New York Mah Jong Ruling May Help Cause of Online Poker

Mah Jong, the ancient Chinese tile-based table game, can now count itself as a winner in the old debate of games of skill vs. games of chance, according to a New York state judge, who recently ruled that the game demands more than luck.

On January 4, 2012, Criminal Court Judge John H. Wilson declared in People v. Feng that “the court declines to declare Mah Jong to be a per se ‘contest of chance.’ ” Although Judge Wilson ultimately allowed a charge of promoting gambling to go forward, his findings have significant implications not just for the game of Mah Jong itself, but also for other popular games, like poker, which have historically been viewed to constitute illegal gambling.

In the Mah Jong case, Jun Feng and Victor Chan were charged with the misdemeanors of promoting gambling in the second degree and possession of a gambling device after allowing an undercover officer to participate in a Mah Jong game in their parlor. The alleged violation was of NY CPL 225.05, which states in pertinent part: “A person is guilty of promoting gambling in the second degree when he knowingly advances or profits from unlawful gambling activity.”

Another provision, CPL 225.00(2) defines “gambling” as follows: “When (a person) states or risks something of value upon the outcome of a contest of chance or a future contingent event not under his control or influence, upon an understanding that he will receive something of value in the event of a certain outcome.” The defendants argued that Mah Jong did not constitute a “contest of chance” within the meaning of New York state law. CPL 225.00(1) defines “contest of chance” as “any contest, game, gaming scheme or gaming device in which the outcome depends in a material degree upon an element of chance, notwithstanding that skill of the contestants may also be a factor therein.”

Judge Wilson disagreed with the defendants, finding the charge of promotion of gambling to be facially sufficient. The judge found the game to constitute gambling, insofar as the defendants risked money upon the outcome of “a future contingent event not under his influence of control” and the house took a share of a player’s winnings. However, he did not find the game to be gambling based on the alternative meaning of “gambling” involving a “game of chance.”

Citing an earlier New York state ruling, Judge Wilson found that Mah Jong was not a contest of chance, notwithstanding the element of luck involved in the game. He noted, “The mere fact that the game combines skill and luck does not make it a contest of chance.” The judge arrived at this finding after conducting a brief survey of the game’s history from online sources and noting the increasing popularity of the game.

While Judge Wilson’s decision may appear to be a mixed bag for these defendants, to gaming enthusiasts his finding that Mah Jong is a game of a skill is a clear win. The debate over what constitutes a game of chance or a game of skill has grown heated in light of last year’s Justice Department takedown of online poker operators. Those in the online poker world who intend to defend against the government’s charges will see Feng as a victory, especially given Judge Wilson’s reliance on the historical evolution of the game in reaching his decision. With the ever-increasing popularity of poker, those who defend online poker as a game of skill can only hope that poker will be dealt as favorable of a hand as Mah Jong.

Share/Bookmark

High Court: Police Tracking of Suspect Via GPS Requires Warrant

Last November, we discussed the U.S. Supreme Court’s oral argument in United States v. Jones, which posed the question of whether police need to obtain a warrant before attaching a GPS device to a suspect’s vehicle during a criminal investigation.

We noted that in this case, 21st-century technology had come face to face with the constitutional requirements of the Fourth Amendment. We were hoping that the high court would uphold the U.S. Court of Appeals for the D.C. Circuit and hold that this action is a search that requires a warrant, but we took a pass on predicting what the Court would actually do.

On January 23, 2012, the Court decided the case – unanimously against the government and in favor of defendant Antoine Jones. The decision is fairly gratifying for those of us who believe it desirable to curb prosecutors’ power by imposing restrictions upon it, including, where appropriate, the requirement of a judge-issued warrant.

It turns out that both the advocates of the original-intent approach to constitutional interpretation, epitomized here and in general by Justice Antonin Scalia, and those who prefer the doctrine of the “living Constitution,” led here by Justice Samuel Alito, agree that the use of a GPS device by the government constitutes a search and requires a warrant.

Scalia, writing for a majority of the Justices, observed that prosecutors had intruded upon Jones’ property in way that would have been a “trespass” under common law.

