Is The Justice Department Responsible For Online Poker's Ponzi Scheme?S

The Justice Department dropped another bombshell in their assault on online poker, alleging that Full Tilt Poker ran a Ponzi Scheme that saw owners being paid nearly half a billion dollars, while player accounts were filled with "phantom money" to the tune of more than $300 million. The original Black Friday complaint, filed in April, alleged that poker companies had violated laws ranging from wire fraud to money laundering, but today's amendment goes a step further. Now, says the U.S. Attorney in the Southern District of New York, Full Tilt Poker was defrauding its players. And more sexily, it adds to the complaint top poker pros like Howard Lederer and Chris "Jesus" Ferguson.

It's a mess that didn't have to be, and it comes in large part due to the Justice Department's piecemeal attack on online poker. Unable to marshall a civil suit against the actual poker companies, and emboldened by new federal legislation against online casinos, in 2007 the DOJ chose to go after the middle men: the money transfer companies that players needed to deposit money into their online accounts. Using prepaid debit cards and foreign workarounds, players had long been skirting the US banking system in their transactions. The thought was, make it impossible to get money in or out, and the poker companies would starve.

These actions "created a whole criminal culture," said former New York Sen. Al D'Amato at the time, a criminal aspect to online poker that hadn't existed before. Now money transfers were forced into a blacker market, out of the reach of whatever safeguards and policing existed. The Justice Department had hoped to bury online poker; instead they just put it further underground.

From today's Memorandum of Law in Support:

Full Tilt Poker's payment processing channels were so disrupted that the company faced increasing difficulty attempting to collect funds from player in the United States. Rather than disclose this fact, Full Tilt Poker simply credited players' online gambling accounts with money that had never actually been collected from the players' bank accounts. Full Tilt Poker allowed players to gamble with—and lose to other players— this phantom money that Full Tilt Poker never actually collected or possessed. When other players won these phantom funds, their accounts were credited with money that Full Tilt Poker did not actually possess, but now nevertheless owed to these players.

...

The Amended Complaint further alleges that, as of March 31, 2011, Full Tilt Poker owed approximately $390 milion to players around the world, including approximately $150 million owed to players in the United States. At that time Full Tilt Poker had only appoximately $60 million on deposit in its bank accounts.

Notably, this cash shortfall only developed after the 2007 lawsuit restricted Full Tilt Poker's access to money transfer services. So we're left asking whether this alleged Ponzi Scheme is a diabolical plot cooked up by owners who don't need to steal to enhance their wealth, or if it was a totally foreseeable side effect of a business forced to operate under Prohibition-style laws. Now players will never see their $300 million in online funds, Lederer and Ferguson, who appear to be little more than well-compensated figureheads, are wanted men, the poker companies are hopelessly crippled, and taxpayers are footing the bill for it all. Everyone lost because of 2007's half-assed crackdown, everyone except a Justice Department that created more work for itself.