Special Report: Vegas casinos gamble on online partners with a past

SAN FRANCISCO Mon May 14, 2012 8:10am EDT

1 of 7. The marquee sign at Caesars Palace displays a welcome to Celine Dion in Las Vegas, Nevada in this February 16, 2011 file photo.

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SAN FRANCISCO (Reuters) - To prime itself for the U.S. debut of legal online poker, MGM Resorts International, owner of such Las Vegas Strip monuments as the MGM Grand, the Bellagio and the Mirage, wanted a partner that knew the ropes.

So last October it hooked up with Bwin.Party Digital Entertainment Plc, a London-listed, Gibraltar-based specialist that rakes in more from Web betting than any other publicly traded company. MGM Resorts took 25 percent of a new venture 65 percent owned by Bwin.Party, with smaller Las Vegas casino operator Boyd Gaming getting the remaining 10 percent.

"We'll be out of the gate as soon as anybody," MGM Resorts Chief Executive Officer Jim Murren boasted to investors in February.

Online expertise isn't the only thing that distinguishes Bwin.Party. In 2009, an earlier incarnation of the company paid $105 million while admitting to U.S. prosecutors it had run an illegal gambling operation and engaged in bank and wire fraud.

Among its principal backers: a California-born woman who made a fortune in phone sex and Web pornography businesses that, like the pioneering online-gambling company that became Bwin.Party, faced multiple allegations of wrongdoing.

MGM Resorts' choice of Bwin.Party as a partner while applying for online poker licenses in Nevada might seem unusual. It isn't. The alliance reflects the calculated risks that major casino operators, Native American tribes and social-gaming giants Zynga and Facebook are weighing as they angle for a slice of a market valued at billions of dollars a year.

Caesars Entertainment Corp is prepping for online poker by tying up with an Israeli company that in 2007 acknowledged settlement talks with the U.S. Justice Department over alleged breaches of anti-gambling laws.

A group of Native American tribes in California has signed up to use software from another Israeli company, run by a man who served prison time for stock manipulation and bribery. Another tribe last week announced a deal with Bwin.Party.

Zynga, eager to convert some of its tens of millions of virtual poker enthusiasts into cash gamblers, also has been in talks with Bwin.Party and others that have had brushes with the law, according to people familiar with the matter.

Meanwhile, offshore gambling outfit PokerStars is considering buying its chief offshore rival, Full Tilt, and making a run at the U.S. market even though founders of both were indicted by the Justice Department last year on charges of illegal gambling, bank fraud and money laundering, according to people familiar with the situation.

All this comes as Nevada prepares to license the first online poker operators and software suppliers late next month -- and as California, New Jersey, Iowa, Massachusetts, Delaware and other states debate similar moves.

Many of the cash-starved states, encouraged by intensive industry lobbying, have felt freer to act since December, when the Justice Department declared that one federal anti-gambling law, the Wire Act, would no longer be enforced beyond sports betting.

But casino operators, Indian tribes and Internet powers bent on offering online poker lack experience delivering it. Online poker is a business that involves processing billions of dollars worth of bets and battling the fraudsters, cheats and robot-player software that can ruin the games. Hence the casinos are cozying up to some tech-savvy offshore partners whose pedigrees might give regulators pause.

Most states have "suitability" rules designed to keep crooks out of the gambling industry. Nevada requires that successful license applicants and their large shareholders possess "good character, honesty and integrity." Nevertheless, the big casino operators and their offshore partners are betting that regulators will look favorably on their license applications for two good reasons: tax money and high-tech jobs.

Early indications are that they are right.

At a hearing on a Caesars deal with the Israeli company last year, Mark Lipparelli, chairman of Nevada's Gaming Control Board, said: "I don't think as we look at companies that we can have perfection as the standard, because I think that would be a disservice to the state in attracting business here." The board unanimously recommended approval of the venture.

Gambling foes warn that states are putting fiscal worries ahead of public safety, exposing a huge and vulnerable population to the potential for compulsive betting. "The governments are so desperate for revenues that they will partner with these lawbreaking outfits," said Les Bernal, executive director of the nonprofit Stop Predatory Gambling Foundation in Washington, D.C. "They will create addiction in order to feed off of it."

PORN AND CARDS

Jim Ryan, co-chief executive officer of Bwin.Party, acknowledged in an interview that when the company was looking for U.S. partners, its history was a chief concern of MGM Resorts and other U.S. companies.

"Suitability is the very first question on all of their minds," he told Reuters during a recent business trip to San Francisco.

It's easy to see why.

Bwin.Party grew out of PartyGaming, a brainchild of San Francisco-area native Ruth Parasol, who has a history as colorful as Las Vegas. After earning a law degree, Parasol first prospered in the 1990s through 1-900 phone-sex and other services that were sued by multiple states for aggressive billing and collection practices. In North Carolina's suit, the judge ordered a company she co-founded to pay $270,000 in damages.