Prosecutors “physically occupied private property for the purpose of obtaining information,” Scalia wrote. “We have no doubt that such a physical intrusion would have been considered a ‘search’ within the meaning of the Fourth Amendment when it was adopted.” And for Scalia, that fact alone was enough to decide the case.

Alito, joined by three Justices who concurred in the result, used quite a different line of reasoning and sharply criticized Scalia’s majority opinion, saying that ironically, it relied upon 18th-century tort law to decide a case involving 21st-century technology.

“This holding, in my judgment, is unwise,” Alito wrote. “It strains the language of the Fourth Amendment; it has little if any support in current Fourth Amendment case law; and it is highly artificial.”

Instead, Alito wrote, he “would analyze the question presented in this case by asking whether [Jones’] reasonable expectations of privacy were violated by the long-term monitoring of the movements of the vehicle he drove.” Alito observed that for decades, the Court has invoked the concept of “reasonable expectations of privacy” in a number of cases to define the nature of a “search” under the Fourth Amendment and to expand the definition of “search” to actions that do not involve a trespass to someone’s property.

Even though Alito is often identified with the pro-prosecution, conservative wing of the Court, he took the defendant’s side in this case. As our blog post last November noted, at oral argument Alito expressed concern about how easy it is these days “to amass an enormous amount of information about people” by the use of today’s technology.

Alito’s opinion followed similar lines. In the absence of legislation about police use of GPS tracking, he wrote, “The best that we can do in this case is to apply existing Fourth Amendment doctrine and to ask whether the use of GPS tracking in a particular case involved a degree of intrusion that a reasonable person would not have anticipated.”

This is good news for constitutional rights and for defendants. Whatever approach one takes to the Fourth Amendment, it’s clear that prosecutors can’t attach a GPS to a suspect’s car without a warrant.

Share/Bookmark

Death Penalty Overturned Because of Sleeping, Tweeting Jurors

Contrary to our prediction, the Arkansas Supreme Court has vacated the conviction and sentencing of capital-murder defendant Erickson Dimas-Martinez and remanded the case for a new trial on grounds of juror misconduct. Although the decision is a definite victory for defendants, it may well invite a flood of appeals based on allegations of misconduct, regardless of whether the defendant can demonstrate a reasonable possibility of prejudice.

In 2010, a jury sentenced Dimas-Martinez to death for the 2006 murder of 17-year old Derrick Jefferson. Dimas-Martinez appealed the conviction and sentence on grounds that he was denied a fair trial. Specifically, he claimed unfair prejudice due to one juror who slept through portions of expert testimony (the sleeping juror) and another juror who posted trial-related messages on Twitter in violation of the court’s jury instructions (the tweeting juror).

In December 2011, the Arkansas Supreme Court reversed the conviction and sentence. Speaking for the Court, Associate Justice Donald Corbin explained that, under Arkansas law, the moving party bears the burden of proving both jury misconduct and a reasonable possibility of prejudice resulting from the misconduct. Corbin noted further that the court will not presume prejudice based on misconduct; the moving party must show that the alleged misconduct prejudiced his chances for a fair trial.

Then, the court purportedly applied the test. First, the court found juror misconduct because of the sleeping juror. The court found a reasonable possibility of prejudice because the juror would have no way of knowing what testimony he had missed, how much of it he missed, and whether that evidence would have influenced his view of the case. Accordingly, the court reversed and remanded. Although the Court could have ended its analysis there, it proceeded to a discussion of the tweeting juror instead.

With respect to misconduct, the Court readily concluded that the tweeting juror had knowingly and repeatedly violated the judge’s explicit instruction not to tweet about the case. But the Court’s discussion of the next prong — reasonable possibility of resulting prejudice —simply conflated the second prong with the first. And considering the tweets, it is clear why: none of the juror’s tweets showed that he was more or less likely to decide the case based on the evidence.

