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After ‘Black Friday,’ American Poker Faces Cloudy Future

In 2003, ESPN significantly expanded its coverage of the World Series of Poker, which was eventually won by a 27-year-old Nashville accountant named Chris Moneymaker, an amateur who had qualified for the tournament on the Web site PokerStars.

Mr. Moneymaker, average-looking and slightly overweight, was a proverbial everyman, betting and bluffing his way past hundreds of pros en route to a $2.5 million purse. His win, along with the increasing availability of Internet poker, inspired an untold number of Americans to quit their jobs — or at least cut down on their other hobbies — and pursue the dream of being a poker champion.

The “poker boom” was under way. Within three years, the number of participants in the World Series of Poker’s $10,000 main event skyrocketed from 839 to 8,773. More people played in the event in 2006 than in the first 33 years of the tournament combined.

But last week, the Department of Justice unsealed a 52-page indictment against the chief executives of three largest companies that offer online poker games to Americans — PokerStars, Full Tilt Poker, and Absolute Poker — and a related civil complaint against the companies themselves. No players — including well-known professionals like Phil Ivey and Howard Lederer who hold equity in Full Tilt Poker — were charged in the indictments. But the Web sites and their chief executives were accused of a variety of crimes, ranging from bank fraud to running an illegal gambling operation. The D.O.J. seeks $3 billion in compensation from the online companies, and up to 65 years of prison time for some of the 11 defendants.

The indictments, quickly dubbed “Black Friday” by the poker community, came as a shock to the large number of Americans — estimated variously at between 1.3 million and 15 million — who play poker online for real money. At Web sites like the Two Plus Two Forums, American players went from bragging about their winnings and bemoaning their bad beats to contemplating an uncertain future that would deprive some of them of their income, with one of dozens of threads on the indictments generating more than 1.3 million page views.

Conversations with a number of elite American players and people with knowledge of the legal and business issues — some of which were confidential because of legal sensitivities — revealed nearly as many reactions as there are ways to play a poker hand, and varying degrees of optimism and pessimism about poker’s future.

An Unstable Status Quo

The indictments represent the biggest threat to American poker players since Oct. 13, 2006, when the Congress — in virtually its last act before the recess for the midterm elections — passed the Unlawful Internet Gambling Enforcement Act. The legislation, attached to a “must pass” port security bill, had passed the House 317-93 earlier that year, but it had been considered unlikely to pass the Senate because of procedural holds placed upon the legislation. The then-Majority Leader, Bill Frist of Tennessee, put a renewed emphasis on the legislation, seeking favor with values voters as he was contemplating running for the Republican presidential nomination in 2008. The bill, which did not redefine online gambling but instead criminalized various actions related to facilitating financial transactions for it, spurred the then-largest poker company, Party Poker, to leave the U.S. market.

Meanwhile, the Department of Justice was stepping up enforcement of the industry, including the January 2007 arrest of the principles of Neteller PLC, an online “eWallet” that allowed players to transfer funds into and out of poker sites.

The game was never completely the same for American players.

During the “poker boom” years of 2003 through 2006, the online player pool was at least doubling in size every year, according to Dan Stewart of The number of new and inexperienced players made the games relatively easy to beat, and between 2004 and 2006, I played a substantial amount of online poker, using it as my primary source of income despite playing essentially in my spare time.

In 2007, however, the games became more competitive; casual players were the most sensitive to the new regulations and new impositions to withdrawing and depositing money, removing some of the weakest players from the poker ecology. I went from a significantly winning player to a modestly losing one, giving back about one-third of the money that I had made during the boom years, and withdrawing the other two-thirds.

Other players — and the poker sites themselves — soldiered on, however. While Party Poker, a publicly-traded company that was under shareholder pressure to avoid legal liability (it preemptively settled with the Department of Justice for $105 million to further reduce its legal exposure), withdrew from the American market, other companies like Full Tilt Poker and PokerStars asserted that federal gambling laws, including the federal enforcement act, were not inclusive of poker, and continued offering games.

With Full Tilt Poker and PokerStars gaining much of PartyPoker’s share in the U.S. market, the number of online poker players has increased slowly, if somewhat unsteadily, at an annualized rate of about 20 percent, according to data provided to The Times by Mr. Stewart, of PokerScout.

