Feds fold the cards on the online poker industry
When you've turned nothing into something once already, you tend to feel you can do it again. There's faith your luck will turn. Perhaps it's delusion. But for a professional poker player, self-confidence is essential.
So it is for Walter Wright, who now finds himself in Costa Rica. He left his wife and two children behind to redeem their failing finances and faltering marriage by doing something that's now illegal in the U.S.—playing poker online.
Wright's life began to change in 2005 when he followed his then-girlfriend from New Orleans to Virginia, where she was beginning law school at Washington and Lee University. He'd played strategy and role-playing video games as a kid in Houston, and later began to obsess over chess. That's when he noticed his chess buddies were becoming increasingly dedicated to online poker and raving about the returns. Wright became engrossed.
He started as most do, playing what's known as the "cash game." It's simple poker—win by pushing your advantage when the cards are good and bluffing when they're not. If you know the odds, bet wisely, and seek out tables with lesser players, within a year or two you can be making a grand a week or more—five to ten times more.
Wright started at low stakes Texas Hold'em with table limits of just 25 and 50 cents. The beauty of playing online is that he could work eight tables at once. It wasn't the best money; PokerStars.com was taking its own cut from the pots, generally capped at $2 to $3 per pot. But as a volume player, he also received rewards points redeemable for things like Amazon gift certificates, which he used to buy food in bulk.
"I was grinding my face off," he recalls.
As he honed his feel for the odds and what his opponents were holding, he moved up to Sit-N-Go games, which are essentially small-scale tournaments that can be finished in an hour. It took time, but he began to see more money than he'd ever witnessed as a waiter in New Orleans.
He made $17,000 that first year and quit his job. He made $28,000 the next, and $55,000 the year after.
Four years ago, when his wife got a job in the Las Vegas public defender's office, the Wrights shipped off to Nevada. Walter dabbled in casino poker, where the stakes are higher. But those games also required a bigger bankroll and presented wider swings of fortune. He wasn't ready.
"I made some money to, like, get some new tires on the car. Make some money and pay a bill.... I was getting a little frustrated with that."
That's when he discovered multi-table tournaments online. They're like Sit-n-Gos but feature as many as 200,000 participants in a single tourney—and much bigger pots.
It was easier than playing head-to-head in cash games, since the competition was generally worse. His strategy was to play dozens of tournaments a night, primarily on PokerStars, moving conservatively through the early rounds as the lesser players fell away, then amping his aggressiveness as the field whittled down.
It was still a grinding way to make a living, sometimes requiring Wright to stare at a computer for 24 hours straight. But he'd spent his teens pulling World of Warcraft all-nighters. And now, instead of making bank with tiny pot after tiny pot, he could bring home as much as $15,000 in a single session.
The first year of online tournaments brought in $100,000. A year later, his earnings had doubled, thanks to more than $100,000 he won by reaching the final table at the 7th World Series of Poker event in the summer of 2009.
But the money was coming a bit too easily. "We never really learned to manage money because nobody in our family has ever had any," he says. "So we didn't manage it well.... My mindset became, 'How much money do you need? I'll make more.' Rather than 'We need to cut down on expenses,' it was, 'Don't worry, I'll shoot for this goal.'"
Wright found himself retreating more and more into the casinos, especially when he and his wife would fight. He was becoming a classic workaholic, and he didn't enjoy the soul-sapping casino atmosphere. He was equally worried about the effect of Las Vegas on their kids.
Last year he convinced his wife to move to Asheville, North Carolina, to be closer to her parents. The plan was for her to take the year off, care for their newborn daughter, and study for the North Carolina bar. Wright would support them by playing online.
Most of their bank account was consumed by the move, but he had few worries. Why should he? He could always make more.
They moved April 1. Two weeks later, the federal government took his job.
In the poker world, April 15 is known as Black Friday. That's the day the U.S. Department of Justice seized the assets and shut down the three biggest companies serving the American market—PokerStars, Full Tilt Poker, and Absolute Poker (which also operated Ultimate Bet)—charging them with bank fraud, money laundering, and illegal gambling.
Wright was luckier than most. Only a few thousand dollars in his PokerStars account was frozen by the feds. Others saw tens of thousands confiscated in the raids.
