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Howard Stutz

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Inside Gaming: Internet gaming giant tries again

31 Mar 2014

By Howard Stutz
You have to hand it to online gaming giant PokerStars.

Despite setback after setback, the Europe-based company won’t give up on its quixotic quest to break into the fledgling U.S. Internet gaming market.

After failing in Nevada and New Jersey, the new target is California.

But odds are PokerStars is once again drawing dead.

The company, operated by the Isle of Man-based Rational Group, is linked to three politically powerful Los Angeles-area card rooms and Riverside County’s the well-connected Morongo Band of Mission Indians.

The partnership wants to block Internet poker legislation in the state that bans PokerStars from participating in what many believe will be a massive revenue-generating Internet market that would dwarf Nevada’s online poker network.

How lucrative?

Morgan Stanley gaming analyst Thomas Allen predicted last week that legal Internet gaming in the United States will produce $8 billion annually by 2020. California, he said, will legalize online poker and alone will see $1.18 billion in annual revenue.

The partnership was first reported two weeks ago by veteran journalist Dave Palermo for A follow-up story quoted an influential state lawmaker who said the alliance creates “a significant wrinkle” in passing any legislation.

Nevada and New Jersey regulators took steps to keep PokerStars from gaining access to the states’ newly launched Internet gaming opportunities. California is considering similar mechanisms in two bills pending in Sacramento that would legalize Internet poker.

There is nothing simple when it comes to PokerStars. The company remains the world’s largest online gaming website, controlling 54 percent of the global Internet traffic through markets outside of the United States.

PokerStars pulled out of the United States in April 2011 following the indictment of its founder, Isai Scheinberg, and two other company officials on fraud and money-laundering charges.

The action was part of the U.S. Justice Department high-profile “Black Friday” crackdown on poker websites that took wagers from Americans after passage of the Unlawful Internet Gambling Enforcement Act, which made financial transactions for online gaming illegal in 2006.

Sixteen months later, PokerStars settled its civil case by forfeiting $731 million. The agreement required Scheinberg to cease any managerial role at PokerStars. The Justice Department absolved the company of wrongdoing in accepting Internet wagers from American gamblers for the five years after the act became law.

Federal authorities didn’t prohibit PokerStars from entering legal U.S. gaming markets.

State gaming regulators had an opposite view.

In Nevada, online gaming regulations include a five-year ban on companies that accepted Internet bets from Americans after 2006. The language was dubbed as a “bad actor clause,” and all but singled out PokerStars. Internet gaming companies that took wagers from Americans, but halted the practice after 2006, including 888 Holdings and PaddyPower, have been licensed or found suitable.

New Jersey gaming regulators considered a “bad actor clause” but dropped the idea. Regulators expressed their disapproval toward PokerStars when the company tried to buy the Atlantic Club last year. That deal fell apart. PokerStars later agreed to be the online gaming partner with Resorts Atlantic City, but the arrangement went nowhere.

New Jersey’s Division of Gaming Enforcement suspended the Rational Group’s casino service industry license application for two years while the company tied up loose ends, namely dumping Scheinberg from its board and removing other executives.

Which brings us to California.

PokerStars is in talks with the Commerce Club, Hawaiian Gardens and Bicycle Club card rooms and the Morongo tribe, which operates the Morongo Casino-Resort off Interstate 10 west of Palm Springs. The group will lobby for legal Internet poker in California — as long as the legislation doesn’t contain a “bad actor clause.”

Los Angeles attorney Keith Sharp, who represents the card rooms, said an agreement has not been reached.

PokerStars spokesman Eric Hollreiser declined comment.

Sharp said the best step lawmakers can take is to let state gaming regulators decide which companies should be licensed. That’s the way it’s worked for 16 years in the card room industry.

“They have done a good job,” Sharp said. “We just don’t need another category.”

Six years ago, the Morongo and 28 other tribes joined the 31 card rooms to form a California association to lobby for Internet poker legislation. Sharp said a passage of a bill “is closer than ever before.”

He said he knows PokerStars is a issue, but not for the three card rooms and the tribe.

“Apparently it is for others,” he said.

California Tribal Business Alliance Chairwoman Leslie Lohse said PokerStars doesn’t meet the standards the organization wants lawmakers to set.

“From the Alliance’s perspective, only entities that adhere to the highest regulatory standards, such as those used in the regulation of Indian gaming, should be licensed to provide online play,” Lohse said in a statement.

The two Internet poker bills pending in the California Legislature include language making it difficult for PokerStars to enter the market. The bills also limit online poker licenses to Indian tribes and card rooms, and cut out the state’s horse racing industry.

California’s 68 tribal casinos produce 25 percent of all the Indian gaming revenue in the United States — $6.96 billion in 2012, according to the newly released Casino City’s Indian Gaming Industry Report.

With 38 million residents, California is far too valuable for PokerStars to pass up. The company is again willing to tilt at windmills, although its enemy is not imaginary.

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