Then Parasol put her money behind Internet Entertainment Group, which gained notoriety for releasing an early Pamela Anderson sex video and promising an initial public offering that never happened. Employees accused the company of routinely overbilling customers, and Chief Executive Seth Warshavsky fled to Thailand as authorities investigated. Warshavsky didn't respond to an interview request.

Parasol managed to emerge unscathed, and in 1997 founded Starluck Casino in the Caribbean, providing online gambling to customers in the U.S. and elsewhere. The company had a big hit with its PartyPoker website, which became the dominant force in U.S. online cards, and then renamed itself PartyGaming.

Parasol, who has been living in Gibraltar for most of the past decade, declined requests for an interview.

In 2005, PartyGaming's IPO became the largest London had seen in four years, valuing the company at more than $8 billion. Just then, debate over the U.S. legal status of online gambling flared.

The Justice Department had long argued that Internet poker violated the Wire Act and other federal and state laws. Despite the success of PartyGaming and other offshore companies, no U.S.-based companies offered alternatives for fear of prosecution.

In 2006, Congress clarified the matter by passing the Unlawful Internet Gambling Enforcement Act, or UIGEA, explicitly barring processing interstate or international poker transactions where state laws forbade such gambling. PartyGaming responded by pulling out of the U.S., leaving two-thirds of its players behind to be claimed by privately held offshore companies.

The law didn't snuff out online poker in the U.S. as players migrated to other offshore providers. Research firm H2 Gambling Capital estimates the U.S. accounts for about $400 million of global annual online poker revenue of nearly $5 billion, or 8 percent. Depending on how many states ultimately legalize online cards, that share could rise to as high as 28 percent in five years, the company says.

PartyGaming's problems didn't end when it left the United States. In 2008, co-founder Anurag Dikshit pleaded guilty to gambling via the wires in federal district court in New York. He forfeited $300 million and agreed to cooperate with prosecutors, leading PartyGaming itself to settle in 2009. The company paid $105 million to avoid prosecution for pre-UIGEA violations. Dikshit couldn't be reached. His lawyer didn't return calls seeking comment.

In 2010, prosecutor Arlo Devlin-Brown told the court that the probe was continuing and referred to documents under seal. He recently told Reuters he could not comment further, leaving open the possibility that Parasol could be charged if she returns home to the United States.

PartyGaming's fortunes recovered as it began to focus on non-U.S. customers. Last year it bought rival Bwin Interactive of Austria and changed the merged company's name to Bwin.Party, with annual revenue of 691 million euros, or $902 million.

During the merger talks, the regulatory suitability of PartyGaming and Parasol became an issue. Parasol and her husband, Russell DeLeon, agreed that the board could force them to restructure their more than 13 percent stake in the merged company or sell it if "required by any gaming regulatory authority in connection with business opportunities," according to merger documents filed with regulators.

That clause wouldn't apply, however, if the licensing process is "more burdensome to the principal PartyGaming shareholders than the licensing requirements currently imposed by the state of Nevada." That means the couple's stake could, in effect, block deals in states with tougher standards. Bwin.Party's Ryan said he couldn't imagine the couple standing in the way. DeLeon couldn't be reached for comment.

Now partnered with MGM Resorts, Bwin.Party has applied for a Nevada license to offer Internet poker software and services. Co-CEO Ryan said the joint venture will handle all U.S. games where players pay to play and can cash out their winnings.

In the meantime, he said, Bwin.Party will promote its brands through a social game, to be announced soon, without the ability to cash out. Ryan said negotiations with Facebook, a likely game platform, are continuing.

Facebook declined to comment. MGM did not respond to repeated interview requests about its choice of Bwin.Party.

"PRETTIEST GIRL IN TOWN"

One of Bwin.Party's top rivals is also listed in London but based in Israel. That company is 888 Holdings, founded by a dentist inspired to put poker on the Net after a 1996 trip to Monte Carlo. The late Aharon Shaked and his brother Avi mortgaged their homes to fund the company, and their families and a co-founding family still have majority control.

In 2006, 888 joined PartyGaming in pulling out of the U.S. market. But for a time before that, 888's Casino-on-Net gambling website was among the top 10 buyers of banner ads aimed at U.S. home Internet users, reaching more than 10 percent of them in a single week, according to Nielsen/NetRatings.

In 2007 the company acknowledged it was in settlement talks with the Justice Department over suspected breaches of pre-2006 anti gambling laws. No charges were filed.

The 888 deal with Caesars that Nevada regulators approved last year was a trial run of Caesars-branded online poker in the British market, where such games have been legal for years. Caesars, operator of the Strip's Caesars Palace, Harrah's and Rio, has since expanded its relationship with 888, agreeing to use its software in the United States once states approve.