For one, all the tweets referenced in the Court’s decision were sent during the sentencing phase. They could not have prejudiced the guilt phase. Additionally, the messages were fairly benign and did not expressly reference the case. For example, when all the evidence was submitted for sentencing, the juror tweeted, “Choices to be made. Hearts to be broken. We each define the great line.” During deliberations, he tweeted, “If its [sic] wisdom we seek . . . We should run to the strong tower.” After the jury reached its sentencing verdict, he tweeted, “Its [sic] over.”

The defense proffered no evidence that the juror received trial-related messages. Thus, the defendant had to argue that these outgoing messages resulted in a reasonable possibility of prejudice. The defense did so by claiming that the juror’s inability to follow jury instructions called into question his ability to follow the law. If Corbin’s standard of law is correct, though, the failure to follow instructions would not, by itself, raise a presumption of unfair prejudice. Without more, the defendant’s argument seemed bound to fail. It didn’t.

The Court found that the juror’s failure to comply with jury instructions raised a question as to whether he followed the law. This reasoning allowed the Court to sidestep a challenging explanation as to how the tweets may have resulted in unfair prejudice: it was the juror’s inability to follow instructions that deprived the defendant of a fair trial, not his tweets.

The distinction is so fine it even tripped up the court.  Corbin wrote: “It is in no way appropriate for a juror to state musings, thoughts, or other information about a case in such a public fashion.” When jurors do so, “[t]he possibility for prejudice is simply too high.” But if the court was concerned with prejudice resulting from the juror’s inability to follow instructions, why would any of this matter? Whether a juror tweets messages online or falls asleep during trial, it is the juror’s failure to follow jury instructions that shows his inability — whether intentional or inadvertent — to follow the law. Under the court’s new test, that alone is grounds for reversal.

We support the court’s decision to address the growing problem of Internet-related juror misconduct. Fortunately, the decision will cause trial judges to think long and hard before overlooking such misconduct. That said, we question whether the court’s rationale will stand the test of time. By eliding the distinction between juror misconduct and resulting prejudice, the court has drastically lowered the bar for obtaining reversal. It is difficult to conceive of any instance of juror misconduct that could not support reversal based on the rationale enunciated in Dimas-Martinez v. Arkansas. In the months ahead, the Arkansas Supreme Court will likely delimit the holding to stem the flood of appeals that will be filed in its wake.

Share/Bookmark

Indictments of Megaupload Are a Greater Threat to Web Users Than Piracy

In last week’s Megaupload indictment, the U.S. government has raised the debate over copyright infringement on the Web to a whole new level – treating the operators of one of the most popular sites on the Internet as if they were part of organized crime.

On January 19, 2012, a federal grand jury in the Eastern District of Virginia charged executives, founders and employees of Megaupload.com, one of the leading file-hosting services on the Web, with copyright infringement, conspiracy to commit racketeering and money laundering. The U.S. Department of Justice is charging that Megaupload.com caused over $500 million in lost revenue from “pirated” content such as music and movies. In addition, the government seized Megaupload’s domain names and shut down all of its sites, contending that Megaupload is an organization dedicated to copyright infringement.

These actions, more suitable to the type of steps that the government takes against an organized-crime enterprise dedicated to murder, theft and racketeering, are astonishing. The government seems to have ignored the fact that other popular content-sharing sites have successfully defended themselves in civil cases by using the safe harbor provisions of the Digital Millennium Copyright Act, which provide immunity to a site that promptly takes down infringing content.

Among those charged in the indictment were Megaupload founders Kim Dotcom and Mathias Ortmann, chief marketing and sales officer Fin Batato, and lead programmer Bram Van der Kolk. All four were arrested in Auckland, New Zealand. On Monday, the Auckland district court denied bail, making way for extradition proceedings that will likely be contested. In addition to the arrests, approximately 20 search warrants have also been executed within the United States and in eight additional countries. The Eastern District of Virginia has called for the seizure of 18 domain names associated with the site, and about $50 million in assets and targeted sites have been seized thus far.

