Software Company Flips a $10 Million Ace|in RICO Antitrust Suit Against PokerStars


      SANTA MONICA (CN) – A software company claims owners of two of the biggest online poker operators, PokerStars and Full Tilt Poker, cost it more than $10 million by running illegal gambling businesses which disguised money they received from U.S. poker players as payments to bogus online merchants.



     Cardroom International claims in Superior Court that the poker companies’ unfair competition prevented it from selling its legitimate Internet poker software.
     The lead defendants, Isai Scheinberg and his son Mark, own and control the PokerStars companies, which Isai founded in 2001, according to the complaint. Isai lives on the Isle of Man.
     According to the complaint: “Cardroom sought to license its software to major media companies for use on their sports-related sites. Between them, the PokerStars defendants and the Full Tilt defendants entered into agreements whereby they provided such play money services to ESPN/ABC, Fox and NBC. At a meeting with one of the aforementioned networks, the CEO of Cardroom was informed that adoption of his system faced the barrier of the purchase of airtime on the network by PokerStars companies, as the PokerStars companies were tying continued purchase of airtime to use of their software and system on the network’s website. Within weeks of meeting with this network, the network announced a deal with PokerStars. The bulk of the money utilized by the PokerStars defendants to purchase time for poker television programs came from funds illegally obtained from United States poker players. Though Full Tilt did not directly interfere in the potential transaction between Cardroom and the network, it was due to the joint conspiracy of the PokerStars defendants and the Full Tilt defendants alleged below that both companies achieved their dominant position in on-line poker.”
     Cardroom claims that due to their domination of the market, the poker companies were able to strike a deal with major casino companies that needed software systems.
     Federal investigators shut down and seized PokerStars and Full Tilt Poker’s websites in April, after the U.S. Attorney in Manhattan charged several poker site owners with bank fraud, money laundering and illegal gambling. A civil lawsuit filed the same month seeks $3 billion in money laundering penalties from PokerStars, Full Tilt Poker, other poker companies and associated payment processors.
     Based on the Isle of Man, PokerStars ran the world’s largest online poker website, pokerstars.com, which provided real-money Internet poker games to U.S. players until it was shut down in April. PokerStars also offered play-money poker games through a separate website, which attracted and identified potential players and promoted the PokerStars brand in the United States.
     Ireland-based Full Tilt Poker operated a similar online poker room, which hosted play-money and real-money games for U.S. and foreign customers. The company comprised several entities based in the United States, Ireland and Curacao and was controlled by professional poker players who often had a stake in the online games.
     “To plaintiff’s knowledge, the pokerstars.com website was a true peer-to-peer internet cardroom,” the complaint states. “The fulltiltpoker.com website, on the other hand, was never a peer-to-peer Internet cardroom, because of the participation of the owners of fulltiltpoker.com in the outcome of the game. The fulltiltpoker.com website was not a poker room because the house, that is to say the Full Tilt business, regularly played. This occurred through two mechanisms. First, the Full Tilt owners (except for [defendant Raymond] Bitar) themselves would play on the website, as these individuals are all well-known professional poker players. Second, Full Tilt placed robots, which are computer programs controlling avatars, on its site to fill tables and earn money from less-skilled players. The fact that the Full Tilt owners played on the website was heavily publicized and indeed a marketing strategy, but the fact that the Full Tilt owners in fact owned an interest in the fulltiltpoker.com website and, except for Bitar, played on fulltiltpoker.com using money of the association-in-fact was kept hidden from players.” (Parentheses, but not brackets, in complaint.)
     While peer-to-peer poker is legal in some states, including California, so long as the host does not have a stake in its outcome, many states bar profiting from such games, according to the complaint.
     Since federal laws failed to directly address online poker until the enactment of the Unlawful Internet Gambling Enforcement Act (UIGEA) in October 2006, poker companies such as PokerStars and Full Tilt exploited loopholes in the system for years.
     Cardroom says that even after 2006, PokerStars and Full Tilt avoided restrictions and received millions of dollars from U.S. poker players. It claims that the poker companies used highly compensated payment processors who lied to U.S. banks about the nature of the transactions they processed.
     “Internet gambling businesses, including Full Tilt and PokerStars, were not permitted by United States banks to open bank accounts in the United States to receive proceeds from United States gamblers after the passage of the UIGEA,” Cardroom claims. “Scheinberg, Bitar, [Nelson] Burtnick and other employees of the Full Tilt companies and PokerStars companies operated through various deceptive means designed to trick United States banks and financial institutions into processing gambling transactions on their behalf, or bribe the owners thereof to process such transactions.”
