Tuesday afternoon, we learned that the Department of Justice had accused Full Tilt Poker executives of fraud. The online poker website was shut down by the FBI earlier this year as part of a general crackdown of online gambling. But the DOJ's accusations are far more specific. It says that the company wasn't merely allowing people to gamble illegally but also stealing money from its customers.
Here's the news, via Alexandra Berzon at the Wall Street Journal:
In the motion to amend the complaint, the government alleges Full Tilt executives misrepresented to the website's players that the money the company was supposed to be holding in player accounts was safely held when it was actually being used for other purposes, including payments to owners.
The distributions to the owners, including Mr. Ferguson and Mr. Lederer, continued even as funds to pay out creditors--the poker players--dwindled because government investigators had made it increasingly impossible to move player money into company-affiliated bank accounts, the government says.
"Full Tilt was not a legitimate poker company, but a global Ponzi scheme," said Preet Bharara, U.S. Attorney for the Southern District, in a statement.
So if I have this straight, the allegations are that Full Tilt executives claimed they put customer money into secure accounts but were really keeping some of that money for themselves. This would certainly qualify as some sort of fraud. It amounts to theft. It would be like if bank executives were siphoning money away from depository accounts. But is it really a "global Ponzi scheme"?
Let's consult the SEC website:
A Ponzi scheme is an investment fraud that involves the payment of purported returns to existing investors from funds contributed by new investors. Ponzi scheme organizers often solicit new investors by promising to invest funds in opportunities claimed to generate high returns with little or no risk. In many Ponzi schemes, the fraudsters focus on attracting new money to make promised payments to earlier-stage investors and to use for personal expenses, instead of engaging in any legitimate investment activity.
Of course, the recent famous version of a Ponzi scheme was that conducted by Bernie Madoff. But the definition above doesn't appear to fit the kind of thing that was allegedly going on at Full Tilt. According to the WSJ article, its executives were improperly taking its customers money and keeping it for themselves. There was no investment vehicle involved, as far as I can tell. Customers would have just used that money to play poker, presumably. And there was no investment return promised either -- the only money that they might have earned would have come in the form of poker winnings.
So the allegations against Full Tilt sound like fraud, but not a Ponzi scheme. I have requested some clarity from DOJ on this point and have not received a callback. I'll update this post if/when they get back to me.
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