The indictment is riddled with inconsistencies. On the one hand, the government asserts that Megaupload is not entitled to use the safe harbor provisions. According to the government, everything on the site was doctored to create a veneer of legitimacy, while its employees knew full well that the site’s main use was to distribute infringing content. Yet the government readily admits that it has Megaupload emails talking about using U.S. courts and lawyers to file actions against other “pirate” sites and that the site did take down illegal content and build an abuse tool. To top it all off, many big-name artists support the site, as evidenced by an entirely legal video posted on YouTube, which Megaupload tried to save in U.S. courts from takedown requests.

The 72-page indictment is not some knee-jerk reaction to the ongoing protests of proposed misguided legislation that would strengthen protections against piracy at severe costs to the Internet. This action was clearly in the works for some time. But the filing of a criminal case against one of the most popular sites in the world is remarkable to say the least, given that other popular content-sharing sites have never faced criminal charges for allegedly facilitating piracy. Indeed, when these other sites have been targeted in well-financed civil cases, they have successfully asserted defenses.

When Viacom filed its lawsuit against YouTube in 2007 based on charges that YouTube and its parent, Google were engaging in “massive intentional copyright infringement,” the government did not arrest YouTube or Google executives. In fact, the U.S. District Court for the Southern District of New York held that YouTube was shielded from liability in that case by the safe harbor provisions.

Similarly, when IO Group, Inc. filed a complaint against Veoh Networks for copyright infringement, the U.S. District Court for the Northern District of California held that Veoh’s video-sharing website was entitled to the protection of the safe harbor provision. In both cases, U.S. courts recognized that simply providing access to content did not equate to engaging in infringing activities.

Megaupload, an online storage and web hosting service site, counts itself in the same category as YouTube and Veoh — merely acting as a hosting company that provides access to content. By invoking the full wrath of U.S. criminal laws, the government is using tools that were never meant for this situation – and is potentially doing incalculable harm to thousands of Internet users and to the integrity of the Web itself.

Share/Bookmark

Online Protests Hit Hard Against Anti-Piracy Bills

Organized online protests over two bills in Congress targeting online copyright infringement — the House’s Stop Online Piracy Act (SOPA) and the Senate’s Protect Intellectual Property Act (PIPA) — seem to have crippled these bills’ progress and ended their chances of becoming law in their present form.

We have previously written about the protests mounting against the bills.

Just this week, high-profile protests cropped up all over the Internet. On January 18, Wikipedia shut down all English content on the site in protest; Reddit.com also went offline for the day; Google covered its homepage logo with a black box; and an estimated 10,000 smaller websites participated in some kind of protest over the bills.

Google’s online petition to Congress expressing opposition to the bills obtained over 7 million signatures in the United States in a very short period of time.

The bills’ supporters continue to argue that the legislation is important to protecting intellectual property. The bill would allow the Justice Department as well as private parties to seek court orders against foreign websites that steal content from American authors and would prohibit advertising networks and payment facilitators from doing business with the offending companies. The bills would also criminalize the streaming of restricted content, with a maximum penalty of five years in prison.

The bills enjoy strong support from organizations that rely on copyright protection, such as movie, music, and cable companies. The bills have also garnered the support of business groups such as the U.S. Chamber of Commerce. The Chamber estimates that American industry loses roughly $135 billion every year to online piracy.

The protests have been led by Internet businesses that argue the bills will lead to censorship of the Internet. Under SOPA, websites such as Facebook and YouTube could be found to be liable if they host infringing content. This would require these sites to police the content that users post, opponents say, and essentially have a censoring effect on the content.

Supporters of the bill stress that the bill is targeting activity that is already illegal and targets foreign websites that infringe on American copyrights.

Due to the protests, at least 13 lawmakers who co-sponsored the legislation have withdrawn their support. According to one media outlet, from the beginning of January 18 to the end of January 19, seventy members of Congress announced their new opposition to the bill.

The Senate has a procedural vote scheduled on January 24 on proceeding with PIPA. Senate leaders currently still plan to move forward with the vote, but it remains unclear if the bill has the 60 votes it needs to pass the procedural vote. Senate Minority Leader Mitch McConnell (R.-Ky.) has called for a delay of the bill because of “serious legal, policy, and operational concerns.”

