The U.S. Department of Justice (DoJ) has issued subpoenas to some of the world's largest investment banks as part of a controversial investigation into the increasingly embattled online gambling industry.
Between October and January, the Southern District Court of New York issued formal requests for information to at least 16 banks that had underwritten the initial public offerings (IPOs) of, or were otherwise involved in profiting from, several major I-gaming companies.
The DoJ is reportedly demanding that the banks—including HSBC, Dresdner Kleinwort, Credit Suisse and Deutsche Bank—turn over e-mails, telephone records and other documents concerning the I-gaming companies they are associated with.
"Big picture: It's unusual—but not unprecedented—for passive investors to be held liable," said Ken Dreifach, an Internet lawyer who previously served as chief of former New York Attorney General Eliot Spitzer's Internet Bureau.
"The DoJ is presumably relying on the literal letter of Section 1955 [of The Prohibition of Illegal Gambling Businesses Act], which states that if you own all or part of an illegal gambling business, then you're in violation of the law," he said. "But you know, no court has ever in the history of Section 1955 applied that provision to passive ownership, which makes sense, because there's never been a model for passive ownership of a gambling business, whereby shares are issued in a jurisdiction in which the company is legally registered."
"This issue has never come up," Dreifach added.
Other observers suggest that the investment banks under DoJ scrutiny may go so far as to successfully oppose the subpoenas.
"You can oppose subpoenas," said attorney Martin Owens, who specializes in the problems of operating gambling businesses online. "You can go into court and say, 'No, this is overbroad.' If [the DoJ is] saying they want to look through all of Deutsche Bank's records, [for example,] then that's pretty broad. We'll never know of course until we get a copy of the subpoena."
IGN was unable to obtain copies of the subpoenas, as a spokeswoman for the Southern District Court of New York said she could neither confirm nor deny the existence of the DoJ investigation.
Meanwhile, concerns have arisen in the United Kingdom—arguably the locus of online gambling—as to whether its government will comply with the DoJ investigation.
The Times reports that HM Treasury on Sunday said that it was "monitoring the situation," and that the Home Office would not comment on whether it had received a request from the United States for "mutual legal assistance," a statutory precursor to the U.S. authorities conducting an investigation in the United Kingdom.
Following the news on Monday, I-gaming stocks tumbled on the London Stock Exchange. Shares in PartyGaming and 888, which both in October withdrew from the U.S. market, fell 9.76 percent and 3.53 percent respectively.
Deutsche was co-broker to PartyGaming; Party was also advised by Dresdner on its IPO in 2005, which generated £5 billion ($9.8 billion) and propelled the company into the FTSE 100. HSBC advised 888 on its £590 million ($1.16 billion) IPO later in the same year; Credit Suisse also advised the company's former shareholders. Neither Party nor 888 was available for comment—none of the banks involved has commented.
"[The U.S. government] is going after parties removed several steps from the business of gambling," the paper quotes one senior banking source as saying. "The United States is saying to itself, 'We must get somebody,' and in the process it seems to think it can foist U.S. legislation, even individual state legislation, on anybody."
Owens echoed, "The DoJ is in an end game here. They know that they've lost a lot of the political support they used to enjoy, so they're trying to have one last push."
Click here to view Section 1955 of The Prohibition of Illegal Gambling Businesses Act.
Chris Krafcik is the editor of IGamingNews. He lives in St. Louis, Mo.