Monday, April 25, 2011

Bharara’s Hammer

Mayor LaGuardia vs. the Mechanical pickpocketsThat’s a picture of Fiorello Henry LaGuardia, taken in September 1934 during his first year as mayor of New York City. Those are slot machines he’s smashing with a sledgehammer. “Mechanical pickpockets,” he called them.

LaGuardia’s campaign had included promises to rid the city of organized crime, and indeed among his first actions upon taking office were to go after figures like Lucky Luciano and Luciano’s cohort, the gangster Frank Costello, a.k.a. “The Prime Minister of the Underworld.”

When one looks at the history of gambling in the United States, it is an especially uneven narrative, full of fits and starts with periods of legalization and prohibition falling upon one another in a disorderly, non-linear fashion. After a lengthy period of prohibition of gambling, the Great Depression had inspired a resurgence in legalized gambling in the U.S. as a way to try to restart the economy. And along with that came a crackdown on illegal gambling, such as had been managed by figures such as Costello.

After having rounded up 1,200 or so of Costello’s illegal slot machines, LaGuardia and a group of NYC policemen staged a media event in which they destroyed the machines before pushing them into the Long Island Sound. The whole scene was filmed and shown as part of a newsreel in theaters that fall. Click here to see that footage.

As it happened, the crackdown on organized crime led by LaGuardia and special prosecutor (and later governor of NY and presidential candidate) Thomas E. Dewey would have significant influence on the subsequent history of gambling in the U.S. Most particularly, it drove many of those interested in the business of gambling to move out west, particularly to Nevada where most forms of gambling were legalized in 1931.

Preet BhararaLooking back today at the newsreel footage of Mayor LaGuardia swinging that hammer, I can’t help but think of what Preet Bharara, the U.S. Attorney for the Southern District of New York, did when he brought those several charges against the founders of PokerStars, Full Tilt Poker, Absolute Poker/UltimateBet, and others, charges that were unsealed 10 days ago on “Black Friday.” You could say that much as LaGuardia and the NYPD destroyed those slots, Bharara effectively destroyed innumerable poker “machines” with those indictments -- or at least has rendered them inoperable by U.S. players.

The indictments include charges related to violating the Unlawful Internet Gambling Enforcement Act of 2006 (counts 1-4) as well as the Illegal Gambling Business Act (counts 5-7). All of the sites have also been charged with conspiracy to commit bank and wire fraud (count 8) as well as with conspiracy to commit money laundering (count 9). I lack the legal knowledge to discuss the charges or speculate with any specificity whatsoever about what might come of them if the defendants ever come to trial. I do not lack the humility to admit as much and thus avoid indulging in uninformed conjecture.

I will say the first seven counts related to the UIGEA and illegal gambling appear somewhat sketchy, and from what I’m reading likely couldn’t withstand a court challenge. The last two seem more serious and harder to counter, although I’m intrigued by the observation that the banks were hardly “victims” here. (See F-Train’s recent post for more on that point.)

I believe at present three of the payment processors who were charged have appeared in court, with two pleading not guilty and the other scheduling a date to appear again. The other defendants -- including the founders of the sites -- are all out of the country and will likely never be entering the U.S. to face the charges.

In other words, it does not appear as though we’re going to see any real legal resolution of the charges against those operating the sites. Thus, the indictments -- like the UIGEA, really -- will ultimately have more symbolic than actual significance. Sort of like Mayor LaGuardia’s display there next to the Long Island Sound so many years ago. Isai Scheinberg, Ray Bitar, and Scott Tom aren’t going to prison for this. Nor will their non-U.S. companies likely be forfeiting $3 billion in assets to the U.S. government, either.

But symbols can have real, tangible effects. Like the UIGEA, the indictments have forced the online poker sites -- the largest ones, in fact -- out of the U.S. And may eventually work to pressure the smaller, remaining ones out, too. Much as those running the games were encouraged to move westward in the 1930s, so, too, should anyone wanting to spread online poker shy away from the U.S. For the near term, anyway.

Danger... Hammers in UseI mean, there are lots of other places in the world to go. Places where people aren’t going around smashing your machines with sledgehammers.

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Blogger Grange95 said...

Out of curiosity, where are you reading that the UIGEA &
Illegal gambling charges are unlikely to hold up?

4/25/2011 11:02 AM  
Blogger Short-Stacked Shamus said...

Probably most influenced here by some of I. Nelson Rose's commentary -- both before Black Friday (about the UIGEA) and since. Have also seen/heard a number of observers saying that the UIGEA/illegal gambling charges would likely not have been brought without the bank/wire fraud & money laundering charges to go with them, which I suppose makes me view the first seven counts with a more jaundiced eye (rightly or wrongly).

4/25/2011 11:50 AM  
Blogger Grange95 said...

I. Nelson Rose has long been a cheerleader for the gaming industry, which shows through in his writing. Not saying he is necessarily wrong, but let's just say his analysis needs to be taken with a healthy pinch of salt.

As for the issue of whether the gaming charges are secondary, I think the biggest factor in play was the size of the online sites coupled with their flagrant disregard for US law. The illegal gaming can't really be separated from the money moving needed to support it. Also, don't underestimate the power of the social conservatives to influence the DOJ. Many of the career attorneys were hired by Republican appointees.

4/25/2011 11:02 PM  
Blogger RGC2005 said...

"Stacking Charges" is a common practice with prosecutors. You will often see the slam dunk charges stacked on top of lesser charges for a number of reasons. Sometimes the lesser charge is in the venue of the investigating agency(s) hence justifying participation. Sometimes they stack weaker but evil sounding charges (ie, ILLEGAL GAMBLING and bank fraud). Finally stacking is an intimidation tool to prevent jury trials and encourage plea bargains. The DOJ gets to rebuy at will while the rest of us get one shot.

4/26/2011 4:28 AM  

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