In the event the bills were to make it out of Congress, President Obama might veto them, but he has not yet made a definitive statement that he intends to do so. The Obama administration did respond to a petition against the bill stating that it would not support legislation that could lead to Internet censorship or reduced Internet security.

Opponents of the current bills are looking toward another proposed bill, the Online Protection & Enforcement of Digital Trade Act, known as the OPEN Act, which takes a much narrower approach to copyright issues by trying to cut off the money that flows to foreign piracy sites.

The online protests have placed a major roadblock in the way of these bills. The bills’ potential to stifle speech and Internet entrepreneurship are too great and the strength of the online protests appear to have put Congress on notice that these bills in their current form should not go forward.

Share/Bookmark

Will Facebook Become a Key Player in U.S. Online Gaming?

Arguably the most popular social media platform in the world, Facebook appears poised to expand its ever-growing empire into the online gaming industry. Rumors circulated in early December 2011 that Facebook was developing a platform for its United Kingdom users to gamble online for real money, perhaps even as soon as in the first quarter of 2012. With millions of users worldwide, Facebook would be poised to accomplish what other online gaming sites could only achieve at a much smaller scale — reaching a large and constantly growing database of players. And with intrastate poker gaining traction in the United States, Facebook, and the new technology that it is developing, may end up as a leading player in the online gaming industry in the United States if and when legalization arrives.

Facebook is no stranger to online gaming. For some time now, it has offered its users the option of playing online games for Facebook credits as an alternative to real money. Earlier this year, Facebook changed its advertising policies, allowing online gambling companies to advertise in jurisdictions where such services are permitted. In the past, Facebook has been extremely strict when it comes to advertising online gambling business on its website. Now, Facebook’s Advertising Guidelines web page has a specific online gambling clause under the Gambling and Lotteries subsection of the Ad Content section, which reads: “Ads that promote or facilitate online gambling, games of skill or lotteries, including online casino, sports books, bingo, or poker, are only allowed in specific countries with prior authorization from Facebook.”

Initiating its launch of its real-money online gaming platform in the UK seems to be the most logical choice, given that the UK boasts one of the most permissive online gambling markets in the world. It appears from available information that Facebook is looking to award eight licenses to online gambling operators in the existing market. Sources for egrmagazine.com have reported that Facebook has drawn up preliminary licenses for UK-based operators, including Gamesys (which owns sites like jackpotjoy.com, botemania.com and iwi.com) and online casino, poker, and bingo gaming giant 888 Holdings. If the UK deal goes through, it will likely be a test run other countries, opening up an entirely new platform for operators with outreach to a wider market and database of players than ever before.

As Facebook “befriends” the online gaming world and vice versa, the question becomes whether the U.S. will ever appear on that friends list. With Nevada recently becoming the first state in the country to adopt online gaming regulations and the Justice Department recently changing its stance on the legality of Internet gaming under the Wire Act, new hope has arisen that there may be a market for online gaming in the U.S. after all. Of course, Facebook would need to overcome a few hurdles before launching its online gaming platform in any country, including implementing a system to keep minors from accessing the service. Nevertheless, if rumors of a launch are true, Facebook’s new online gaming platform will immediately give it a dominating position in the market. Let’s just hope the United States does not deny that friend request.

Share/Bookmark

Protests Mount Against Proposed Law That Would Cripple the Internet

From the Arab Spring to the Occupy Wall Street movement, 2011 was a year of protests. It was capped off with a little-covered (by traditional media) but important protest that will carry on into 2012. We’ll call it the “Pioneers Strike Back” movement of Internet entrepreneurs. The issue is a piece of controversial legislation pending before Congress — H.R. 3261, commonly known as the Stop Online Piracy Act, or SOPA.

The bill, which is supported by Hollywood, major media companies, and labor unions – along with many corporate monoliths – is supposed to combat copyright and trademark infringement over the web. The general tactic is to create new causes of action against websites for facilitating intellectual property violations. The problem is that the legislation is so broad that it could change the dynamics and use of the Internet as we know it. And in the process, it could run roughshod over the Constitution – undermining free speech and due process.