But most of that growth has occurred outside of the United States. According to Taylor Caby, a poker player and entrepreneur who owns CardRunners, a Web site that offers poker coaching and instructional videos, about 70 percent of the sales of his software products now occur outside the United States, and the fraction is increasing every year. On a per-capita basis, Americans are only about half as likely to play poker online as their counterparts in Canada and Europe, where online poker is explicitly legal.

And beneath the surface, the regulations contained within the Unlawful Internet Gambling Enforcement Act – which were implemented slowly because their ambiguous language had drawn a number of objections from banks — were beginning to have their desired effect.

Several months ago, I was told by Brandon Adams, a high-stakes poker player and teaching fellow at Harvard, that PokerStars and Full Tilt Poker were having increasing trouble finding reliable payment processing companies, which act as intermediaries between the poker sites and commercial banks. Some companies, a number of which were cited in the Department of Justice’s complaint on Friday, were absconding with funds intended for players, or had those funds seized by the government.

Mr. Adams estimated that at least 10 percent of the transactions between Americans players and the poker sites were compromised in this fashion. Although the poker sites always made good on player withdraws, they would sometimes credit a player’s account with a deposit before the intermediary company had debited the funds from the player’s bank account, allowing players to essentially play for free if the intermediary disappeared before the transaction was completed.

The difficulties with payment processing were something the poker companies were willing to tolerate for access to the American market. The Department of Justice’s complaint, however, alleges that some of the techniques they used to secure the services of the payment processors were illegal, and constituted money laundering or bank fraud.

Player Deposits at Two Sites Likely to be Returned

The indictments on Friday left millions of dollars in deposits from U.S. players in limbo. Mr. Adams estimated that PokerStars and Full Tilt Poker collectively had on the order of $500 million in deposits from U.S. players. Another high-stakes player that I spoke with, Tom Dwan — better known in the poker community for his online handle “durrrr” and his relentlessly aggressive style of play — thought Mr. Adams’s estimates might be too conservative. Both had heard rumors of American players with as much as $5 million in their poker accounts.

On Wednesday, however, the Department of Justice announced that it had brokered an agreement with two of the three sites, Full Tilt Poker and PokerStars, that would allow them access to their seized domain names in order to assist in the return of funds to U.S. players. In exchange, Full Tilt Poker and PokerStars agreed not to offer real-money games to American players.

Although player funds could conceivably still be at some risk if the sites were to cease operating entirely, these companies still have viable businesses outside of the United States. PokerStars, according to various public and private estimates, does between 70 and 75 percent of its business in the international market, and Full Tilt Poker does between 50 and 60 percent.

But players with deposits at the third company charged in the indictment, Absolute Poker (which also offers games under the Ultimate Bet brand) could be at substantially greater risk.

Unlike Full Tilt Poker and PokerStars, Absolute Poker did not reach an agreement with the Justice department on player funds, and instead has continued to offer games to Americans. The damages that the Department of Justice is seeking from Absolute Poker — $500 million — represent a much higher fraction of their revenues, putting its survival into greater question.

Nor do players necessarily expect Absolute Poker to act honorably. The company has a reputation in the poker community for unscrupulous behavior, largely because of a scandal in which players with connections to the owners of the sites were alleged to have cheated by playing in the games while having access to every opponent’s cards, essentially making them clairvoyant.

An Uncertain Future

Although PokerStars and Full Tilt Poker collectively accounted for about 80 percent of the U.S.-facing market, some other companies will probably continue to offer service to the United States.

“There are plenty of other sites that are still facing the U.S. market,” said Mr. Caby, the CardRunners owner. “None of them had the reputation that the ones that were indicted have. [But] people wll move to sites that will take their action.”

That is assuming, however, that the D.O.J.’s probe does not expand further, something which is highly uncertain. Some of the potential replacements for Full Tilt Poker and Poker Stars, such as, flout the law much more flagrantly by offering sports betting.

For the time being, the Department of Justice — especially its Manhattan office, which tends to pursue high-impact, high-profile defendants like Bernard L. Madoff — might not have interest in such low-hanging fruit. But if these sites were to grow, they would make themselves easy targets.

“The way that these cycles work is that they tend to be slow-moving and it’s likely that they get worse in time rather than better,” said Mr. Adams.

