Internet Gaming: a US View

The U.S. Perspective

1. Federal Legislation: All bills must be re-introduced during the next Congress

Senate: The Kyl Bill (S 692)(106th Congress): In the 107th Congress, Senator Kyl is uncertain as to whether he will introduce new legislation. Senator-elect John Ensign (R. Nev.) stated he "supported a ban on Internet gaming when I was in the House (of Representatives), but I don't know if a ban will be successful. If you can' t win the issue, you have to do what's smart. We may have to move in the direction of legalizing and regulating Internet gaming." ¹ (emphasis added)

House of Representatives: Three relevant bills were introduced in the 106th Congress. The Goodlatte Bill (H.R. 3125) failed (245-159) on July 17, 2000, to obtain the necessary 2/3 vote because of a procedural requirement.

Cong. Goodlatte had predicted the legislation would pass with "overwhelmingly strong bipartisan support."² He and many others had warned of the danger to children, ³ the support from sports associations⁴ and Christian groups,⁵⁶ that Internet gaming is growing so fast that unless stopped it would be too late;⁶ and that the Goodlatte Bill did not expand gambling on the Internet.

Opponents of the Bill stressed the opposition of the Justice Department,⁷ the President,⁸ and most of the nation's governors because of the failure to include an exemption for online lottery purchases ⁹ and other groups.¹⁰ Two of the best debaters in Congress opposed the Bill.¹¹ Cong. Barney Frank stressed how the Bill would destroy Internet freedom and state rights.¹² Cong. Chris Cox emphasized the Bill would (1) treat "online and offline gambling under different rules, (2) legalize betting which would be illegal if made by phone and

"Third, he bill would unfairly make Internet service providers and search engines and other interactive service providers, ISPs, who have nothing to do with gambling, people who have nothing to do with gambling, it would make them responsible for policing the behavior of their subscribers.Fourth, this bill would have the Federal government dictate, indeed amend, the terms and conditions on which ISPs today offer service. It would require that every ISP terminate the account of any subscriber who is suspected of using the service to gamble. Fifth, the bill contains price controls. It requires every ISP to offer gambling filtering software at, quote 'reasonable cost,' putting the Federal government in an unspecified way in charge of determining what is a reasonable price for filtering software."¹³

In an analysis of the vote 159 members (44 Republicans, 114 Democrats and 1 Independent) voted against the measure; 25 short of the 270 votes (two-thirds) required. Goodlatte, in opting for suspension "badly misjudged the mood of the House. Or to be charitable, maybe he was just taking measure of the opposition, on the assumption that the GOP leadership will allow him another vote."¹⁴ Supporters and opponents of the Goodlatte bill included very liberal and very conservative members. Supporters included very liberal democrats such as Cong. Hastings (Fla), Jackson-Lee (TX), Nadler (NY), Wexler (Fla) and conservatives such as Armey (TX), Burton (Ind), Hyde (Ill). Liberal opponents ranged from very liberal democrats (Conyers (Mich), Frank (Mass), Kennedy (RI) , Rangel (NY)) to ultra-conservative Republicans Archer (TX), Cannon (UT), Kasich (OH) Rohrabacher (Cal). Instead of ideology, a regional analysis might be more useful. The South (the Confederacy, except for Texas) voted 73-18 for the Bill, perhaps because of the relative unimportance of the lottery in many of those states. California, a high-tech state, voted 30-18 against the Bill. Massachusetts, a liberal state with a well-respected lottery voted 9-0 against the Bill. The casino-dominated states of New Jersey and Nevada voted 13-2 in favor of the Bill.¹⁵

Perhaps the development most devastating to the success of the re-introduction of the Goodlatte Bill would be the introduction by Conyers of H.R. 5020¹⁶ which basically mirrored the proposals of the U.S. Justice Department, whereby the Wire Act would be amended to prohibit Internet gambling without exemptions, and the ISPs would be immune from liability. The authors had no intent to proceed with bill unless Congressman Goodlatte succeeded in again scheduling H.R. 3125 for a vote. Should the Goodlatte Bill be re-introduced in the 107th Congress, it will have to face to a re-introduced Cannon-Conyers Bill.