But he was now stuck in North Carolina, out of a job, living with his in-laws, and with no way to provide for a family of four. Their financial troubles accelerated. When the first opportunity came for his wife to take the bar, they didn't have the money to pay for the test.
Hardly anyone noticed when the Unlawful Internet Gambling Enforcement Act passed in 2006. Moralists and casinos, who were trying to protect their turf, had been pushing it for years without luck. That's when Senators Bill Frist (R-Tennessee) and John Kyl (R-Arizona) got the bright idea to stuff the act in a port security bill as a last-minute amendment.
In true Washington fashion, most legislators never read the final bill. Many didn't even know an anti-gambling measure was in it. But in one secretive stroke, the two senators had declared war on poker.
It didn't actually outlaw online play. Kyl and Frist preferred their attack on the American pastime to remain surreptitious. Going after individual players would have meant a huge backlash. Instead, they targeted the financial institutions that handled the sites' money, making it illegal to deal in gambling proceeds.
Party Poker, the world's largest site, decided to cash in its chips. It agreed to pay a $105 million fine and leave the American market in exchange for not being prosecuted.
That left the world's most lucrative market up for grabs. PokerStars and Full Tilt, also-rans at the time, were quite willing to step into the breach, despite the legal risks.
Why not? PokerStars, based on the Isle of Man, and Full Tilt, headquartered in the U.K.'s Channel Islands, figured they were outside the reach of U.S. prosecutors. It wasn't long before the two companies had cornered some 70 percent of the American market with revenues of nearly $2 billion a year.
But since the feds were squeezing banks and credit card companies, finding payment processors to handle their money grew increasingly difficult.
"By early 2007, suddenly the payment options are becoming much more tricky for PokerStars and Full Tilt," says Melinda Sarafa, a New York lawyer who's represented gamblers. "That's where they're starting to look into alternative providers."
The feds' squeeze was working. By 2009, an audit of Absolute Poker revealed that almost a third of its revenue went to disguising the money trail. Says Sarafa: "The allegation is that the companies tried to find banks that were essentially in distress, providing them with a very lucrative lifeline, and that the transactions were disguised as other types of transactions so it wouldn't raise regulatory eyebrows."
Some in Congress tried to fight back, realizing that playing a few hands of poker after work wasn't exactly the height of fiendishness. Rep. Barney Frank (D-Massachusetts) authored a bill to legalize online games.
But while that measure was winding through the House, the U.S. Attorney's Office of the Southern District of New York was pressing ahead. In 2009, it filed charges against Allied Systems and Account Services for processing poker money. The feds seized $34 million owed to 27,000 players.
The sites reimbursed their customers and rolled on. PokerStars and Full Tilt discovered that SunFirst, a struggling Utah bank, was willing to handle the payments in exchange for fees and an investment.
But the feds killed that deal a year later. They also quashed Full Tilt's attempts to make similar arrangements with two Illinois banks.
Full Tilt's problems were especially multiplying. Believing their revenue stream would soar eternally, its owners had pulled $444 million in profit from the business over the previous four years. But when the feds began seizing their payment processors' funds, the company had no war chest to cover the losses.
By last March, its customers held $390 million in their accounts. But Full Tilt only had $60 million in the bank to cover those accounts. When the feds seized its assets a month later, American players alone were owed $150 million. The feds accused the company of running a "global Ponzi scheme."
On that Black Friday, the Justice Department killed a $2.5 billion industry.
Four summers ago, Maxwell Fritz was making minimum wage serving cotton candy and curly fries at a Portland amusement park. He'd just finished his first year at Princeton, where he was studying to become a math teacher.
Fritz had played online casually with friends back in high school. He'd managed to turn a few hundred dollars' profit, and that planted the seed for next summer's job. It had to pay better than minimum wage.
He made $10,000 after school let out, so he continued during the school year. Over an 18-month period, while still attending Princeton and working his teaching internship, Fritz managed to take home $100,000. Over the next six months, he would grab another $200,000.
Then Black Friday hit. Suddenly, Fritz had not only lost his income, but $65,000 was seized from his Full Tilt account.
He was among the fortunate to recover quickly. A fellow player provided a reference that allowed him to move from one kind of gambling to another: Wall Street.