Ambitions are running high at 888. "The most exciting market opportunity for the industry must be that of the States, and we are definitely the prettiest girl in town, with everybody keen to have discussions with us," 888 Chief Executive Officer Brian Mattingley told investors last month. Officials at 888 declined interview requests, as did those at Caesars.

Lipparelli, the Nevada Gaming Control Board chairman, said scrutiny of the initial Caesars venture was lower than what it would have been for a U.S. venture. He said current investigations of Bwin.Party, 888 and more than 20 other license applicants would be far more rigorous than anything the overseas outfits had experienced in their home countries. "Some will probably not make it through," Lipparelli said.

He said confessions of pre-2006 wrongdoing wouldn't automatically prevent licensing, though. Gambling executives say they expect smooth sailing in Nevada because regulators want to add local technology jobs. Concern about past lawbreaking "has all gone away," one casino executive said.

One big test could come in the case of PokerStars, based in the Isle of Man, and Full Tilt Poker, based in the Channel Islands, which together snapped up most of the U.S. market after the 2006 law was passed and PartyGaming ran for the exits.

Last year, on an April day known in online poker circles as Black Friday, federal prosecutors unsealed indictments alleging illegal gambling, bank fraud and money laundering against the founders of PokerStars and Full Tilt. Preet Bharara, U.S. Attorney for the Southern District of New York, said Full Tilt had operated as a Ponzi scheme, relying on new players' deposits to cover payouts to older customers while executives and advisers took hundreds of millions of dollars from player accounts.

The indictments prompted Wynn Resorts Ltd to drop a weeks-old "strategic relationship" with PokerStars. The main owner of Station Casinos, which serves Las Vegas locals at 11 casinos off the Strip, abandoned a similar tie-up with Full Tilt. Neither Nevada company returned calls seeking comment.

Full Tilt has shut down while it negotiates with the Justice Department. But PokerStars remains the biggest site worldwide, with what others in the industry believe tops $1 billion in annual revenue. It harbors hopes that a deal with prosecutors could pave the way for a return to the U.S.

People familiar with the situation say that as part of the settlement talks with the Justice Department, PokerStars is considering buying Full Tilt and refunding U.S. players hundreds of millions of dollars missing from their accounts. PokerStars confirmed the settlement talks but declined to comment on Full Tilt or its American aspirations. Full Tilt officials couldn't be reached for comment.

"CONCERNED ABOUT PROBITY"

In California, casinos and gambling-software companies already are scurrying for deals with the tribes and others that would be eligible for direct licenses under a bill pending in the state senate. Caesars manages the Rincon tribe's Harrah's casino and is hoping to build on that with software from 888.

A coalition of tribes and card rooms known as the California Online Poker Association has signed up to use software from Playtech Ltd, a London-listed British company. About 40 per cent of Playtech is owned by Teddy Sagi, an Israeli billionaire who pleaded guilty to stock manipulation and bribery in 1996 in a scandal known as the Discount Affair. He was sentenced to nine months in prison. Playtech didn't respond to a request for comment.

The tribes are aware of the risks of choosing partners that won't satisfy the state Justice Department, which the current bill would empower to approve license applications.

"We are very, very concerned about probity," said Joaquin Fletcher, president of the Pechanga Development Corp, owner of the Pechanga Resort and Casino in Temecula, California. "We don't want whoever we pick to just create more nightmares down the road."

Similar concerns are on the minds of social media companies.

Zynga, the dominant provider of recreational games on Facebook, has 36 million monthly average users of its Texas HoldEm Poker, the second most popular game on Facebook after its CityVille, according to market research firm AppData.

The card game doesn't require regulation because players don't receive cash payouts, though they often pay for extra chips to play with. Those virtual chip purchases have made the game one of Zynga's top earners and opened the company's eyes to the potential of the real thing.

Lazard Capital Markets said in March that it expected Zynga to move "aggressively" and capture an extra $100 million in annual profit by offering online poker with cash payouts and prizes.

Zynga has held talks with Bwin.Party, 888, multiple California tribes and card rooms, and the big brick-and-mortar casinos, people familiar with the discussions said. The company might experiment first with poker in well-regulated overseas markets such as the United Kingdom, they said. Zynga declined to comment.

The gambling majors have seen the promise of social networking as well. MGM Resorts, like Bwin.Party, is planning its own game without cash payouts but with social networking built in. Caesars recently bought game application developer Playtika, which has a popular free slot machine app on Facebook called Slotomania, and it launched a Caesars-branded casino game suite there, too.

Despite the enthusiasm, the risks of a regulatory, legal or public-relations setback for Zynga and Facebook are substantial, even if they partner well.

With millions of free players, "it's very likely these people can be converted" to playing for real money, said one longtime offshore poker executive. "But do they want a headline saying some kid lost $10,000 playing poker on Facebook?"

(Editing by John Blanton)

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