The bill most serious to the success of Internet gambling, even more so than the Goodlatte Bill would be the Internet Gambling Funding Prohibition Act, was introduced on May 10, 2000 by Congressmen James Leach and John LaFalce and was immediately referred to the Banking Committee and the Committee on the Judiciary (on May 30, 2000, it was referred to the Judiciary Committee Crime subcommittee). The bill would prohibit bank instruments such as credit cards or electronic funds transfers from being used for Internet gambling or betting activities. ¹⁷ The Bill also "contains sanctions designed to dissuade other nations from hosting such casinos."¹⁸

At the June 20, 2000 hearing, the speakers opined along predictable lines; for the bill were the Attorney General of Wisconsin,¹⁹ a former member of the NGISC;²⁰ opposed were the U.S. Treasury Department²¹ and the U.S. Justice Department.²² The most important remarks, however, were those of Alex Ingle, Executive Vice-President of the New York Racing Association who warned the Racing Industry's "future appears to be threatened with the sweeping nature of H.R. 4419 which would appear, again, to make it inadvertently illegal to transact simulcast wagering and account wagering over 'a packet-switched data network, words contained in the bill,' using checks, wire transfers and credit cards for settlement. Criminalizing this highly regulated, licensed, taxpaying, $12 billion piece of commerce would end pari-mutuel wagering as we understand it today."²³ On June 28, 2000 the House banking Committee voted on the Leach-LaFalce Bill. It had earlier rejected a compromise amendment by Cong. Leach that "would have exempted any 'lawful bet or wager that is placed, received, or otherwise made on a live horse or a live dog race.'"²⁴ Cong. Jack Sweeney then offered an amendment "which substantially (limited) the applicability of the bill. The Sweeney amendment, which passed overwhelmingly on a voice vote, and a show of hands, provides that the prohibition contained in the bill applies only 'where such bet or wager is unlawful under any applicable Federal or State law in the State in which the bet or wager is initiated, received, or otherwise made.'" ²⁵

There was some confusion concerning the bill. Cong. Mell Watt (D. NC) opined that "I don't think anyone understands what we are doing at this point."²⁶ Cong. LaFalce was so upset at the Sweeney amendment that "he no longer supports the legislation that bears his name."²⁷

2. Federal Non-legislative methods

1. IRS action against credit card companies (e.g. Mastercard) concerning offshore accounts of individuals.²⁸
2. Federal criminal complaints against Internet offshore bookmakers/ staff

The U.S. Attorney had failed abysmally in attempting to use 18 U.S.C. § 1955²⁹ against offshore bookmakers. In early 1998, U.S. Attorney for the Southern District of New York filed criminal complaints against approximately 21 individuals alleging a conspiracy to violate the Wire Act (18 U.S.C. § 1084). Defendants generally operated offshore (Antigua, Costa Rica, Curaçao, Dominican Republic) and all had participated in telephone betting. Some were very minor participants who were expected to cooperate with the authorities in return for dismissal of the charges. In all cases, an FBI agent had placed the bet from New York with Defendant's business and the agent was promptly paid if the agent bet successfully.

Of the approximate 21 Defendants, seven remained fugitives or could not be found. Nine pled guilty to either a misdemeanor or a felony. Four had the charges dismissed. The highest fine was $750,000, but nobody was imprisoned.³⁰

Two individuals decided to fight, but one plea-bargained after losing his motion to dismiss. ³¹ The other, Jay Cohen, made it clear, when he surrendered himself to federal authorities that he would not plea bargain. After the federal judge denied his motion for dismissal, without giving reasons, the matter was set for trial.

During the trial, the Prosecution stressed that Cohen was an unusual bookie, whose business was advertised on the American media, that he took wagers from Americans and that "it was an American operation from top to bottom."³² The prosecution also stressed that while telephone betting might be legal in New York State, sports betting was not.³³ The prosecutor predictably belittled Cohen's Antigun license by asking Cohen, on cross examination, questions such as whether he received his gaming license in 2 weeks, and whether Cohen had called the Antiguan government corrupt, and whether Antigua was a "third world country."³⁴

The defense stressed that Cohen had used a top accounting firm to set up his operation and that he did not believe he "knowingly" violated the law.³⁵ After considerable deliberation and a request for documents, the jury found Cohen guilty on February 28, 2000. After several postponements, Cohen was sentenced on August 9, 2000 to 21 months imprisonment (which was considered the minimum according to federal guidelines) and a $5,000 fine.