"I figured if gambling online is illegal, I might as well go to legalized gambling in the form of the stock market," Fritz laughs. A friend had gone to a Wall Street firm and "just blew the doors off, and he said what he learned in poker really helped him. They were like, 'Well, we need to hire more poker players.'"
For Michael LaTour, the game was a way out of unemployment. The Syracuse man landed a job out of college selling mortgages and personal loans for American General Financial. But a year later, spectacularly inept bets by American's parent company, AIG, put him back on his ass.
"There weren't many jobs out there, and I'd been on unemployment for a while," LaTour says. "I saw some people being successful at poker, and I decided if I was ever going to seriously take a shot at it, now would be the time to do so."
He played for two years, earning $50,000 in 2010. He was doing much better last year, averaging $10,000 a month for 2011 until the feds came calling. Suddenly, the $35,000 in his PokerStars account was seized.
"The days after it was really a panic," he says. "Nobody knew what was going on. It's been draining emotionally."
If he and his girlfriend hadn't bought a house, LaTour might have gone to Canada. Instead, he's taken the Syracuse police officer exam, but the academy doesn't offer classes until April. Two years after pulling himself off unemployment by his wits, he's back to searching for a job.
"This isn't something I wanted to do my entire life," he says, "but the money was out there, and it made more sense than any entry-level job just because of the potential to win such huge amounts of money."
Players weren't the only ones thrown out of work. The feds blew up an entire industry. In 2003, Michael Minkoff started a business that handled the shipping of poker books and videos sold on websites. His Las Vegas company also did freelance video production. It was a modest affair, employing three people and a passel of part-time help.
Then came the stealth attack by Frist and Kyl in 2006. Sites began closing and paring costs, hurling little guys like Minkoff to the side of the road. Black Friday nearly finished him. At his peak, he was moving over a thousand books a month. Nowadays, he's selling less than 50, hardly enough to employ himself part-time.
The feds launched an even bigger hit on the television industry. The list of canceled shows since April is long. Poker After Dark, the late-night show on NBC, was canceled abruptly after four years when the feds called its sponsor, Full Tilt, a "Ponzi scheme." High Stakes Poker ended a six-year run on the Game Show Network in December. The National Heads-Up Poker Championship, also on NBC, collapsed in October after seven years. In April, Fox pulled PokerStars Big Game and PokerStars Million Dollar Challenge prior to their second seasons.
According to Kantar Media, Full Tilt and PokerStars spent $26 million in TV advertising last year; PokerStars spent another $8.3 million on web and magazine ads. In one fell swoop, the feds made it disappear.
Though the major American sites were wiped out, a few remain, most notably Bovada and Merge Gaming Network.
The volume is much lower, and it's difficult to get paid. All have severe restrictions on how much and how often you can withdraw from your account. Merge only allows players to withdraw up to $2,500 once every six to eight weeks. And many are finding it difficult to add money to their accounts, since credit card companies will often reject the transaction.
After Black Friday, Walter Wright started playing on Merge just to salve nerves made raw by an empty wallet and a squealing baby. He and his wife went to Florida for a live World Poker Tour event, but he didn't play well. When they returned to North Carolina, they didn't even have enough money to get their dogs out of the kennel.
With their marriage stretched to its breaking point, Wright went to Costa Rica just before Thanksgiving. A friend agreed to front him a roll, pay his airfare, and cover his rent for a few months.
Costa Rica has become a magnet for Americans. Wright lives in an apartment complex with other online players. The country's tourist-friendly economy makes it a logical landing spot for those like Wright, who has a DUI and subsequently isn't allowed into Canada. Since Black Friday, companies like Poker Refugees have sprung up to help players gets visas, bank accounts, and apartments in Costa Rica.
But there remains a larger question: Why are the feds chasing honest, taxpaying citizens out of the country? Especially for something as benign as playing cards, an act committed by nearly every American?
Congressman Barney Frank denounced the crackdown as an "incredible waste of resources," wondering why the feds felt compelled to protect "the public from the scourge of inside straights."
After all, for most of the country's estimated 2 million online players, poker is little more than leisure recreation. And those who made their living from it seemed to personify the American spirit, providing for families by creating livelihoods from their wits.
There's also the question of why conservatives like Frist and Kyl would push a law so lush with dreaded nanny-state overtones. "I believe in a smaller, more conservative role for government than telling me which card games I can play on my computer," says Fritz.