     Cardroom says PokerStars and Full Tilt found a way around Visa and MasterCard regulations, which required banks to assign a particular code to Internet gambling transactions and often prompted U.S. banks to block such transactions.
     “In order to circumvent the Visa and MasterCard regulations and trick U.S. banks into authorizing their Internet gambling transactions, the defendants, and in particular the Scheinbergs, Bitar, [Howard] Lederer, Burtnick and [Chris] Ferguson, worked with and directed others to apply incorrect transaction codes to their respective association-in-fact’s Internet gambling transactions order to disguise the nature of those transactions and create the false appearance that the transactions were completely unrelated to internet gambling,” the complaint states. “Burtnick assisted both Full Tilt and PokerStars. Though Full Tilt and PokerStars were competitors, in the area of payment processing to the United States they repeatedly and directly cooperated with each other and third parties to illegally process payments.”
     Cardroom says PokerStars and Full Tilt created bogus companies, some disguised as online flower shops and pet supply stores, and used them to process credit-card charges without applying a gambling code to the transactions.
     Once the banks detected the fraudulent merchants, the poker companies turned to other methods, such as prepaid debit cards and phone cards that could be loaded with money from U.S. customers’ credit cards, and fraudulent e-check processing, according to the complaint. PokerStars and Full Tilt used third-party e-check processors based in California, Arizona and Australia, which, in exchange for high fees, disguised gambling payments into nongambling e-commerce transactions, according to the complaint.
     But Cardroom says keeping track of the phony merchants and answering complaints from customers confused by the phony merchant names on their statements created administrative and technical problems for the poker companies. The companies allegedly abandoned e-check processing after the government began investigating several payment processors, and turned to “transparent processing,” which would be invisible to law enforcement.
     Cardroom claims that the poker companies and their associates persuaded small U.S. banks that were facing financial difficulties to process online poker transactions in exchange for high processing fees and investments in the banks.
     John Campos, vice chairman of the board and part owner of SunFirst Bank, a small bank in Saint George, Utah, was arrested this year for allegedly processing more than $200 million in payments for PokerStars and Full Tilt, in return for a personal payoff, $1.6 million in fees and a $3.4 million investment in SunFirst.
     Cardroom says that while PokerStars held players’ money and returned their balances after the shutdown, Full Tilt immediately spent customers’ money on promotional expenses and paid other poker professionals thousands of dollars to promote its website.
     “Because Full Tilt Poker spent all of its players’ money on receipt, as opposed to holding the deposits in separate bank accounts, it was able to effectively limit competition from new entrants into markets where online poker was legal, and, in the United States, ensure that companies looking to offer online poker on a fantasy (i.e. no real money basis) would be discouraged from entering into license agreements with software companies given that the Full Tilt companies would offer strategic alliances on terms that no company making a fair profit could match,” according to the complaint.
     Cardroom says PokerStars and Full Tilt caused it to lose customers by controlling 80 percent of the online poker business and by offering software that linked together multiple websites of different companies, which was often preferred over Cardroom’s single-operator system.
     What’s more, the poker companies persuaded U.S. broadcast and cable networks to use their software system in exchange for the purchase of airtime. Cardroom claims that “the market dominance of the pokerstars.com and fulltiltpoker.com websites meant that investors until April 15, 2011 were highly skeptical of the business prospects of independent software houses seeking to advance and develop software systems for legal online poker, given the apparent impunity by which the PokerStars association-in-fact and Full Tilt Poker association-in-fact operated their websites in defiance of United States law for half a decade.”
     It adds: “Though the United States has forced the PokerStars defendants and the Full Tilt defendants to cease offering services to United States players, PokerStars’ huge stockpile of cash, and huge quantity of marketing information, which are being used to offer games to foreign players, continues to hamper plaintiff from entering into profitable agreements or obtaining equity funding that would otherwise be ordinarily available to a startup Internet company.”
     PokerStars continues to dominate the non-U.S. online poker market and Full Tilt is trying to get back into the business, according to the complaint.
     Cardroom seeks more than $10 million in compensatory and punitive damages for RICO and antitrust violations, and wants the poker companies enjoined from reentering the California and Florida markets.
     It is represented by Cyrus Sanai of Beverly Hills.

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