Subject Matter Jurisdiction and Application of New York Law
Respondents argue that the Court lacks subject matter jurisdiction, and that Internet gambling falls outside the scope of New York state gambling prohibitions, because the gambling occurs outside of New York state. However, under New York Penal Law, if the person engaged in gambling is located in New York, then New York is the location where the gambling occurred [See, Penal Law § 225.00 (2)]. Here, some or all of those funds in an Antiguan bank account are staked every time the New York user enters betting information into the computer. It is irrelevant that Internet gambling is legal in Antigua. The act of entering the bet and transmitting the information from New York via the Internet is adequate to constitute gambling activity within the New York state.
Wide range implications would arise if this Court adopted respondents' argument that activities or transactions which may he targeted at New York residents are beyond the state's jurisdiction. Not only would such an approach severely undermine this state's deep-rooted policy against unauthorized gambling, it also would immunize from. liability anyone who engages in any activity over the Internet which is otherwise illegal in this state. A commuter server cannot be permitted to function as a shield against liability, particularly in this case where respondents actively targeted New York as the location where they conducted many of their allegedly illegal activities. Even though gambling is legal where the bet was accepted, the activity was transmitted from New York. Contrary to respondents, unsupported allegation of an Antiguan management company managing GCC, the evidence also indicates that the individuals who gave the computer commands operated from WIGC's New York office. The respondents enticed Internet users, including New York resident, to play in Its casino.
As for respondents, claim that none of the federal statutes apply to operation of an Internet casino licensed by a foreign government, there is nothing in the record or the law to support their contentions. To the contrary, the Wire Act, Travel Act and Wagering Paraphernalia Act all apply despite the fact that the betting instructions are transmitted from outside the United States over the Internet. The scope of each of these statutes clearly extends to the transmission of betting information to a foreign country (See, the Wire Act which prohibits "use of a wire communication facility for the transmission in interstate or foreign commerce of bets or wagers. . ." [18 USC § 1084(a)]; the Travel Act which prohibits the use of "any facility in interstate or foreign commerce" with intent to promote any unlawful activity [18 USC §1952]. Nor can it be convincingly argued by respondents that the federal statutes are unconstitutionally vague (See, Turf Center, Inc. v. US, 325 F2d 793, '795 [9th Cir 1963], Katz v. United States, 369 F2d 130, 135 [9th Cir 1966], United States v. Mendelsohn, 896 F2d 1183, 1186 [9th Cir 1989]) Because the Wire act, the Travel Act and the Wagering Paraphernalia Act have all been found to be constitutionally valid, and have been found not to be overly broad or vague, and because respondents, conduct falls within the scope of New York's prohibition against gambling, all of these statutes apply to respondents activities.
The evidence demonstrates that respondents have violated New York Penal law which states that "a person is guilty of promoting gambling..... when he knowingly advances or profits from unlawful gambling activity" (Penal Law § 225.05). By having established the gambling enterprise, advertised, solicited investors to buy its stock, to gamble through ito on-line casino, respondents have "engage[d] in conduct which materially aids . . . gambling activity", in violation of New York law (Penal Law § 225.00(4) which .states "conduct includes but is not limited to conduct directed toward the creation or establishment of a particular game, contest, scheme, device . . . [or] toward the solicitation or inducement of persons to participate therein"). Moreover, this Court rejects respondents, argument that it unknowingly accepted bets from New York residents. New York users can easily circumvent the casino software in order to play by the simple expedient of entering an out-of-state address. Respondents' violation of the Penal Law is that they persisted continuous illegal conduct directed toward the creation, establishment, and advancement of unauthorized gambling. The violation had occurred long before a New York resident ever staked a bet. Because all of respondents, activities illegally advanced gambling, this Court finds that they have knowingly violated Penal Law § 225.05.
Not only are respondents guilty of violating New York state's gambling laws but they have also violated several federal laws. Like the great majority of states, federal law also proscribes gambling. Statutes such as the Wire Act, the Travel Act and the Interstate Transportation of Wagering Paraphernalia Act are just three examples of the federal government's policy against gambling. As the Wire Act's legislative history states:
"The purpose of the bill is to assist various States and the District of Columbia in the enforcement of their laws pertaining to gambling, bookmaking, and like offenses and to aid in the suppression of organized gambling activities by prohibiting the use of wire communication facilities which are or will be used for the transmission of bets or wagers and gambling information in interstate and foreign commerce."