On Nov. 1, 2000, Cohen's lawyer filed his appeal before the U.S. Court of Appeals for the 2nd Circuit, alleging 5 reasons why his convictions should either be overturned or set for a new trial because of judicial error. The two most important arguments were:

1. Whether the district court erred in instructing the jury that the law of conspiracy does not require a corrupt motive before there may be a conviction of a violation of 18 U.S.C.§ 371, and whether, in the absence of such proof, Defendant's conspiracy conviction was based on legally insufficient evidence.
2. Whether the district court erroneously concluded that the exception set forth in 18 U.S.C. § 1084(b) does not apply to this case, and improperly instructed the jury as to the essential elements of the substantive offense." (i.e. it is legal to bet on sporting events both in New York and Antigua?) ³⁶

Should Cohen's conviction be overturned as a matter of law, this may leave the U.S. Government without effective legislation to crackdown on offshore Internet gaming operators.

What is interesting is that the U.S. government has taken minimal action against offshore gambling operators since early 1998. The sole exceptions were charges against several Western New York businessmen alleging offshore illegal bookmaking, with payment of winning bets from Western New York.³⁷ The other case would be an indictment under 18 U.S.C. § 1955 against the two officers of Handa-Lopez, Inc.³⁸ and the Corporation itself. According to the indictment, "Handa-Lopez and its principals represented to the public that they hosted Internet gambling web sites in offshore locations. In fact, Handa-Lopez hosted the sites from within the United States as its server was physically located at its office in Sunnyvale, California." ³⁹ The indictments also charged Defendants with processing over $6 million in credit card transactions with over 18 Internet gambling sites.⁴⁰

In May, 1999 federal and California state agents had seized the $1 million home, a Ferrari and an airplane of a corporate officer alleging they were purchased with profits from illegal criminal activity. The company's files and bank accounts were also seized.⁴¹

3. States

It is also remarkable that there have been few recent state actions against offshore Internet operators. Wisconsin, Minnesota, New York and Missouri had taken successful legal action against offshore Internet operators, but there is little present litigation. Five states, Nevada, Louisiana, Illinois, Michigan and South Dakota, have passed legislation against Internet gambling.⁴² Attorneys General from Florida, Indiana, Kansas and Texas have also stated that Internet gambling was in violation of respective state law.⁴³ The Attorneys General of Florida and Indiana have also taken additional steps to curb on-line offshore gambling. The Florida Attorney General persuaded Western Union not to wire money to offshore gambling sites.⁴⁴ The Indiana Attorney General has asked offshore operators to include a conspicuous notice that Indiana residents should not wager on their offshore gaming sites. ⁴⁵

Perhaps out of frustration, the Texas Attorney General ordered the records seized of MonetizeMedia⁴⁶ , an Internet search engine that advertised for and provided access to Internet offshore casinos. After much confusion and complicated litigation (including threats of sending the Attorney General's lawyers to jail for contempt), the records were returned and criminal proceedings were abandoned.⁴⁷ This was of little comfort to operators who were placed in a state of near financial insolvency.

The most remarkable development has occurred in Las Vegas, Nevada where well known gaming entrepreneurs sought to contract with the city of Las Vegas for Internet gambling. The entrepreneurs wanted to establish Internet gambling sites for gaming everywhere but the United States. In effect, pursuant to an agreement with VegasOne.com, Las Vegas would "collect 25% of the company's net profits and an additional 5% of the gross profits to pay for the city's as-yet-undefined oversight of the venture."⁴⁸ VegasOne's directors included some of the most respectable names in gaming e.g. Si Redd, Larry Woolf and Phil Hannifin. According to its literature,

"The reasons for VegasOne.com's formation was two-fold:

1. To tap into the already existing Internet gaming industry to service Internet players worldwide (Except in the U.S.) by The City of Las Vegas licensing its name to an Internet gaming website in a host country acceptable to both parties.
2. VegasOne.com believes that t is only a question of time before it can accept bets in the U.S. The licensing of The City of Las Vegas' name will create a pre-existing foundation to utilize this event."⁴⁹

The plan has been abandoned.

