Perspectives on DOJ Settlements | Why Bother?

17 February 2009
As an American who has been watching the policy and law enforcement I-gaming gymnastics of our various state and federal governments since 1995, I’m continually surprised at the lack of understanding of our legal system by those outside the United States. Granted, it’s one of the more illogical and clearly political decision-making processes you might find around the globe. But that makes it all the more predictable.

I’m completely baffled by the intense moves by some to “make a deal” with the Department of Justice, especially right now. My previous blogs on the Anurag Dikshit deal in December illustrated that incredulity.

Pleading guilty to violating the Wire Act (which clearly applies only to sportsbetting) for a poker site operator made no sense at all and was clearly a huge win for the strong-arm tactics of US prosecutors. And to make that deal with a huge fine and NO firm agreement on potential time served was even more curious. Panic will make folks make unusual decisions, I guess.

Thus, I read of the recent earnings calls for PartyGaming and 888 shareholders with interest. Much talk has been bandied about that the M&A heavens would open up and confer to both a clean bill of health and a plethora of attractive buyers if a DOJ deal is made. But, hey, wait just a minute.

First of all, the number of operator, software and payment processing companies in our industry which may be viewed as “clean and pure” by NOT taking United States play at some point in their history may be counted on two hands. But let’s look at those who have some history of a “US taint” and see how they’ve fared. For some of those which may have had a checkered past, consolidation has already begun. Most notably, Gtech Corporation bought into Boss Media A.B. in 2008, and William Hill bought into Playtech Ltd. in 2008.

So, why make a deal now? In case you hadn’t heard, things are in a bit of flux in the United States. There’s a new administration and no one knows yet how things will unfold. Significantly, though, two key federal prosecutors are on their way out: Catherine L. Hanaway of the Eastern District of Missouri will likely be replaced soon and Michael J. Garcia from the Southern District of New York has already left.

Both have been true believers on the issue of the evils of Internet gaming as is evident from cases like Neteller and BetOnSports, among others. (One might recall that BetOnSports defendant David Carruthers has been held on house arrest for over two years with no trial in sight. And Gary Kaplan, the company’s founder, has been incarcerated in jail for almost two years now. By contrast, Bernard L. Madoff, who is accused of bilking investors -- including lots of non-profits – of $50 billion, is confined to house arrest at his $7 million Manhattan apartment. Go figure.)

If you throw in the ongoing battles in the World Trade Organization case as well as the European Union infringement proceedings, it just seems like a strange time to lock in when there’s so much uncertainty. The real question is: Will a firm deal and admission of guilt by one of these companies make them more attractive or less attractive to prospective buyers? It’s a gamble.

I was curious, therefore, to hear the C.E.O.s of Party and 888 take on these issues on their recent earnings calls. The first is an exchange on the Party Gaming call Chief Executive James A. Ryan and an analyst.

Jim, just following up on your remarks on the negotiations with the DOJ, do you think it makes good business sense for PartyGaming to pay money and settle now based on terms offered by the former Bush Administration rather than to now renegotiate a settlement either directly or through the RGA (Remote Gambling Association) leveraging its TBR (Trade Barriers Regulation) complaint that will fully exonerate PartyGaming from any criminal charges, implications or taint?

    The issue that we face, and we are encouraged by a number of developments that are happening in the U.S. marketplace. But at the end of the day, what we have to DOJ is to look at what the best interests of the shareholders of PartyGaming. So, however this matter will be resolved, our overriding objective will always be what is in the best interests of our shareholders.

Do you believe that the founder's -- Mr. Dikshit's -- step has actually affected PartyGaming's opening positions or ongoing positions with the DOJ?

    As I think that as it relates to Anurag and where he landed with the government, that was a very personal decision for him. That's a decision that he reached on his own, the company is not involved or has not been involved in his discussions. Our discussions with the government are separate and distinct from any of our founders.

You're obviously confident that you can reach a settlement. Can say what your best estimate is as to the timing of that?

    In terms to timing with regards to the DOJ, as I mentioned earlier, we simply do not control the process or the timing. So it's difficult to predict as to when the matter may be closed, And as we announced on Dec. 16, that we are negotiating the final terms of a possible settlement, even that is the process that we are in at this stage. The best I can say to you and the market is stay tuned as the situation evolves, and we'll keep you posted.
By contrast, Gigi Levy, the chief executive of 888, had this exchange with an analyst on the company’s most recent call.

What can you tell us about DOJ timing and are you as positive as PartyGaming’s announcement a few months ago?

    I cannot comment on Party’s own progress, but our feeling is that any deal [for 888] is not imminent, and it is not a good time to say that we know when . . . It would be great if it [a settlement] were this year but we are not sure . . . I can say that it is progressing and heading in the right direction . . . Other positive things we are seeing in the market are Barney Frank’s update last week and we expect to see new legalised gaming in the US -- especially in poker. Sorry to be vague, but I cannot really comment.

For PartyGaming, these are “legacy” issues -- not just the past sins of taking United States play but the past judgments of former C.E.O.s to begin these DOJ negotiations. But one must wonder: What’s really in the interest of the shareholders, and what’s in the interest of the managers (past and present) by pursuing a settlement at this point in time?

So, the question I pose is, what’s the rush? Take a breath, sit back, and see how things will sort out in the United States over the course of the next few months, at the very least.

Mrs. Schneider is the founder of IGamingNews and former chief executive of River City Group. She now consults for Clarion Gaming and contributes regularly to IGamingNews.