Through a notice and cutoff system, SOPA would allow private parties to effectively shut down any supposedly infringing site based merely upon the rights-holder’s allegations. For instance, a rights-holder could require payment processors and advertising networks to sever ties with an allegedly infringing site upon a five-day notice. Any subsequent determination by a court in favor of the alleged infringer could be too little, too late.

And SOPA goes even further: Service providers would be forced (for their own protection) to shut down entire domains, without regard to the content of each specific site.

Also troubling is the evisceration of safe harbors for websites established under the Digital Millennium Copyright Act. The DMCA limited websites’ responsibility to monitor content posted by users. Under SOPA, so long as a site is determined to “facilitate” infringing behavior, it could be considered liable under the law. So Facebook could find itself in hot water for something a user posted on his or her Facebook profile. The law, therefore, would require websites to institute policing measures to avoid liability. The law would also make it hard for smaller, emerging services to stay clear of litigious online entities that may constantly challenge the new sites’ content and/or architecture.

The prospective law’s measures risk stifling speech and innovation. Moreover, as many have pointed out, it could institute a framework for government censorship. (See an interesting review of this by the Cato Institute.)

These concerns over SOPA, along with concerns about potential cyber security and stability risks, have been written about extensively across the web and have been addressed to Congress. Most compelling is an open letter to Congress signed by 100+ law professors who express concern about both technological and constitutional infirmities of the law.

But the legislation, with some 31 co-sponsors, may very well make its way through committee to a potentially successful House vote. The reason would be the extensive big business backing of the bill. A non-exhaustive list of supporters identifies major players such as the Chamber of Commerce, News Corp., CBS, Viacom, MasterCard and Visa, and the Teamsters Union, just to name a few (some strange bedfellows, by the way!). In the world of political currency, the deep pockets that support the bill are formidable competitors. OpenCongress.org provides detail by identifying which deep pockets are supporting which congressmen.

SOPA supporters argue that the legislation is important to protecting intellectual property. The Chamber of Commerce, for instance, has estimated that online piracy costs U.S. companies roughly $135 billion a year. Detractors have a very different take on the economic – and non-economic costs – of the legislation.

Fortunately, all hope is not lost. Internet pioneers and entrepreneurs have been actively countering supporters of the bill. GoDaddy, which initially supported the bill, was “encouraged” to change its position after a registrant rebellion incited by Reddit.com. RedState.com is going after supporting legislators. And, best of all, major online presences like Google, Facebook, Yahoo!, and Amazon are taking a stand against the legislation, even considering the “nuclear option” of temporarily shutting down their services in protest. Yahoo! is rumored to have declined to renew its membership to the Chamber of Commerce in response to the group’s support of the bill. There is speculation that Google will do the same. Hopefully these moves will signify success for the Pioneers, and not the Empire.

Share/Bookmark

Judges’ New Scrutiny of Settlements May Make Life Difficult for Defendants

Recent headlines about the Securities and Exchange Commission have focused on Judge Jed S. Rakoff’s recent rejection of the agency’s proposed settlement of fraud charges with Citigroup Global Markets. In that case in the U.S. District Court for the Southern District of New York, Judge Rakoff rejected the Citigroup settlement because, in his view, there were no established facts on which to base a decision whether the settlement was “fair, reasonable, adequate and in the public interest.” The SEC and Citigroup have appealed Judge Rakoff’s decision, which is on hold as the U.S. Court of Appeals for the Second Circuit decides whether to grant an expedited hearing in the case.

Judge Rakoff’s decision is already having significant ramifications. In a December 20, 2011, letter to the SEC, Judge Rudolph T. Randa of the U.S. District Court for the Eastern District of Wisconsin cited Judge Rakoff’s Citigroup decision and requested that the commission provide a factual predicate showing the fairness and appropriateness of its proposed settlement of fraud charges against Koss Corporation, a Milwaukee-based maker and seller of stereo headphones. Like Judge Rakoff, Judge Randa would like the SEC to provide to the Court a factual predicate showing “the proposed final judgments are fair, reasonable, adequate and in the public interest.”

