The Missing Message

It’s been a rough week for poker. Federal authorities went after the biggest three online poker rooms, arresting those owners they could find and forcing Full Tilt Poker, Poker Stars and Ultimate Bet to refuse real money action from United States customers. There are a lot of people debating what is likely to happen in various forums, and trying to discern the motives of those involved. I’m going to take a different approach, because I believe that the central and most important implication of these actions has been lost.

The charges against the poker rooms had nothing to do with poker.

The charges were due to actions that only existed in order to support poker. This is true. The poker rooms created fraudulent bank accounts and even took interests in banks in order to assist players in quickly moving their money in and out of poker rooms. Gamblers love to move their money in and out of online poker rooms constantly, and highly value the ability to do this quickly, forcing poker rooms to accommodate them. The major poker rooms chose to offer excellent service in this area but did so at the expense of doing things that are flagrantly illegal, and they got caught.

This doesn’t mean the poker rooms made the wrong choice. It is impossible to say given what we know whether it was worth the risk or not to do what they did. Like any choice in poker or in life, what matters is making the decision that maximizes utility rather than the one that is safe. There was always going to be some chance that the US Government went after these poker rooms, and that chance went up with every fraudulent banking transaction, but playing by the rules entirely would have resulted in there being no poker rooms. There is a finite amount of disutility that will result from these arrests and lawsuits, so this is no different than saying that if you have never missed a flight you spend too much time in airports. If you never run into legal trouble, you’re probably obeying too many laws.

What is even more important than that, however, is the dog that didn’t bark. The Federal Government claims that online poker and online gambling in general are illegal in and of themselves, and it would be trivial to prove that said online gambling is taking place. The defendants would doubtless admit it, as they do every day when asked. They did not, however, accuse anyone of this horrible crime. Why did they not do this, and only go after them when they had caught the rooms red handed engaging in fraudulent banking transactions?

The only explanation that makes any sense is that the DOJ is not confident that the poker charges themselves would stick. A jury might choose to find the defendants not guilty, or a judge might rule against the DOJ, and declare that what the poker rooms are doing is legal. The risk is that if it was found in court that online poker was legal, there would be a vast increase in the quantity of online poker. This would, in the opinion of those going after poker rooms, be a very bad thing. The threat of potential legal action against online gambling is severely reducing how much of it takes place. Confirming that such activity is in fact illegal wouldn’t enhance that effect much, whereas refuting the assertion would have a huge impact. Most people don’t estimate the probability that something bad will happen to them if they play poker online, which it almost certainly won’t, and if they do they would be unconcerned in either case. Those who don’t estimate the probability something bad will happen to them won’t change their behavior if that chance goes up, but would change their behavior if that chance went to zero. Going after poker rooms for hosting poker games must have far more downside than upside for the DOJ.

If attempting to enforce a law is sufficiently dangerous or costly that the law is not enforced, the law effectively does not exist. The DOJ has, for those who are paying attention, confirmed that online gambling is legal. In the short run this has made online poker more difficult to play. In the long run, this will have the opposite effect.

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3 Responses to The Missing Message

  1. brec says:

    (1) Replace FBI with DOJ.

    (2) Implicit in this post is that no trial is necessary, as the indictment is a recitation of fact rather than of accusation.

  2. JMD says:

    No, DOJ is correct. DOJ makes the charging decision and drafted and filed the indictment and the civil complaint filed, specifically in this case the U.S. Attorney for the Southern District of New York.

    There does seem to be little dispute about the majority of the relevant facts here, and I doubt we’ll see a trial anyways considering how little good it would likely do the poker companies. Maybe we’ll see something like a deferred prosecution agreement where they agree to stop doing business in the U.S. and pay a fine or something, hard to say.

  3. JMD says:

    I have to say, I’ve had a chance to look at the indictment and it seems to me that it certainly *does* charge the poker companies with online gambling violations. Counts 5-7 charge Poker Stars, Full Tilt and Absolute Poker, respectively, with “operation of an illegal gambling business.” The money laundering and wire fraud charges are counts 8 and 9 of the indictment. The remainder are violations of the UIGIEA, which, given the way the statute is written, are something of a hybrid between a bank fraud charge and an illegal gambling charge. Counts 5-7, though, present squarely the issue of whether poker counts as “illegal gambling” to the test.

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