Tuesday, April 28, 2015

The Wire Act, the UIGEA and other silliness (Part 1)

First, an apology. For quite a while, I tried to post here at least once a week. I found that to be manageable for a while, but since I always try to write at least 1,500 words, I can't just sit down and bang it out. I end up spending 4-5 hours on each post, including research, checking links, etc.

Couple that with some tumultuous times elsewhere, the past few months have been a challenge. I'll be able to talk more next week about those issues (and I promise to do so), but in the meantime I had a few things that I thought I could get through today. We'll see.

In Nolan Dalla's excellent blog today, he says an inordinate number of kind things about me, some of which relate to Fleet Street Games. Sharon and I attempted to start a subscription poker site back in 2008-2009, and had some success, but our funding ran out and we were unable to raise money to continue operations (a common story for 2008). One of the things we did was to develop a short series of TV spots that focused on the absurdity of federal and state crackdowns on online poker, which you can see at the links below. These spots featured a lovable schlub named Bean, who just wants to play online poker but has a succession of terrible things happen.

Bean Gets Busted
Bean Goes to Jail
Bean Gets Fried
Bean in Heaven 

[There's also a long-form version that we intended to use as a viral video - you can see that one here. It's about three minutes long.]

The theme is simple: why are we treating online poker players like hardened criminals, instead of dealing with hardened criminals?

I came to that way of thinking after several years as an online poker player (1999-2002) and as an online gaming marketer (2002-present). And it occurred to me as I thought about this that there is a massive amount of incorrect information out there about how we got to this point, so I thought I'd collect it all in one place.

DISCLAIMER: I am not a lawyer, although I often talk like one. I do have a thorough understanding of the laws I'm going to discuss here, but don't take me to task if I get something wrong, unless it's something big.

Way back in 1961, Congress passed the Interstate Wire Act. The intent of the bill was simple: make it illegal to transmit information across state lines for the purpose of sports betting. This was part of a much larger effort by then-Attorney General Robert F. Kennedy to crack down on organized crime.

The federal government has been careful over the years not to attempt to pass legislation regarding gambling, which has traditionally been left to the individual states. The Wire Act was not an attempt to change this; it was the Fed's way of ensuring that they had jurisdiction in cases where gambling wasn't taking place in a specific state, but crossed state boundaries.

Spin forward many years, to the Early Middle Ages of the Internet (1998). The first online poker site emerged that year, Planet Poker. There were already a few sites that allowed casino games of various types, but since they are in a different category (more on that in a minute) I'm not going to try to deal with them in this discussion.

In 1999, Congress attempted to pass the Internet Gambling Prohibition Act, which was intended to do exactly what it sounds like. This was the first of many annual attempts to ban Internet gambling in the United States. The bills rarely made it past committee review, and none made it to the House or Senate floor for a vote. [Amusing side note: the primary driver behind the defeat of the Internet Gambling Prohibition Act was Jack Abramoff. If you don't know who he is, click here, but be prepared to go down a rabbit hole.]

In 2002, after several attempts by the Bush Administration's attorney general, John Ashcroft to use the Wire Act against online gambling advertisers, the US Fifth Circuit narrowly interpreted the Wire Act, ruling that the statute could only be applied to sporting events and contests.

Other than a few aborted attempts, there was little legislative activity in the online gambling space until 2003, when Chris Moneymaker won the World Series of Poker after winning an $82 satellite on PokerStars.com. Chris's win generated a huge amount of publicity, mostly because he was the first online qualifier to win the WSOP.

Around that time, PokerStars, PartyPoker, UltimateBet and other sites began advertising on television, further raising their profile. John Ashcroft realized that he had very little legal standing to prevent these ads, as well as the tens of millions of dollars in advertising for online sites in print and other media. So he took a creative, although deceptive, approach to the problem - he went directly to the media with a chilling scare tactic. In a letter dated June 11, 2003 (signed by his deputy, John Malcolm), Ashcroft and the DOJ claimed that Internet gambling was illegal, regardless of what the courts or other interpretations said. 

