Nathan Vardi, Forbes Staff
In December 2008, with their stock prices crashing and their companies struggling under mountains of debt, the captains of the U.S. casino industry headed to the Las Vegas offices of IGT for a critical board meeting of the American Gaming Association.
There were some huge egos in the room and the topic under discussion was whether their powerful lobbying group would change its position on Internet gambling. For years the industry had essentially opposed it, fearing cannibalization of the casino business and that the dark corners of cyberspace would be impossible to regulate. Some in the room, however, like Gary Loveman, chief of Harrah’s Entertainment, were pushing for a new policy. Loveman found himself vigorously opposed by billionaire Steve Wynn, who won the battle since the AGA’s bylaws required unanimity. “I jokingly say I was neutered on Internet gaming,” says Frank J. Fahrenkopf, Jr., the chief of the AGA. “But the rest of the world was not waiting for the casinos or Congress.”
For yet another year the Las Vegas casino industry sat on the sidelines while offshore companies like PokerStars and Full Tilt Poker made fortunes from the massive U.S. online poker market. PokerStars, based in the Isle of Man, became the biggest online gaming business in the world, with estimated annual profits of $500 million on $1.4 billion of revenues. This fact did not escape the attention of the Las Vegas casino moguls who had turned their backs on the Internet. By March 2010 Wynn was no longer a member of the AGA and the industry had become convinced games like online poker could be adequately regulated. Loveman, whose company owns the World Series of Poker brand, had little trouble getting the AGA’s other board members to change lobbying policy. The March 2010 decision by the AGA’s board to support online gambling regulation represented a sea change and was one of the defining moments of the online poker landscape in the U.S and even the world.
The AGA’s decision fueled a serious effort in the fall of 2010 to pass federal legislation that would have officially legalized and regulated online poker. Senate Majority Leader Harry Reid of Nevada quickly flip-flopped on his long-standing opposition to all forms of Internet gambling and led the charge during last year’s lame duck Congress. But the AGA’s policy reversal also had a huge impact on the people running PokerStars and Full Tilt. The lobbyists for PokerStars, which included Richard Gephardt, had convinced the company that the legislative push could be successful. It probably emboldened Full Tilt to take even more risks in crediting accounts of players on its site even though it could no longer withdraw money from their bank accounts due to pressure from the Justice Department. The AGA decision certainly had an impact on the way PokerStars and Full Tilt Poker viewed the efforts of the Justice Department, which believed facilitating for-money online poker in America violated U.S. law, making it seem like an end-run around federal prosecutors, or at least a stronger negotiation position, might be possible. Wynn was also watching the AGA carefully and its decision helped motivate him not only to stop opposing online poker, but to sign a joint-venture agreement with PokerStars.
Reid’s failure to push legislation through in 2010 was followed by the stunning April move by the U.S. Attorney in Manhattan, Preet Bharara, to shut down the U.S. operations of PokerStars and Full Tilt, and indict some of their top people, accusing them of operating illegal gambling businesses. Prior to the April indictments there were about 2.5 million people who played online poker in the U.S. Now a small fraction of that make online poker bets from U.S. soil. Full Tilt crumbled under the weight of what Bharara last week described as a Ponzi scheme, a term that lawyers close to Full Tilt and its founders say is wildly inappropriate. Either way, federal prosecutors say players in the U.S. are missing as much as $150 million as a result of Full Tilt’s practice of improperly crediting player accounts. While some believe that other offshore operators could eventually create another shadow online poker industry in the U.S, those firms will have the same kind of payment processing struggles that Full Tilt was unable to manage. The poker boom is over.
Now Fahrenkopf is the best hope for online poker in America and he is seizing on the indictments and Ponzi scheme allegations. “There is a whole different attitude on the Hill and in the country and in a funny way the PokerStars and Full Tilt events, both on April 15th and last week, show the need for legalization and regulation of online poker,” Fahrenkopf says. “What we want is a clear definition of what is legal and illegal and to develop some tax revenue and jobs.” The Poker Players Alliance, a grassroots lobbying group led by Alfonse D’amato and for years backed by PokerStars and Full Tilt, is still trying to assert itself, but it will likely be overshadowed by Fair Play USA, a new group backed by AGA members Caesars Entertainment (the former Harrah’s) and MGM Resorts. Former FBI director Louis Freeh and former homeland security secretary Tom Ridge are on Fair Play’s board.
Fahrenkopf is not supporting or opposing the two pieces of proposed legislation on online gaming that have been introduced. But he recently made his strongest call for the regulation of Internet poker, outlining his views in an AGA code of conduct. “We are supporting the right piece of legislation,” he says, conceding it’s going to be tough sledding in a divided Congress. Fahrenkopf seems to think he can do business with the new Tea Party members of Congress. But in addition to getting the Tea Party members on board, he has got to deal with the usual array of interests ranging from the tribes to the state lotteries that have traditionally proved tough for proponents of online poker, not to mention Jon Kyl, a Republican who has been blocking such efforts for years. If Fahrenkopf fails, it’s hard to see federal lawmakers sanctioning online poker until 2013 at the earliest. State lawmakers seem ready to pounce and do something on the state level in January, but it’s still not clear how those efforts would work. “God bless them if they get it through, but I don’t think it has a good chance,” says Sue Schneider, president of consulting firm eGaming brokerage and an astute veteran of the online gambling industry. “I am skeptical; it is really up to Frank Fahrenkopf to pull in every chit he’s got.”