H.R. Rep. No. 967, 87th Cong. 1st Sess. (1961). U.S. Code Congressional and Administrative News 1961, p 2631; see also Telephone News Systems, Inc v. Illinois Bell Tel. Co., 220 F Supp 621 (1963), affirmed 376 US 782.
The Wire Act bars citizens from engaging "[i]n the business of betting or wagering knowingly using a wire communication for the transmission of interstate or foreign commerce of bets or wagers or information assisting in the placing of bets or wagers," 16 U.S.C. 1084(a). A Wire Act violation occurs when a defendant is in the business of betting or wagering (See U.S. v. Anderson, C.A. Wisconsin, 542 F2d 428 [7th Cir 1976]).
Furthermore, the Travel Act, 18 U.S.C. § 1952, proscribes similar interstate gambling activity by stating:
". . . the use of any facility in interstate or foreign commerce, including the mail, with intent to [1] distribute the records of any unlawful activity . . . or [3] otherwise promote, manage, establish carry on or facilitate the promotion, management, establishment or carrying on, of any unlawful activity . . . shall be fine not more than $10,000 or imprisoned for not more than five years or both."
Respondents' interstate use of the Internet to conduct their illegal gambling business violates federal law. As the legislative history behind the Wire Act indicates, the purpose of these federal controls is to aid the states in controlling gambling. Like a prohibited telephone call from a gambling facility, the Internet is accessed by using a telephone wire, When the telephone wire is connected to a modem at,--ached to a user's computer, the user's phone line actually connects the user to the Internet server and then the user may log onto this illegal gambling website from any location in the United States. After selecting from the multitude of illegal games offered by respondent, the information is transmitted to the server in Antigua, Respondents' server then transmits betting information back to the user which is against the Wire Act. The Internet site creates a virtual casino within the user's computer terminal. By hosting this casino and exchanging betting information with the user, an illegal communication in violation of the wire Act and the Travel Act has occurred.
Respondents attempt to circumvent federal law by asserting that none of these statutes apply to the operation of an Antiguan casino. Moreover, they allege the federal government has not explicitly ruled on Internet gambling therefore it is an unregulated field. Respondents disregard that the Interstate Commerce Clause gives Congress the plenary power to regulate illegal gambling conducted between a U.S. and a foreign location. (See Champion v. Ames, 188 US 321, 334 [1903]). Gambling conducted via the Internet from New York to Antigua is indistinguishable from any other form of gambling since both the Wire and Travel Act apply to the transmission of information into a foreign country. See 18 U.S.C. 1084(a); 18 U.S.C. 1953(a). Therefore, the respondents are culpable for violating the Wire Act and the Travel Act.
Additionally, respondents violated The Interstate Transportation of Wagering Paraphernalia Act. Under this act:
"[W]hoever, except a common carrier in the usual course of business, knowingly carries or sends in interstate or foreign commerce any record, paraphernalia, ticket, certificate, bills slip, token, paper, writing or other device ,inder, or to be used, or adapted, devised, designed for use in (a) bookmaking; or (b) wagering pools with respect to a sporting event or (c) in a numbers, policy, bolita, or similar game shall be fined not more than $10,000 or imprisoned for more than five years, or both," [18 USC § 1953(a)]
The respondents intentionally sent records of gambling activity from the GCC location in Antigua through international and interstate commerce into various United States locations, among them New York. When respondents solicited perspective investors, they sent them a multitude of materials which were specifically to be utilized for the setting up and advancing of the Internet gambling business through U.S. mail. Furthermore, the actual computers which would be used for gambling between the United States and Antigua was bought and delivered through U.S. mail from Florida to GCC's location in Antigua.
The respondents total activities unambiguously advance gambling in direct violation of the explicit safeguards that New York and the federal laws have placed against unauthorized gambling activity.
In addition, several of New York's registration requirement have been violated. For instance, under BCL § 1301(a), a "foreign corporation shall not do business in this state until it has been authorized to do so . . . " by submitting an application to the Department of State. WIGC is a foreign corporation, incorporated in Delaware, operating out of offices in Bohemia, New York. Since WTGC failed to apply for approval from the Department of State, the respondents were repeatedly operating illegally in New York State.