Koss and its chief executive, Michael J. Koss, were accused of maintaining materially inaccurate financial statements, books and records from 2005 through 2009 – a period during which the company’s chief accountant embezzled more than $30 million from the company. Koss and the company were also charged with failing to maintain adequate financial controls.

In addition to asking for a more detailed factual presentation, in his December 20 letter, Judge Randa also questioned whether he should – or even could – grant the relief that is specified in the proposed SEC-Koss settlement. The agreement would settle the case without any admission or denial of the charges (as is customary in SEC civil settlements). But the agreement also proposes the entry of an injunction restraining Koss from violating the same securities laws it was accused of violating, and would require the company to maintain adequate records and a system of internal accounting controls.
“If enforcement becomes necessary,” Judge Randa noted in his letter, “the terms of such a vague injunction would make it difficult for the court.”

The SEC has until January 24, 2012, to respond to Judge Randa’s letter, and an SEC spokesman has indicated that the agency intends to “provide the court with the information as requested.”

Citigroup and Koss are not the first companies to have judges call into question the adequacy of their proposed settlements with the SEC. In 2009, Judge Rakoff questioned the adequacy of a proposed settlement with the Bank or America, and settlements with Barclays and in an unrelated case with Citigroup were also questioned by federal district judges in Washington, D.C.

Going forward, the SEC may have to reconsider the way in which it settles civil enforcement matters with companies or, at a minimum, the way in which it presents those settlements to the courts for approval. The interesting question will be whether the need to present a factual predicate for the fairness of a settlement will still permit the SEC to settle cases with companies allowing the companies to avoid any admission of liability.

For those defendants – particularly companies – that seek to settle cases without admissions of liability, increased judicial scrutiny of SEC settlements may make it harder for them to resolve civil enforcement matters easily. In addition, if that scrutiny leads to more settlements in which companies admit liability, it may become more difficult for individual targets of investigations to defend themselves against legal claims and in the court of public opinion. The resolution of the Citigroup and Koss cases may give some hint of where things may be headed for those seeking to settle SEC cases in the future.

Share/Bookmark

New DOJ Opinion Paves Way to Legal Online Poker

On December 23, 2011, the U.S. Department of Justice revealed that it has reversed a long-held position by stating that the Wire Act applies only to sports betting. This marks a major change in policy for DOJ, which has long contended that the Wire Act prohibits all forms of Internet gambling, including poker.

Late that day, the DOJ released a 13-page legal opinion dated September 20, 2011, written by Assistant Attorney General Virginia Seitz in response to a 2009 request by New York’s lottery division and the Illinois governor’s office to analyze the application of the Wire Act to their plans to use the Internet and out-of-state processors to sell lottery tickets. The opinion noted that “nothing in the materials supplied by the Criminal Division suggests that the New York or Illinois lottery plans involve sports wagering, rather than garden variety lotteries. Accordingly, we conclude that the proposed lotteries are not within the prohibitions of the Wire Act.”

The opinion states, “[W]e conclude that interstate transmissions of wire communication that do not relate to a ‘sporting event or contest,’ 18 U.S.C. § 1084(a), fall outside of the reach of the Wire Act.”

For years the DOJ’s Criminal Division has held that the scope of the Wire Act went beyond sports betting. This had a significant impact on state lotteries and online poker companies that operated offshore. DOJ has now rejected that view, writing, “We conclude that the Criminal Division’s premise is incorrect and that the Wire Act prohibits only the transmission of communications related to bets or wagers on sporting events or contests.”

DOJ’s position in the past that online poker violated the Wire Act led to guilty pleas by several defendants to Wire Act violations in connection with their involvement with online poker. In 2008, Anurag Dikshit, a co-founder of Party Gaming, an online poker company, pled guilty to violating the Wire Act and agreed to forfeit $300 million. He was sentenced to one year of probation.

The opinion could allow for states to cooperate with each other on online gambling that is legal in the individual states. The Nevada Gaming Commission recently approved regulations that would allow for implementation of online intrastate gaming, but critics have stated that there may not be a large enough population within the state to sustain the games. However, after this opinion it becomes possible for states that have legalized intrastate online gambling to cooperate to allow for larger pools of players.