FOOTNOTES:

¹ Jeff Simpson, "Election Gambling Issues: Different parties, similar positions" Las Vegas Review-Journal, Nov. 5, 2000 at 1. Regulation is increasingly supported by U.S. land-based casinos. For example, Alan Feldman, spokesperson for MGM Mirage, stated the American Gaming Association support of prohibition is a result of "acting on a vote from a year and a half ago. This thing is moving at lightning speed." Marci McDonald, "Betting the House" U.S. News and World Report, Oct. 16, 2000 at 44.

² Cong. Goodlatte H6061, July 17, 2000

³ Most supporters of the bill included the argument about the danger to children; eg Cong. Goodlatte, Cong. Waxler (H6062), Cong. Gibbons (H6063), Cong. Wolf (H6063), Cong. Shaw (H6067)

⁴ National Football League, National Basketball Association, Major League Baseball, The National Hockey League, Cong. Goodlatte (H6061)

⁵ ID "The Bill is supported by a wide array of religious organizations, the National Council on Churches, the Presbyterian Church of the United States, the Family Research Council, Focus on the Family, the Christian Coalition, Jerry Falwell Ministries, the American Family Association, the United Methodist Church, the Southern Baptist Convention, the Home School Legal Defense Association."

⁶ e.g. Cong. Tauzin H6066 "If we fail to present the President with the legislation this year, the proliferation will be enormous" ID

⁷ See letter of Robert Raben, Assistant Attorney General, U.S. Dept. of Justice to Speaker Dennis Hastert, July 15, 2000 ID

⁸ Letter of the Office of the President OMB, July 17, 2000; as summarized by Cong. Conyers H6066: Vice President Gore also opposed the Bill because it could expand gambling. Tony Batt, "Gore Against Online Gambling Ban" Las Vegas Review Journal, July 3, 2000 at 1

⁹ Cong. Frank H6062 A purported letter of Gov. Jeb Bush (June 23, 2000) opposed the bill. It was however, a forgery.

¹⁰ Cong. Baca H6068 "The bill is opposed by the Department of Justice, AT&T, the San Manuel Band of Mission Indians, Computer and Telecommunications Industry Association, Covad Communications, Center for Democracy and Technology, National Congress of American Indians, Electronic Privacy Information Center, ACLU, Traditional Values Coalition, Seniors Coalition, Free Congress Foundation, Americans for Tax Reform, CATO Institute, American Association of Concerned Tax Payers and Coalition for Constitutional Liberties."

¹¹ According to a spokesperson for Cong. Tauzin, "When you see Chris Cox and Barney Frank lining up against you, you know there's a problem." Joan McKinney, "Tauzin Bill Came In Out of the Money" Sunday Advocate (Baton Rouge, LA) July 23, 2000 at 9

¹² Cong. Frank H6062

¹³ Cong. Cox H6066

¹⁴ McKinney, "Tauzin Bill Came In Out of the Money" supra n.11

¹⁵ "Analysis of House Vote on the Internet Gambling Prohibition Act" Tech Law Journal, July 23, 2000 http://www.techlawjournal.com/crime/20000723.asp

¹⁶ Comprehensive Internet Gambling Prohibition Act of 2000. The bill has the support of Rev. Lou Sheldon of the Traditional Values Coalition. Vicky Nolan, "A Closer Look at "H.R. 5020"

¹⁷ H.R. 4419 Leach-LaFalce Introduce Internet Gambling Legislation, Press Release, Committee on Banking and Financial Services, May 10, 2000

¹⁸ Gregory A. Baer, Assistant Secretary of the Treasury for Financial Institutions; Hearing on the House Banking and Financial Services Committee, The Use of Bank Implements for Internet Gambling" Federal News Service, June 20, 2000

¹⁹ Testimony of Alan R. Kesner, Assistant Attorney General, Wisconsin Department of Justice, http://www.house.gov/banking/62000kes.htm

