How Will the DoJ’s New Stance on Wire Act Impact Internet Poker in 2012?

The DoJ flip-flop on the Wire Act may not do much for Federally-regulated online poker in 2012, but could be a boon for Nevada brick-and-mortars.

To paraphrase one of Paulie Walnuts all-time best lines in the Sopranos, people in the poker industry wouldn’t mind “giving 2011 back to the Indians.”

But the last two work days before Christmas, a few unexpected presents were given to the industry. First, Nevada set itself up to launch intrastate poker in 2012. Then, the Department of Justice dropped a letter saying that the 1961 Wire Act only applies to sports betting, meaning activities like online poker or state lotteries would essentially be exempt.

We spoke with a number of connected industry insiders for their perspective on how the DoJ letter will impact the online poker world in 2012. The prevailing consensus: it won’t much at the Federal level, but it’s go time for intrastate online poker.

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Clearly, the DoJ letter is great news. But for the chances of online poker regulation at the Federal level, it shouldn’t have much of a direct or immediate impact. It’s not going to push any legislation faster through Congress. As we’ve stated, and many people we spoke with agree, an online poker bill probably won’t work its way through Congress to law via the tradition route (House subcommittee -> House committee -> House general -> Senate and -> to the President’s desk. More likely (like the UIGEA), it gets tacked onto an omnibus bill during the lame duck session, hopefully after the 2012 mid-terms/Presidential election.

So let’s eliminate any DoJ flip-flop affecting online poker (immediately) at the Federal level. That leaves the immediate fate of online poker legislation with the States.

At the local level, the December 23rd DoJ letter eliminates some legality gray area for states. Nevada has already positioned itself for intrastate poker, and now New Jersey, with Atlantic City as its gambling Mecca, quickly moved into action, hoping to pass legislation through as soon as next week. Expect other states, like California or even Iowa, to follow.

We spoke with Stu Hoegner of Gaming Counsel, a law firm specialized in working with Internet gaming operations, for his view on the DoJ letter. He told us:

The memorandum opinion released by the US Department of Justice on December 23rd is big news. It essentially signals that the Department of Justice going forward will confine its prosecutions under the Wire Act to bets on sporting events and sporting contests. This is a major shift. What this means for Internet poker isn’t entirely clear yet. Poker is not mentioned in the opinion, but it’s hard to see how the same analysis of the Wire Act wouldn’t apply to a purely intrastate, regulated Internet poker offering.

While we heard from some sources at online operators that the DoJ reversal could impact the current Black Friday indictments, that likely won’t be the case, as the Wire Act wasn’t used necessarily as a basis for those violations. Stu Hoegner elaborates:

However, we should recognize that this is just how the Department of Justice perceives the application of one piece of federal legislation (except possibly insofar as the opinion touches on the apparent conflict between the Wire Act and the UIGEA). The federal government still has plenty of dry powder to attack what it believes to be unlawful Internet gaming, including, for example, the Illegal Gambling Business Act. Note that this statute was one of the ones used to indict the Scheinbergs and the ThrillX-K23 groups in the New York and Maryland indictments, respectively. (The NY indictments also relied on bank and wire fraud and UIGEA violations.) From a legal perspective, the legal opinion rendered this past week need not affect how the DoJ is prosecuting either the Maryland or the New York cases; not only was the opinion confined to intrastate non-sports offerings (not the facts in either prosecution), but the Wire Act wasn’t relied upon in the criminal counts in either case, anyway. (Although, as I pointed out here, the affidavit in support of the indictments in Maryland by the Homeland Security Special Agent does include the Wire Act in the applicable statutes section.)

Another attorney (and Wicked Chops Insider contributor) Dave “F-Train” Behr, agrees that the DoJ letter does much more for intrastate than Federally regulated poker:

Because of the potential impact on their gaming licenses of making a mis-step, casino operators need all of their ducks in a row. The DoJ letter is one of the last ducks to line up for intrastate poker.

While the prevailing consensus is the DoJ letter is great news for intrastate online poker adoption, it doesn’t mean there won’t be issues and stumbling blocks getting there. In an article by AP reporter Oskar Garcia, sometimes controversial gambling law expert I. Nelson Rose stated:

[Traditional Brick & Mortars] are going to have problems because when the states legalize, their natural inclination is to give it to the locals…If you’re a Nevada casino operator, you don’t want to be competing in more than 50 separate jurisdictions against connected, politically powerful operators.

However, in his blog, Rose makes an interesting case for how the Wire Act could quickly broaden and expand the scope and potential liquidity-base of intrastate poker:

…there may be nothing preventing states from making compacts with other states, and even foreign nations, once they have legalized an online game, like poker. If Nevada and the District of Columbia want to take Internet poker players from each other, what federal law would they be violating? And, if they agreed that their residents could bet with licensed poker operators in, say, Antigua and England, while residents of those nations could bet with poker operators in Nevada and Washington, we know they would not be violating the Wire Act, or the anti-lottery laws, or any of the federal prohibitions which require that the gambling be illegal under a state’s laws.

The difficulities and potential challenges pointed out by Rose echo the sentiments of one of our senior management sources at an online poker operator. He told us:

I think the opinion was important, correct, and long overdue.  However, there are still a million miles to go. It still remains to be seen how the states handle joined liquidity and more importantly international liquidity.  Absent communication and a consistent approach by states on this issue, we actually may have been in better shape before this opinion than we are now.  Inconsistency could equal chaos.

Recapping and digesting all of the information, we believe the DoJ letter effectively means:

  • …little for the chances of Federal online poker regulation by the end of 2012;
  • …a lot for the chances of online intrastate poker in 2012 (at worst, all the pieces are in place for the public to be playing in select states in 2013, at best, people are playing by the end of 2012);
  • …an absolute battle by Nevada, New Jersey, and potentially California to be first-movers;
  • …some messy and complicated maneuvering to connect the opt-in states and potential foreign players to increase liquidity.

The last point is crucial. While Nevada or New Jersey setting up regulations and actually overseeing online poker operations at the state-level is a long-term must if they want to position their respective states to be “the” governing body once Federal laws are enacted, in the short-term, neither state will see much in the way of revenue unless they can increase their liquidity base.

And ultimately, the more messy things get between the states, the more likely we believe the Federal government will be forced (likely from gaming lobbyists and the actual brick & mortar donors like Caesars Entertainment and MGM) to step in and set up regulations for online poker.

One way or another, strap yourselves in for an interesting 2012.
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