Intrastate online gambling is now legal in just Nevada and Washington, D.C., though it has not yet began to be implemented in D.C. This ruling may serve as an impetus for many states to follow.

This opinion could increase legislative momentum at the federal level to legalize online poker. One primary concern in Congress has been the uncertainty of the application of the Wire Act to online poker. At a House subcommittee hearing in October, some testimony focused on whether the Wire Act applied to online poker, which was a primary concern of the subcommittee. Now that it is clear that the Wire Act does not apply to online poker, one of the major hurdles has been removed.

Federal legislation was introduced this summer by Rep. Joe Barton (R-Tex.), but thus far the bill has not made it out of subcommittee. After the second subcommittee hearing on the issue of online poker, House Energy and Commerce Committee Subcommittee on Commerce Manufacturing and Trade Chairman Mary Bono Mack (R-Calif.) has said previously that no action on the bill would likely occur before the new year.

There is also a possibility that states that could work together to bring interstate online gambling without federal legislation. There does not seem to be any compelling economic reason for federal legislation. However, from a regulatory perspective it may make sense for the federal government to enact legislation to set bars on the regulatory efforts of the states to ensure some level of competency and consumer protection.

This is big news for all online poker players. Many legislators at both the state and the federal level feared that the Wire Act may apply to online poker, but now that it is clear that it does not, a major hurdle to the legalization of online gambling has been removed. We hope that the legislative momentum from the opinion continues to move forward toward legalization.

Share/Bookmark

New Step for Nevada: Commission Approves Online Gambling Regulations

On Dec. 22, 2011, the Nevada Gaming Commission unanimously approved regulations drafted by the Nevada Gaming Control Board that could make Nevada the first state to provide online gambling within its borders.

Earlier this year the Nevada state legislature passed legislation allowing for intrastate online gaming.  In June, Governor Brian Sandoval, a former Nevada Gaming Commission Chairman, signed the legislation into law. Earlier this year, Washington, D.C., became the first U.S. jurisdiction to pass a law allowing online gambling played within its geographic limits, but the law has still not been implemented. Several other states have debated or introduced bills that would legalize online gambling within its borders.

The Nevada regulations would allow the state’s casinos to launch gambling websites for players within the state’s borders by the end of 2012. Six companies have already filed an application for a Nevada license. The main operator of the website must be a casino company, but other companies will be allowed to provide software or other services to the websites.

The regulations state that all bets received by the website must be placed within Nevada until federal law changes or the Justice Department states that bets may be accepted from outside the state.

Mark Lipparelli, chairman of the Nevada Gaming Control Board, believes that under the new regulations, online poker in Nevada will be legal under federal law as long as the right to bet is limited to people located in Nevada. The regulations place the burden on the website operator to show that the bets were placed within the state. Lipparelli also stated that the technology exists to permit operators to enforce such a geographic limit. Lipparelli pointed to the fact that Nevada has allowed several companies to offer websites for sports betting within the state, and these sites have gone unchallenged by the federal government.

The regulations also require that website operators verify the age and location of every gambler who registers within 30 days of registration. Operators will be required to hold a reserve of cash or a line of credit to cover the money held in player accounts – a provision that must be verified by an independent accountant. The regulations also cover problem gambling notifications, information that must be posted on the websites, fees and taxation and record-keeping requirements.

Nevada Gaming Commission Chairman Peter Bernhard said that he expects the regulations to be adjusted as issues develop that are not addressed at present.

Some in the industry question whether Nevada, with a population of about 2.6 million, has enough people within its borders playing online poker will allow the sites to be profitable.

There has been some momentum in Congress toward getting an online gaming bill passed. Two hearings have been held by a House subcommittee looking at the viability of online gambling.

The Nevada move is a major step forward for online gambling in the United States. The Nevada law clearly shows that there is a demand for online gambling and a belief that it can occur with the proper controls in place for age verification and for the prevention of problem gambling. This action may serve as an impetus for other states and the federal government to pass laws allowing online poker.

Share/Bookmark