²⁰ Richard Leone, Federal News Service, June 20, 2000

²¹ Assistant Secretary Gregory A. Baer Testimony Before the Committee on Banking and Financial Services on H.R. 4419 Internet Gambling http://www.house.gov/banking/62000bae.htm

²² Kevin DiGegory, Deputy Assistant Attorney General, Criminal Division http://www.house.gov/banking/62000dig.htm

²³ Federal News Service June 20, 2000

²⁴ "House Banking Committee Approves Internet Gambling Funding Bill" Tech Law Journal http://www.techlawjournal.com/crime/20000629.htm

²⁵ ID; Republican John E. Sweeney, whose district included the Saratoga Race Course, "said that without the exemption for horse racing, the Leach-LaFalce bill would have 'devastated' horse racing, which he said is a $34 billion-per-year industry." Greg Connors, "Government Efforts as Industry Regulations Show a House Divided" Buffalo News, July 12, 2000 at C1

²⁶ Tech Law J. supra n.15

²⁷ Connors, supra n.25; LaFalce also stated, "The Sweeney amendment basically perverted the principal purpose of the bill," ID

²⁸ "IRS Probes Offshore Accounts" Nov. 1, 2000 https://www.igamingnews.com

²⁹ U.S. v Truesdale, 152 F3d 443 (5th Cir. 1998)

³⁰ For a breakdown on the other Defendants see Tom Somach, "The Cohen Case: What Happened to the Others?" Aug. 10, 2000, and Paul Hugel "The New York Internet Gambling Prosecutions - A Status Report"; Some defendants were sentenced to probation with community service.

³¹ U.S. v Ross, 1999 WL 782 749 (S.D. NY, Sept 16, 1999)

³² Mark Balestra, "The Jay Cohen Trial - Day 2" Feb. 15, 2000

³³ ID "The Jay Cohen Trial - Day 6", Feb. 22, 2000

³⁴ ID

³⁵ Cohen's brief may be found at http://majorwager.com/articles/brief.htm

³⁶ ID at p. xiii

³⁷ Dan Herbeck, "1-800 Betting Line Toll-Free, Not Mob-Free, FBI Says," Buffalo News, July 16, 2000 at C1

³⁸ "Handa-Lopez Indictment" The indictment also included a count of conspiracy to violate 18 U.S.C. § 1955, ID

³⁹ Indictment ID par.4

⁴⁰ "California Court Indicts Brown, Clark, Handa-Lopez" June 16, 2000

⁴¹ "Net Bet Probe in Silicon Valley" Aug. 24, 1999

⁴² See 1999 ILL. LAWS 257; LA. REV. STAT. ANN. § 14:90.3 (West 1998); NEV. REV. STAT. ANN. § 465.091 (Michie 1997); Michigan Act 235, Public Acts of 1999 approved by the Governor Dec. 22, 1999; South Dakota Codified Laws § 22-25A1 to A15 (2000) "Internet Gambling"

⁴³ Florida, A.G.O. 95-70 Oct. 18, 1995; Indiana, A.G. Opinion number 98-8, July 7, 1998; Kansas, Attorney General Opinion number 96-31, March 25, 1996; Texas, A.G. Opinion, May 2, 1995

⁴⁴ John Lantigua, "Cyber Stakes" New Times Broward-Palm Beach, July 9, 1998

⁴⁵ See Letter from Jeff Modisett, Indiana Attorney General, to Rolling Good Times (July 8, 1998) https://www.rgtonline.com/newspage-/artllisting.cfm/2494

⁴⁶ MonetizeMedia.com

⁴⁷ According to Cathy Herasimchuk, Attorney for MonetizeMedia, "This is a nice, small family business and (they) don't do anything inappropriate. I think it's a terrible thing. This could happen in any business or any home across the state. Since the property was taken in June, the company has become virtually bankrupt and was unable to move forward with plans to go public this month." AP, October 7, 2000

⁴⁸ Tom Gorman, "Vegas Officials May Roll the Dice on Online Casino; Finance: City Considers Selling Rights to Its Name to an Offshore Internet Betting Firm. Critics Fear Legal and Ethical Problems, and Hometown Gambling Concerns Object." Los Angeles Times, Nov. 15, 2000 at A1

⁴⁹ http://www.vegasone.com