Moreover, pursuant to the Martin Act, the issuer, dealer, saIesmen of securities must all be registered with the Attorney General prior to the solicitation of investors. GBL § 359(e) defines a dealer as "a person, firm, association or corporation selling or offering for sale from or to the public within or from this state securities issued by it". Respondents acted as the issuer, dealer: and salesmen when they sold units of WIGC stock from their office in New York without registering. Respondents frivolously claim they are exempt from registering under the Maritin Act due to due GBL § 359(t). However, they fail to point to any applicable exception under GBL § 359(f). Furthermore, although a company failing to register is normally penalized with a fine and subsequently the company is often allowed to file for the violation still constitutes a fraudulent practice under New York law (See, GBL § 359-e (14) (1)).
This Court further finds that respondents also violated the Martin Act's prohibition against the use of deception, misrepresentations, or concealment in the sale of securities (See, GBL § 352(l)). It is well settled that fraud exists not only where there has been an affirmative misstatement of a material fact, but also where there has been an omission of a material fact (See, GBL § 352-c(1); TSC Industries Inc. v. Northway Inc., 426 US 438 [1976]; State of New York v. Rachmani Corp., 71 NY2d 718, 727 [1988]). While the evidence does not conclusively show that respondents misrepresented to investors certain facts about the potential return on their investment, the likelihood of an IPO, or the legality of Internet gambling, respondents did misrepresent and failed to disclose facts regarding the use of proceeds raised in the offering.
It is undisputed that approximately 46% of the investors' funds were used to pay respondents' commissions, salaries, and consulting fees. Without disclosing to investors, individual respondent Jeffery Burton, CEO and Director of WIGC received a personal loan of $84,000 from the corporation. Respondent Cynthia Burton, Jeffery Burton's wife and a secretary at WIGC drew a salary of $93,439 from WIGC over a mere seven month period. Respondent Lawrence Blocker, President and Director at WIGC, received $135,864 in salary, commissions and fees. Respondents Gregory Flemming Sr, Gerald Varland, and Howard Toomer, all Vice Presidents of Marketing, took substantial salaries of $242,260, $109,650, and $71,260 respectively. In addition to the individual respondents created various business entities through which they paid themselves undisclosed consultant fees.
Not only were none of these salaries disclosed to investors, the respondents' offering materials indicated that only 18% of the offering proceeds would be used as working capital and to pay commissions. Had investors known that 46% of the funds raised were being paid to respondents in the form of salaries, commissions and consulting fees, they might well have chosen to forego the investment (Compare, People v. Tellier, '7 Misc 2d 43 [NY County Sup Ct 1956]; Grandon v. Merrill Lynch & Co., 147 F3d 184 (2nd Cir [1998]).
Because of the clear illegality present in respondents' actions, and absence of any triable issue of fact, respondents are found liable under Executive Law § 63(12) for their state and federal law violations.
Remedies
The Attorney General is entitled to injunctive relief which is routinely granted in special proceedings under Executive Law § 63 (12) (People v. Apple Health Sports Clubs, Ltd., Inc., 206 AD2d 266 [1s Dept 1994], affd, 84 NY2d 1004 [1994]). The requirement of a bond to assure future proper behavior on the part of an enjoined party traditionally accompanies such an injunction (see, Peolple v. Empyre Inground Pool, 227 AD2d 731 [3rd Dept [1996]; People v. Helena VIP Personal introductions Servs, 199 AD2d 186 [1st Dept 1993]). This Court finds the request for an in-;unction warranted, and directs fixing of the amount be incorporated in an order to be settled.
As for the Attorney General's request for restitution, penalties, and costs, which are available under Executive Law § 63(12) and GBL § 353(3), this Court finds the circumstances warrant awarding them in this case. The manner of the accounting, the mechanism for restitution, and the amount in penalties and costs to be awarded shall be resolved at a hearing.
Because each respondent is individually liable for the actions conducted by both WIGC and GCC WIGC's (See, e.g., Matter of State of New York v. Daro Chartours, 72 AD2d 872, 873 [3rd Dept 1979]; see also, Marine Midland Bank v. Russo Produce Co., 50 NY2d 31, 44 [1980] finding that corporate veil can he pierced to hold corporate officers liable for a tort regardless of whether they acted in conjunction with the corporation and in the course of their corporate duties), and shall be fined appropriately, all parties including individual respondents are directed to appear for a preliminary conference before this Court on September 9, 1999, at 9:30 a.m., to resolve any issues regarding, the ,scope of the accounting, discovery, or scheduling of the hearing.
Respondents are further directed not to destroy any personal or business records relating to this matter.
This constitutes the decision and order of this Court.
Settle order on notice.
Dated: July 22, 1999
ENTER
_____________
J.S.C.