Another concern is that poker coverage on television could significantly decrease, since it relies heavily on advertisements placed by companies like PokerStars — in some cases being tantamount to infomercials. ESPN, which has been responsible for much of the coverage but tends to be very cautious about how it applies its brand, has pulled PokerStars advertisements from its Web site, and is reviewing whether to continue poker programming at all, although there are indications that they will continue to broadcast the World Series of Poker. Some smaller tournaments have already been cancelled.

A spokesman for the World Series of Poker, Ty Stewart, which could see its sponsorship opportunities and coverage cut back, did not return e-mail messages and phone calls.

The Prospects for Legislation

Poker’s future will probably depend on efforts to legalize the online version of game.

In July of last year, a bill sponsored by Representative Barney Frank of Massachusetts, which would have superseded the Unlawful Internet Gambling Enforcement Act and legalized, taxed and regulated online gambling, was approved 41-22 by a House panel. Although the bill then stalled, a version of it — which would have granted online poker licenses to a select number of land-based casinos and racetracks — was being pushed by the Democratic Majority Leader, Harry Reid, and was extremely close to being included in the budget compromise that was passed during the lame-duck session of Congress in December, according to John Pappas of the Poker Players Alliance, a lobbying group that advocates for legalization of online poker.

One way the indictments could spur legislation is by unifying the poker community behind the efforts of the Poker Players Alliance. When provisions to legalize online poker were under discussion last year, some players opposed them because the regulations would have established a 15- or 18-month moratorium during which no operator could offer games to the U.S., an effort to level the playing field demanded by the American Gaming Association.

With the benefit of hindsight, that is a trade that American players would gladly have taken. “The status quo was obviously untenable, yet many online players believed that even without legislative clarity online poker would exist,” said Mr. Pappas.

The downside case is that the allegations could taint online poker with the stench of illegality and scare legislators away from an issue that rank-and-file voters are at best indifferent about.

But Mr. Frank thought the indictments were a boon to his legislation.

“I think frankly it will help us in our efforts,” Mr. Frank told me. “You don’t want to have laws that are on the books but not enforced,” he said, noting that the arrests could help underscore the hypocrisy of the government’s current position on gambling, which permits online wagering on horse racing, the lottery, and bricks-and-mortar and riverboat casinos, but not online poker.

Large casino companies, like Caesars and MGM, which were once lukewarm on online poker, were behind the push for legislation last year, and are increasingly of the view that promoting some forms of gambling at the expense of other, highly similar forms is not a good long-run strategy. “Nevada people have talked about it,” Mr. Frank said. “They’re aware its just not a good idea for them to be aligned with people who think gambling is the work of the devil.”

Mr. Pappas, meanwhile, said that the P.P.A. had an increasingly good relationship with horse racing companies like Churchill Downs Inc. Although it was not widely reported outside of the horse racing press, the National Thoroughbred Racing Association came out in favor of efforts to legalize online poker last year.

The support of these companies could be crucial because the Republican leader in the Senate, Mitch McConnell, is from Kentucky, where Churchill Downs runs the Kentucky Derby and contributes significantly to his campaign. If there is an alignment of interests between Mr. McConnell and the Democratic leader, Mr. Reid of Nevada, the prospects for legislation improve.

Mr. Pappas thought there was a realistic chance that a poker bill could be passed as soon as the end of this year, particularly in a case where the regulations were attached to a larger bill. In the context of something like a budget negotiation, Mr. Reid and Mr. McConnell would have more influence over the content of the legislation.

Although the House could be a bigger obstacle than the Senate, Mr. Pappas noted that support for poker legislation does not split cleanly along partisan lines.

“We now have a Republican lead bill in the House now and we are working with other Republican lawmakers to introduce more pro-poker legislation soon,” Mr. Pappas said. “It is also important to note that the new freshman class of Republicans have a different mindset than the social conservative Republicans that pushed UIGEA in 2006. The eighty-plus new lawmakers tend to be more libertarian minded.”

But poker players, who tend to have vaguely libertarian but mostly indifferent views toward politics, may not be aware of how difficult it is to get anything done in Washington, even when there are a number of interests coalescing.

“Some people inside the poker industry are delusional when it comes to the likelihood of legislation,” Mr. Adams said.

The D.O.J.’s indictments on Friday were the bookend to Mr. Moneymaker’s fairy tale.  If the golden, innocent age of American poker wasn’t already over, it truly is now. Whether there is a another poker boom on the horizon, or the game instead enters a sort of Dark Ages, remains to be seen.

Nate Silver founded and was the editor in chief of FiveThirtyEight.