The two United States-based investment firms that are being sued for investing in illegal gambling operations maintain their innocence and have vowed to "defend the charges vigorously."
The Vanguard Group, based in Pennsylvania, and American Century Companies, based in Missouri, have been named in separate class-action suits claiming that several of their fund managers knowingly invested in illegal offshore Internet gambling companies -- this prior to the United States crackdown on Internet gambling, which intensified markedly with the arrest of David Carruthers, ex-chief executive of BetonSports, in 2006.
It was revealed on Wednesday that PartyGaming and Sportingbet were two offshore Internet gambling companies owned by Vanguard's European Index and Global Equity funds -- two of the funds named in the suit. Both companies exited the United States market when the Unlawful Internet Gambling Enforcement Act took effect in October 2006.
The plaintiffs claim to have lost upwards of $10 million since the companies left the United States market, according to court documents.
Thomas Sheridan, a partner at Hanly Conroy Bierstein Sheridan Fisher & Hayes, is representing the plaintiffs in both cases. He explained to IGamingNews that it does not matter whether or not his clients were aware of the investments because the cases are not dealing with securities fraud.
"It's a non-issue," Mr. Sheridan said. "In securities-fraud cases it would matter whether the plaintiffs relied on the truths or falsity of what the defendants said. "But these are not fraud cases. We're not saying anybody lied about things. We're just saying they made investments they weren't supposed to."
Analysts and experts in the media have, over the last few days, scrutinized the merits of the case and IGN wanted to know if there is any chance they will hold up.
Jeffrey E. Grell: There are many questions that are very, very grey at best. In U.S. Statutes Section 1955, when you look at the literal wording of the statute it essentially says anyone who finances or owns in whole or in part an illegal gambling operation violates or engages in criminal activity.
There's a cardinal principle of law that you can’t engage in crime unless you knowingly and intentionally commit a criminal act. You can't negligently commit a crime. You can't commit a crime out of ignorance.
I think the biggest stretch they are making here is that they are claiming, "Well you caused Vanguard to engage in an illegal activity by investing in these illegal gaming operations." And the definition of online gaming is in a pretty big mix-up right now because nobody knows whether it's illegal or legal, and politically it's an unresolved question. I know at this point in time there is nothing that says it's illegal to gamble online. It's just that banks are not supposed to transfer money to online casinos, which makes it difficult to gamble online but it doesn't make it illegal. It just makes it illegal for banks to transfer money to online casinos.
When Vanguard and the other company invested in these companies the question was probably even less resolved than it is now, and it's far from resolved now. When they invested they probably considered these to be legal operations.
So, like I said, it's really not possible to engage in criminal activity negligently or unintentionally or mistakenly; I think they are going to have a difficult time proving mens rea, or the intent to engage in a criminal activity in this case.
If you look at U.S. Statutes Section 1955, it doesn't apply to bettors, it applies to people who are conducting the online gaming enterprises. The only U.S. contact -- which is people betting -- doesn't constitute a violation of 1955. So, I don't know how 1955 applies here. If these companies are regulated under a foreign jurisdiction, by a foreign jurisdiction and if they have no assets in the United States and no contact in the United States other than individuals going online and playing games, I don't know how that constitutes a violation of U.S. law or brings the online operators under the jurisdiction of Section 1955.
Mr. Grell, the founder of Ricoact.com, has been prosecuting and defending federal civil claims involving the Racketeer Influenced and Corrupt Organization Act, or RICO, since the early 1990s.
Martin D. Owens Jr.: This brings up the question of is Internet gambling illegal as they aver that it is.
As we know, we still have the question of whether the federal law makes Internet gambling illegal inasmuch as the time that they allege you only had the Wire act. Secondly, this alleged illegality, how is that related to the damages?
(Under RICO) it's a predicate offense. Even where you could find a state law to cover it we still have the jurisdiction question. Where did the gambling take place?
Let's say that they outlawed tobacco in this country tomorrow and you invested in a tobacconist in London and he sold cigarettes to American tourists. Would that be the basis of a class action?
Specializing in Internet gambling law, Mr. Owens is a lawyer based in Sacramento, Calif.
Richard Carter : It all depends on the mandate of the fund. If I gave money to somebody and said "I want my investment to be relatively low-risk," and he invested in online gaming, then I'd probably be pretty unhappy and have a case to sue and claim for damages.
So, it all depends on the mandate of the fund and what they can invest in. You will make wrong decisions, so I don't see how you can sue someone for investing in the wrong stocks.
If they're saying they invested in the stocks and they're illegal . . . just because the shares went down and the U.S. put through a bill doesn't make them illegal.
It's going to be very interesting.
It's very complex because these are companies that are domiciled outside of the U.S. and have no assets in the U.S. I just think it's going to be very problematic.
They would have to prove that they knowingly invested in an illegal gambling business. And given the amount of lawyers that were poring through PartyGaming's prospectus, they spent $30 million on lawyers and they couldn't say it was illegal.
I think that's the only way they're going to be able to win the case because if they could prove that these people knowingly invested in something that was illegal then I guess you could argue that they were being negligent, potentially.
It could prove to be very dangerous because if this goes to a court and the court says these things aren’t illegal then God knows what happens.
Mr. Carter has covered the leisure sector as a sell-side analyst for over five years -- at Numis Securities since 2004 and previously at Investec.