Frist declined to comment for his motives. Kyl didn't respond to repeated interview requests.
Most players cynically dismiss the senators' move as a strong-arm play. The feds want their protection money—i.e., taxes—and won't let the ride continue until someone pays up. But since government moves in slow motion, it's left a multi-billion-dollar industry to rot from atrophy. Any remedy will likely take years.
"It's really frustrating to me," says LaTour. "It just seems they weren't seeing any of that money that was going out there so they want to set it up so they can tax it. But the longer this takes, the more there will be people like me who just give up on it and move on with our lives to find another way of making a living. I've pretty much stopped waiting around."
A solution seems rather simple. Since everything's handled electronically, internet poker offers the possibility of instant taxation of winnings. And the feds could easily force sites operating in the U.S. to pay American taxes for the privilege of doing business here.
Yet the mom-and-pop poker enthusiast doesn't employ a battery of lobbyists on Capitol Hill. And even if she did, she'd still be confronted by the moralists who believe any form of gambling is a sin.
"We're a pretty small minority," says Wright. "We don't have a big voice. We need to be louder. But we're talking American politics. One, we know it's going to take longer than it should, they're going to find a way to screw people, and they're probably going to make the taxing situation really complicated."
Brian Mogelefsky grew up on Long Island and joined his dad's mortgage business, Discount Funding Associates, out of high school in the early '90s. It remained a small concern until the 2000s, when they took the business online, hiring 600 people at their peak.
But the mortgage industry was about to implode. By 2006, the Mogelefskys had closed shop.
Until then, poker had been little more than a hobby. Mogelefsky started playing after seeing the Matt Damon-Ed Norton film Rounders, and began showing up at house games on Long Island.
But when his company collapsed, Mogelefsky decided to play poker online for a month in earnest, a test to see if it could provide a living. He ended up making $7,000. A new career was born.
His new job offered geographical flexibility. He and his wife began making lists of where they'd like to raise their two kids. They settled on a perfect neighborhood in South Charlotte, North Carolina, where they could halve their cost of living and build their dream home.
"I want to be here when my kids grow up," says Mogelefsky. "For the things I wanted to accomplish, it was worth it to make the sacrifices. Even today, I don't really want to play poker for a living, but I sort of backed into it and it allowed the lifestyle and things that were important to me.... It was going great until April 15."
Mogolefsky had the best week of his life just before Black Friday, earning over $15,000. He generally never let his Full Tilt account rise above $10,000 before withdrawing the money. But by that time, the company was already experiencing financial problems.
Full Tilt refused a withdrawal at the beginning of April. By the time the feds seized its assets 15 days later, Mogolefsky had $28,000 in his account. It was now frozen.
"I know how to pick them," he laughs ruefully. "I went from the mortgage industry to the poker industry, the two biggest collapses of the last 10 years.... I was in shock. Not only am I not able to produce more money, but the money I basically earned the last three months is also gone."
The closest casino to his home is Harrah's Cherokee, three hours away in the middle of Great Smoky Mountains National Park. But it doesn't offer enough action to make a living. So Mogelefsky began flying to Florida, crashing at his in-laws' place in Fort Lauderdale and playing the poker rooms at dog tracks and Indian casinos. The competition isn't particularly tough, but the pots are small and he can't churn the hands that he could online.
Still, with a family of four to feed, he has no other choice but to gut it out.
"It's hard because my expenses are through the roof, just from traveling, and then I have to eat. All the gas, all the extra costs, and I'm not able to put in nearly as many hours, and now I'm away from my family all the time."
Like most players, Mogelefsky has no illusions about the government riding to the rescue. The feds may have crushed a $2.5 billion industry, but they seem to have no idea how to resurrect it in a more palatable form. Nor do they seem to acknowledge all the families they've cast adrift.
Says Mogelefsky: "It's month to month, but the game plan is, hopefully, I can make enough playing live to survive until that day comes whenever it may be—Five years from now? Two years from now? Ten years from now?—when I can go back to playing online."
Vanessa Peng is a vivacious, engaging young woman from Singapore. She came to the U.S. with her newly remarried mother when she was 8, settling in Rock Hill, South Carolina.
