Jackpot: Fed Crackdown on Full Tilt Clears Way for Casinos

Amazing how boldly the feds can move to halt wild financial speculation when they're in the mood. No, not Wall Street. That would be, you know, really hard. Instead, the government is lowering the boom on Full Tilt Poker, alleging that the online gambling site defrauded players and operated as a global Ponzi scheme.

The Justice Department's civil lawsuit against Full Tilt's owners, who include well-known poker pros such as Howard Lederman and Chris Ferguson, is damning. If true, it makes you wonder if criminal charges might be forthcoming given that the complaint alleges bank and wire fraud, along with money laundering.

As laid out in the suit, Full Tilt seems to have operated less as a pyramid scheme than the kind of racket Henry Hill of "GoodFellas" fame might have admired. The company is accused of failing to pay users more than $300 million in winnings, even as Full Tilt's 23 owners withdrew $444 million from the firm over a number of years. Here are a few other aspects of the purported scam, which DOJ says violated a 2006 law -- the Unlawful Internet Gambling Enforcement Act -- that made it a federal crime to accept payments for online betting:

• Arranging for money received from U.S. gamblers to be disguised as payments to hundreds of non-existent online merchants and other non-gambling businesses
• Using third-party payment processors to deceive banks about the kind of financial transactions Full Tilt was conducting
• Creating phony companies, including online flower shops and pet-supply stores, to trick banks into processing gambling payments disguised as common credit card charges
• Using bogus pre-paid debt and phone cards that gamblers could use to place bets, with the defendants also accused of arranging for fake consumer reviews to make the cards seem legitimate
• Conspiring with payment companies to disguise electronic fund transfers, such as "e-checks," used for betting purposes as non-gambling transactions

In a weird way, strict anti-gambling regulations in the US are responsible for this fiasco. If poker sites were legal and regulated, we could trust the regulator -- an arm of the US government -- to protect gamblers' funds. Casinos are strictly regulated; online poker sites should be as well. Instead, they became international fugitives, going to great lengths to make it possible for US gamblers to skirt regulations and use their sites.

Granted, Full Tilt's business model got turned upside down a few years ago when the feds started shutting down payment processors that handled online gambling transactions. That should've prompted the company's leaders to find another business model -- one that didn't require breaking the law -- or exhaust its legal options in challenging anti-online gambling regs. Instead, according to the DOJ, Full Tilt got sneaky.

Casinos muscling in
Salmon is onto one thing, though. If one party stands to benefit from Justice's jihad against online gambling, it's big casinos. Gambling giants like Caesars Entertainment, MGM Resorts (MGM) and Wynn Resorts (WYNN) would love nothing more than to run legal, strictly regulated online poker games.

That's why the gambling industry is actively lobbying to legalize online poker in the U.S. As Caesars CEO Gary Loveman told the FT in August, three months after the feds first shut down Full Tilt and two of its competitors, PokerStars and Absolute Poker:

The authorities cracked down on the illegal offshore providers, but that's left a vacuum for people like us to be able to legally offer this service.

With three major online poker sites out of the way, casino operators will presumably step up the campaign in Washington to let them in on the action. As FairPlay says, "American consumers must be protected."

Related:

• Law and Disorder: Why the Feds Won't Prosecute Bankers
• Better Than Bernie: How Wall Street Used CDOs to Perpetrate a Massive Ponzi Scheme
• Bernie Madoff's Jailhouse Interview: Banks Were "Complicit"