ESI Entertainment Settles with U.S. Justice Dept. for $9.1 Million (Updated with D.O.J. Comment)

9 June 2008

ESI Entertainment Systems Inc., the parent company of electronic payments processor Citadel Commerce Corporation, last week agreed to pay $9.1 million to settle conspiracy charges brought by the United States government.

Following a 14-month period of negotiations with Michael J. Garcia, the United States Attorney for the Southern District of New York, ESI agreed to a deferred prosecution agreement to avoid facing charges of "conspiracy to conduct illegal Internet gambling."

Anthony B. Greening, chief executive of ESI in Burnaby, British Columbia, said in a prepared statement Thursday that the settlement was made in the best interest of the company and its shareholders.

While ESI was charged after the Unlawful Internet Gambling Enforcement Act took effect in October 2006, none of the charges relates to the act. Regulations for the act, which targets Internet-gambling-related financial transactions, have yet to be issued by the United States government.

ESI -- and before it, Neteller, a British online money transfer company -- was charged under Title 18, United States Code, Sections 1084, 1954, 1955 and 1956, which governs illegal gambling and racketeering crimes.

Martin D. Owens Jr., a California lawyer who specializes in Internet gambling law, told Interactive Gaming News that there is no legal precedent for this kind of settlement.

"You know where they got this technique? From the S.E.C.," said Mr. Owens, referring to the United States Securities and Exchange Commission. "They have what's called a consent decree. If you have a trader that does something that alarms the regulators they'll often open an investigation. And at the end of the day, everybody will agree that nothing is wrong, but they won't do this again, and hand over some money."

He suggested it was Elliot Spitzer, the former attorney general of New York, who commenced the crackdown on Internet gambling companies in the United States in August 2002. It was then that PayPal Inc., a San Jose, Calif.-based electronic money transfer provider, reached a $200,000 deferred prosecution agreement with Mr. Spitzer.

"Relying on sheer weight of administrative power, he (Mr. Spitzer) strongarmed a settlement out of PayPal in 2002, after PayPal had got out of the I-gaming business, but just when it was being acquired by eBay, and so, vulnerable," Mr. Owens said. "Actual guilt or innocence had little part to play here. It was simply better business to pay a known fine than risk a bigger one later on."

The Justice Department, meanwhile, declined to comment on specific questions about the ESI case.

"As with all cases handled by the U.S. Attorney’s Office, each case concerning illegal internet gambling is considered on its own merits," Rebekah Carmichael, a spokeswoman for Mr. Garcia's office in Manhattan, wrote in an e-mail to IGN on Monday. "As is evident from our continuing initiative in this area, there are serious consequences for violating United States laws."

For the third quarter of ESI's fiscal 2008 (ending Nov. 30, 2007) the company revealed an 88 percent decline in revenue against the year-ago period, due primarily to the withdrawal of Citadel, its Internet gaming money transfer arm, from the United States. Revenues for the nine months to Nov. 30, 2007, fell 87 percent from 17.5 million Canadian dollars, or $17.1 million, to 2.2 million Canadian dollars.

ESI left the United States market in January 2007 when Neteller's two founders, John D. Lefebvre and Stephen E. Lawrence, were arrested in the United States on charges of conspiracy and money laundering in connection with illegal Internet gambling.

Mr. Greening of ESI said Thursday that the long-running negotiations between the company and Mr. Garcia's office exhausted a significant amount of its capital and resources. The company, listed on the Toronto Stock Exchange, will now refocus efforts on "building and strengthening" its business, he said.

Mr. Greening did not return phone calls Friday.

Emily Swoboda is the senior staff writer at IGamingNews. She lives in St. Louis, Mo.