antigua and Barbuda have previously brought suit against the United States successfully with the WTO when it awarded monetary damages for violating international agreements on trade in services by prosecuting the operators of offshore internet gambling sites. Online poker is the second largest industry in Antigua's economy. Mark Mendel, the Caribbean government's legal adviser, told Reuters: "I don't think there's another country in the world that puts people in jail for engaging in trade that's lawful under international law. It's as if Antigua would put Americans in jail for selling pineapples."
On June 29, the Alderney Gambling Control Commission suspended Full Tilt's license as a result of an investigation that arose after earlier federal indictments in New York, accusing company executives and associates of bank fraud, money laundering and other crimes. The license is suspended pending a July 26 hearing in London. Immediately following the suspension, the companies real money completely ceased operations. The actions by the AGCC mandated the cessation of the following:
Various sources report that this opened the way for Jack Binion to buy Full Tilt and ensure all Full Tilt Poker players get refunded in the process. On June 30, European investors agreed to provide capital to repay Full Tilt Players in exchange for a majority stake in the company. On July 26, the hearing revealed that Full Tilt owed in overdue licensing fees to the AGCC, which Full Tilt paid within seven days as promised clearing the way for approval of a refinancing deal. The hearing was suspended until no later than September 15 as a result of the revelation. The delay until September 15 offers Full Tilt a chance to complete its negotiated settlement. On September 29, the AGCC stripped Full Tilt of its license. The AGCC's statement said that Full Tilt had misrepresented its financial situation, while Full Tilt said the action would jeopardize its ability to repay its customers.

Economic impact

Prior to the indictments, the United States accounted for 25 to 40% the poker business for these companies. For PokerStars the International business share was 70 to 75% and for Full Tilt it was 50 to 60%, according to one source. Darren Rovell cites a source that says the three companies had a 95% market share in online poker in the United States. Following the shut down of play in the United States, traffic was down 24%, 49%, and 45% at PokerStars, Full Tilt and Absolute, respectively. Meanwhile, companies not affected by the indictment saw traffic spike.
The companies combined for an estimated US$200 million in advertising and marketing in the United States and their withdrawal from the U.S. market left network shows such as Poker After Dark and The Big Game without advertising sponsors. On cable television, ESPN's contract with PokerStars was for $22 million. ESPN withdrew its Pokerstars advertising. On Sunday April 17, ESPN2 cancelled its scheduled broadcast of 2011 North American Poker Tour presented by PokerStars.net. On Game Show Network, prepaid episodes of High Stakes Poker continued to air for several months after the event, but the show was in danger of not returning.
The companies accounted for a large proportion of World Series of Poker qualifiers via online satellites. Additionally, other players lost access to the funds they could use to play in the events. As a result, the 2011 World Series of Poker main event had the highest percentage of foreign players in history with 2,265 foreign players.
Wynn Resorts allied with PokerStars on March 25 to seek the legalization of Internet gambling in the U.S., but terminated the accord on April 15.
U.S. citizens who play online poker for a living effectively lost their livelihoods due to the DOJ action. Pokernews pointed out a thread on the Two Plus Two forums where the PPA asked players to share their stories. Among the poker networks seen as potential destinations for U.S. Poker players looking for a new online home are Carbon Poker and DoylesRoom.
According to Brandon Adams, live poker gambling at casinos might be a short-term beneficiary of the crackdown, but often online and live poker are not competitive but complementary, with players honing their skills in cheap, fast games online before gaining the nerve to play for higher stakes at a casino.
According to Time, the opposition to legalized domestic online gambling is depriving the United States economy from a huge potential source of tax revenues. One political action committee that received approximately $300,000 from PokerStars returned the money.
On April 26, PokerStars began processing cashouts. On May 4, Blanca Gaming of Antigua, the parent company to UB and Absolute Poker who had already laid off 95% of its employees, decided that it would have to pursue bankruptcy. On May 6, Pokerstars augmented their cashout policies to allow players to cashout frequent player points and pro-rata portions of partially earned VIP rewards bonuses.
On May 27, the Department of Justice unfroze an Irish account containing more than one-third of the more than $100 million that was owed to players. The account belonged to Full Tilt and its co-founder, Raymond Bitar. This was one of nine frozen Irish accounts. Full Tilt Poker had failed to uphold its promise to return U.S. Poker players by May 15, following the April 15 events. As a result, Full Tilt Pro Phil Ivey announced he would not be playing the 2011 World Series of Poker and suing Full Tilt. Ivey voluntarily withdrew the suit on June 30.

Arrests

John Campos and Chad Elie were arrested on Black Friday. Campos is part-owner and vice chairman of the board of directors for SunFirst Bank. On Monday, April 18, Campos, of St. George, Utah, appeared in a Utah court, but did not enter a plea. He was released on $25,000 bond, ordered to surrender his passport and to appear in a New York court for his next appearance. Chad Elie, of Las Vegas, made his first court appearance in Manhattan on Tuesday April 19. He was released on $250,000 bail.
Bradley Franzen made a court appearance in Manhattan on Monday April 18, entering a plea of 'not guilty' to the nine counts listed on his indictment, including bank fraud and money laundering charges. Franzen's bail was set at $200,000, for which his parents' house was used as collateral. Franzen pleaded guilty in a New York court on May 23, 2011. It is not known when he will be sentenced; however, it appears that Franzen struck a plea agreement with prosecutors, in which he agreed to cooperate in the probe, in return for which prosecutors would recommend leniency. Most of the other named defendants were out of the country. Ira Rubin, indicted on illegal gambling, fraud, and money laundering charges was arrested on Monday, April 25, 2011, in Guatemala. He made his initial court appearance in Miami on April 27, and was remanded in custody to his next appearance on April 29.
Ray Bitar surrendered to authorities on July 2, 2012.
Isai Scheinberg surrendered to authorities upon landing in New York on January 17, 2020. Scheinberg surrendered his passports, posted a $1 million bond, and was released with orders to remain in the New York area. He was the last of the 11 original defendants to face his charges in the US.

Convictions

On December 20, 2011, Absolute Poker co-founder Brent Buckley pleaded guilty to misleading banks. The plea deal calls for him to receive a sentence between a year and a year and a half in prison. Sentencing was set for April 19, 2012. Buckley was sentenced to 14 months.
On January 17, 2012, Ira Rubin entered a plea agreement in a Manhattan federal court in front of US Magistrate Judge Gabriel Gorenstein. Rubin agreed to plead guilty to three of the nine counts of conspiracy to commit bank fraud he faced and was expected to be sentenced to 18–24 months of prison. He received a three-year sentence. Judge Kaplan said, "You are an unreformed con man and fraudster," and calling his actions a "brazen" defiance of US law. "A significant sentence is necessary to protect the community."
John Campos pleaded guilty in March 2012 to a single misdemeanor bank gambling charge. He was sentenced in June to three months in prison. During his plea, Campos said his processing of the gambling proceeds for PokerStars and Full Tilt Poker was not in return for a $10 million investment in the bank.