LAST MONDAY WAS Black Monday for the internet-gambling industry on the London Stock Exchange. Industry giant PartyGaming lost about $5 billion in market value as its stock plummeted 58% to 45 from 107 pence. Falling more than 60% were the listings of Sportingbet and online-gaming cash-transfer services Neteller and FireOne Group.
The cause of the debacle was the passage on Sept. 30, during the waning hours of the U.S.
congressional session, of a law to make it illegal for banks or credit-card companies to process payments to online gambling outfits. The measure, sponsored by Republican Rep. James Leach of Iowa and Republican Sen.
John Kyl of Arizona, had been knocking around for months, stymied by various internal congressional squabbles and special interests such as the horse-betting industry's request for special exemptions. Finally, however, the ban made it, heaving across the finish line as a rider to the port-security bill. President Bush is expected to sign that into law in early November.
The immensity of the disaster to the online-gambling industry is readily apparent: the majority of its business comes from U.S. gamblers even though the companies are all domiciled in offshore tax havens like Gibraltar, Antigua and Costa Rica.
Some 80% of PartyGaming's revenue, for example, originates in the U.S., mostly from poker players attracted to the site's 24/7 card playing.
Now, most of the online companies have announced plans to pull out of the American market voluntarily. Some investors, of course, will try to find bargains amid the wreckage, perhaps thinking the companies could excel as vehicles for foreign betting. Fat chance.
In fact, the outlook for this sector may well get worse in the months ahead, as the implications of the U.S. ban play through financial statements.
One of the few investors likely to get out alive is PartyGaming's founder, a one-time backer of the porn industry named Ruth Parasol. She and her husband had the good sense to start cashing out more than a year ago. More about them later.
IF NOTHING ELSE, the collapse in the gaming shares bespeaks an obtuseness on the part of investors in the stocks. First of all, it's no secret that the Justice Department has long considered companies offering online gaming to U.S.
residents to be violating existing federal laws, such as the Wire Act and the Illegal Gambling Business Act. Moreover, some eight states have specific bans on online gambling and most other states prohibit all forms of unlicensed gaming (needless to say, none of the Internet-gambling companies has such a license). Perhaps PartyGaming (ticker: PRTY.
London) posed the issue most starkly and brazenly in its prospectus for its initial public offering of stock in 2005: "Offshore gaming companies rely on the apparent unwillingness or inability of regulators generally to bring actions against businesses with no physical presence in the relevant country." Likewise, there have been plenty of warning signs of a coming U.S.
crackdown. In July, BetOnSports chief executive David Carruthers, a British citizen, was arrested by federal agents in a Dallas-Fort Worth Airport lounge during a short layover en route from London to the company's headquarters in Costa Rica. The company fired him immediately for his blunder.
And Carruthers was held on a previously-sealed indictment charging him, the company and 10 other of its operatives with mail and wire fraud, money-laundering, tax evasion and taking in more than $3.3 billion in illegal wagers from the U.S.
over the life of the company. Carruthers is now living in a hotel outside St. Louis, sans passport and sporting an ankle bracelet, grimly awaiting his next hearing date in federal court in that city.
Last month, Peter Dicks, non-executive chairman of Sportingbet, was likewise arrested at JFK Airport when he nonchalantly showed up in the Big Apple to attend a directors meeting of a tech company. His arrest was a result of a sealed warrant issued by Louisiana state authorities, charging him with "gambling by computer" offenses. Louisiana is rumored to have dozens of other sealed warrants covering virtually the entire executive rosters of the online-gambling industry.
In any event, Dicks was able to beat the Louisiana warrant in late September when New York Gov. George Pataki refused to order his extradition. Perhaps this was because Dicks had already resigned his position.
He's now safely back in Great Britain. THE ARRESTS FOLLOWED a heady growth spurt for the industry (see "Full House: Suddenly, the Whole World is Playing Online Poker," the Barron's cover story of Feb. 21, 2005).
And they quickly changed the behavior of executives. A number of industry figures, including PartyGaming chairman and English "suit" Michael Jackson, disclosed that they no longer planned to travel to the United States. World Gaming Chairman James Grossman and Director Clare Roberts both resigned their positions with the London-listed and Antigua-based concern.
Both had business interests in the U.S. that required continued access to America.
Party's Over: Shares of once-promising online gambling concerns have been under increasing pressure this year as legal and regulatory woes have mounted. Congress' move banning the transfer of U.S.
funds for betting was the capper. Likewise, CryptoLogic, a provider of online-gambling software, saw fit to announce plans to move its headquarters in January from Canada to Ireland. At the same time, its Canadian CEO announced he was stepping down "for family reasons.
" The company said that the change of domiciles was dictated by the need to be nearer to its customers. No mention was made of the U.S.
regulatory mortar fire that seemed to be landing steadily closer to the company's quarters. Offshore Internet-gaming companies and their major operatives had long lived in a world of denial, assuming that their operations were beyond the long reach of U.S.
regulators. For one thing, such industry figures as PartyGaming's Parasol and BetOnSports founder Gary Kaplan, an ex-New York bookmaker, were assumed to be extradition-proof. After all, they were living in domiciles Gibraltar in the case of Parasol and Costa Rica for Kaplan where online gaming is legal.
Moreover, all their company computer servers, cash balances and other assets are also in offshore locations that the government would likewise find all but impossible to access. But the Leach-Kyl measure hits the Internet gaming industry where it hurts the most. It effectively cuts the companies off from all U.
S. wagering, the very lifeblood of the business. The bill makes any transfer of U.
S. funds for the purpose of wagering or settling accounts illegal. Among other things, financial institutions will receive ongoing assistance from the Treasury, the Fed and the Department of Justice to identify new domain names and other conduits used by online-gaming companies to circumvent the rules for U.
S. funds. A fairly ironclad "coding and blocking" system will be capable of identifying and thwarting Internet-gambling transactions.
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