The full text of what became known as the June Letter is available here. But the key issues are covered in just a few sentences:

  •   "the public [has been led to believe] that such [Internet] gambling is legal, when in fact, it is not."
  •   "...individuals that accept and run such advertisements may be aiding and abetting these illegal activities."
  •   "...state and federal laws prohibit the operation of sportsbooks and Internet gambling within the United States."
  •   "Internet gambling and offshore sportsbook operations that accept bets from customers in the United States violate Sections 1084, 1952, and 1955 of Title 18 of the United States Code, each of which is a Class E felony." [note: 18 US Code § 1084 is the Wire Act]
Each of these statements is false, but that didn't stop the Department of Justice. It was a scare tactic, pure and simple, and it was backed up by this incredible statement:

"...any person Or entity who aids or abets in the commission of any of the above-listed offenses is punishable as a principal violator of those statutes."

Translation: If you [NBC/ESPN/Travel Channel) allow these ads to run, we are going to charge you with a Federal crime just exactly as though you were running the site yourself. Ashcroft was furious with the Fifth Circuit for emasculating the Wire Act, so he decided to just ignore it and wave a big stick at broadcasters.

It worked, at least to a degree. Broadcasters suddenly and dramatically raised their prices to online gaming companies, or refused to run their ads. They imposed draconian rules on what could and could not be said in ads, even though there was no basis in law (and no other advertiser was subject to this treatment). This was one of the principal reasons that the World Poker Tour took the branding off the PokerStars Caribbean Adventure broadcast in early 2004. 

The next few years saw a flurry of anti-Internet gambling legislation, each of which was introduced by a Republican. I found this very surprising, since I was under the impression that one of the founding principles of the Republican party was less regulation and smaller government. But this has continued to be true - each piece of legislation introduced to ban Internet gambling at the Federal level has been introduced by Republicans. If I'm showing bias here (I am not a Republican), my apologies, but it's hard to interpret this fact.

All of these attempts failed until late September 2006. Bill Frist (R-Tennessee) was then the Senate Majority Leader and had aspirations for the presidency. He had been an opponent of Internet gambling, and was listed as a cosponsor of some previous bills, but was never particularly vocal. However, he found what he thought was a cause that could propel him to the 2008 Republican presidential nomination. 

In what is known on Capitol Hill as a "midnight drop," Frist inserted a series of clauses, known as the Unlawful Internet Gambling Enforcement Act (UIGEA), into a larger bill, the Security and Accountability for Every Port (SAFE) Act. The SAFE Port Act was a "must-pass" bill that itself was introduced very late in the legislative process, and as a result had not been thoroughly reviewed by either house of Congress. The UIGEA clauses were introduced just hours before the bill came up for a vote. The UIGEA itself was never debated or even officially read into the Congressional record. The SAFE Port Act was approved by voice vote in both the Senate and the House, and was signed into law on October 13, 2006.

This is where a lot of confusion and obfuscation began about just what the UIGEA was. The UIGEA is, at heart, a very simple piece of legislation. 

What the UIGEA does: it makes banking transactions for the purpose of "illegal Internet gambling" illegal. 

What the UIGEA doesn't do: it doesn't make any form of Internet or other gambling illegal. In fact, the bill explicitly states that its intent is to cover only transactions for Internet gambling that are already illegal under State or Federal law.

Over the next year, I can't tell you how often this law was misinterpreted, misquoted or misapplied. I made no less than 100 calls to the press in the wake of the UIGEA, and roughly 90% of the reporters I talked to were under the impression that the UIGEA made online poker illegal. I later learned that at least some of this 'misunderstanding' came from an informal DOJ briefing document that explicitly stated that online poker was covered under the Wire Act and was therefore "illegal Internet gambling."

Getting back to October 2006: in the wake of the UIGEA, Sharon and I were expatriates, and maybe worse (more on this here and here). It wasn't at all clear that we could return to the US without my being arrested. And our plight paled in comparison with others - for example, PartyPoker, which had gone public on the London Stock Exchange in 2005 with a valuation greater than British Airways, saw its market capitalization drop from over $12 billion to less than $1 billion in a matter of days. It's safe to say that there was no one involved in the Internet gaming business that wasn't affected in a significant way by one man's attempt to become President.

Next up: Black Friday, the December letter and where we are now.