By Martin Owens
They Didn't Go Big Enough: Comparing Full Tilt and Wall Street
A little stealing is a dangerous part,
But stealing largely is a noble art;
'Tis crime to rob a hen roost of a hen,
But taking millions makes us gentlemen
Once upon a time, it was easy to tell if somebody was stealing. If they had their mitts on it, knew they had no right to it, and tried to make off with it anyway. Well, there you were. Today, things are not so simple. In an age of electronic commerce and electronic money, of complex transactions and transfer, sometimes it is hard to say where the money is, who has (or should
have) custody of it, and for what purpose.
By way of illustration, let's compare two recent business failures that have attracted the attention of the Department of Justice and the FBI.
The first was Full Tilt Poker, a billion dollar company run by some of the biggest names in poker, which offered its customers the chance to compete against each other in honest poker games for money. FTP, along with Poker Stars and Absolute Poker, were indicted in April for allegedly breaking U.S.
anti-gambling law by taking American customers, (whose accounts were immediately frozen). In September, Uncle Sam upped the ante with a further
accusation: allegedly, Full Tilt had not only been frolicking in the gray areas of the gambling laws but was secretly diverting cash from customer accounts. This was, of course, a lethal blow to customer confidence, and was meant to be. The Federal prosecutor peppered his press releases with [inaccurate] accusations of "Ponzi schemes." Money was definitely missing - but how much? It seemed to depend upon whom you asked. $390 million according to the Wall Street Journal, but there were lower estimates. Chris Ferguson, one of the FTP principals, has filed for the return of $98 million of the seized funds alleging FTP's "right and title" to it.
The second was MF Global, a Wall Street Financial firm. Run by former New Jersey Governor Jon Corzine, it became involved in selling the bonds of shaky European governments and had to shut down and go into bankruptcy at the end of October. This was precipitated by $6 billion of "exposure" (read:
MF's bets on those bonds all failed when the bonds kept going south), and the bottom line was even worse: facing $40 billion of liability, MFG had only about $5 billion on hand. But, lo and behold, here, too, the customer accounts had been fiddled with. Here also, the figures keep changing: $700 million of customers' funds was originally unaccounted for, but this now seems to have grown to $1.2 billion when Australian operations are factored in.
Same difference, you say? Customers' money missing? Put them on trial and,
if found guilty, in the hoosegow. Right?
Well, actually... no.
You see, it is not entirely clear if FTP has actually committed fraud, though that is the accusation. On the one hand, yes, they owed more than they had on hand. But, on the other, were they short because they were looting the accounts for personal gain or because DOJ seizures interrupted their cash flow? Wouldn't that make it DoJ's fault, especially if, as FTP & Co. claim, they weren't breaking any laws? On November 14th, Chris Ferguson, one of FTP's principals, filed claims for $98 million seized by Federal authorities on the grounds that FTP has title to it and it is needed to pay the players. The DOJ continues to play coy about whether or not an agreement has been reached to give the players back their money from the seized funds, or if that burden will fall on Full Tilt's prospective new buyer, the French corporation Groupe Bernard Tapie . The accusation of violating the UIGEA, the original charge, is, by comparison, more than merely interesting:
it means that a responsible legal authority will finally have to tell us all just what the UIGEA actually says. It will be a first.
Within the law?
But even if the FTP folks were being naughty and helping themselves to funds they weren't officially entitled to yet, this supposed transgression pales in comparison to what MF Global was supposedly up to. Not only did MF Global allegedly go into individual investor accounts, but it then turned around and bet that money on euro bonds at odds of 40 to 1 against. Some say the odds went as high as 100 to 1. Of course, in the rarefied language of Wall Street such things are talked about in terms of "leverage" and "positions"
but that's what it amounts to. So can we look for Governor Corzine to be accused of fraud, or "a vast Ponzi scheme," as the Federal prosecutors trumpeted about FTP?
To borrow a line from John Wayne: "Not hardly."
You see, while the odds are good that FTP can fight the charges against it (the DoJ essentially assumes, but does not back up, the accusation that online poker breaks New York State gambling law, and Federal gambling laws depend on an underlying violation of state law to trigger them), it may well be that MF Global won't have to fight anything at all, notwithstanding the fact that it lost a lot more money and hurt a lot more people.
How can that be? Because of the beast called Commodities Futures Trading Commission Regulation 1.25. A quiet amendment to this regulation went through in the year 2000, when everything was rosy, the market could go nowhere but up, and it was raining money in all directions. Regulation 1.25 was changed, it seems, to allow a financial firm like MF Global to simply take its depositors' money ( called an " internal repo") and invest the funds in risky propositions - such so that the sovereign debt of countries whose budgets are a joke. The firms in question could not only invest the money short term but apparently keep the profit accrued thereby, which means that MF Global may be able to stand up, face the judge, and truthfully say, "we did nothing unlawful."
Next Time, Go Big
Now we know the real offense which FTP and the others committed. They didn't take the current advice and "go big." It's ironic. The Federal prosecutors have accused these poker rooms of running "Ponzi schemes" but they weren't.
If only they had been! And, instead of offering honest poker games, FTP and company had been taking other people's money and making all sorts of spooky seat-of-the-pants bets on the unknowable future and the actions of governments, over which no one has any control (including, it would appear, the governments themselves), if they had been offering huge returns in impossibly short periods of time, they'd be fine! Or, if they did screw up, there would always the protection of bankruptcy court, overseen by some of the most respectable people in the nation. Former FBI director Louis Freeh has, for example, been appointed the bankruptcy trustee for MFG.
FTP may or may not have stolen anybody's money: that's up to the courts to decide. But it is clear they would be in no trouble at all if, like Wall Street, they had first taken the precaution of stealing the law itself.
Again and again, the stockbrokers and traders and hedge funds directors loudly declare that they are nothing like a gambling operation. I couldn't agree more. These days gambling is much safer.
Mr. Owens is a California attorney specializing in the law of Internet and interactive gaming since 1998. Co-author of INTERNET GAMING LAW with Professor Nelson Rose, (Mary Ann Liebert Publishers, 2nd ed 2009) ; Associate Editor , Gaming Law Review & Economics; Contributing Editor, TSN. Com
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