It was a culture shock to say the least. She and her brother found comfort playing video games as they slowly assimilated, and the seed of competition was sowed. She would eventually study law in little Lexington, Virginia. Her eureka moment came when she watched a friend play poker online. "I was completely fascinated."
It wasn't until her third year of law school that she found the time to dive in. She started with $25 in her account and played the penny tables, slowly learning the game. She was thrilled by the competition and the mental challenge.
"The thing about living in a very, very small town is you get bored pretty quickly," says Peng. "Since I didn't have much of a social life in that little town, I was able to play a lot of poker in that six months. By the time graduation came I was supposed to be studying for the bar and that good stuff, but I was so wrapped up in poker, that was kind of what took over my life. On top of everything else, the legal market had sort of crashed at this point."
She found a job working with a divorce attorney in Chicago, but discovered she didn't have much stomach for it. Then she failed the bar. It was something of an omen.
"I was able to take a step back and really reexamine my life. Around that time poker was going really well for me. I had my first five-figure month and I just really started reevaluating, thinking maybe this is what I was meant to do."
She made $40,000 that first year. By 2010, she was pulling in six figures annually.
When Black Friday hit, Peng was one of the top money-makers on Ultimate Bet, with $30,000 in her account. She'd also just won $12,000 in a Full Tilt tournament. All told, she saw $80,000 frozen in the crackdown.
Peng was better situated than most to weather the storm. She and her boyfriend, who also plays, moved to Windsor, Ontario. The Canadian town sits just across the river from Detroit, allowing her to play online while still traveling to live tournaments here and abroad.
Nearly a year after the feds froze her money, Peng, who planned to use it to start a used jewelry business on eBay, still hasn't seen a penny of it.
Within a month of the federal crackdown, PokerStars returned $100 million to U.S. players, and continued to operate abroad.
Full Tilt was cleared to offer returns but never did, since it doesn't have the money. In September, the feds accused owners Howard Lederer and Chris "Jesus" Ferguson of running a "global Ponzi scheme."
"Banks fail for not having sufficient revenue to cover customer deposits all the time," the company's lawyer, Jeff Ifrah, said at the time. "No one refers to such failures as Ponzi schemes. And there was no Ponzi scheme here." The court battle rages on.
This fall the French company Group Bernard Tapie stepped in to buy Full Tilt for $80 million, promising to pay off the debts to international players. The feds have assumed responsibility for paying American players. They've announced no timetable for repayment.
Absolute Poker—originally formed by four frat brothers at the University of Montana—wasn't liquid enough to continue either. None of its players have been reimbursed.
In December, Absolute Poker co-owner Brent Beckley pleaded guilty to lying to banks about the nature of his transactions. He's expected to receive 12 to 18 months in prison.
His accomplice, Ira Rubin, ran a payment processing company in Costa Rica that disguised gambling proceeds through fake merchants and suppliers. He pleaded guilty in January and is expected to receive up to two years.
Rumors have been circulating that Absolute Poker will repay players soon, though payoffs may be as little as 25 cents on the dollar.
"If you had a federally regulated system that wouldn't happen," says Congressman Joe Barton (R-Texas). He's also pushing a law to legalize online poker. "This is one of those rare congressional bills that's not a Republican-Democrat issue. There are people for it and against it on both sides, but there are much more people for it. If it came up on the floor of the Senate on a majority vote wins, it would pass. Whether it has 60 votes, I just can't tell you."
The general sentiment, from players to politicians, is that something will get done...eventually.
In the meantime, poker has gathered some powerful advocates. Casinos that once guarded their turf are hoping to get in on the online action. They're pushing Senate Majority Leader Harry Reid (D-Nevada) to get something done, but the prospect of new revenue sources is anathema to many Republicans. They squashed Reid's attempt to pass online poker regulation in 2010.
It may come down to the states legalizing it within their borders (much like medical marijuana), and daring the feds to step in. Nevada has already begun issuing online gambling licenses. Washington, D.C., passed a plan for running its own online poker site. And in December, the Justice Department reversed its long-standing view that the 1961 Wire Act banned online gaming, a move many experts see as opening the door to state-regulated poker.
Yet for the moment, the future remains cloudy. Maybe one day players will again be able to provide for their families. Until then, they're just out of luck.
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