ANALYSIS-US online poker ruling at risk in future administrations

Wed Dec 28, 2011 9:40pm GMT

* Focus shifts to states on whether to pass gambling laws

* Little impact seen on current criminal cases

By Jeremy Pelofsky

WASHINGTON, Dec 28 (Reuters) - While the Internet poker world salivates at the prospect of its business coming back to life thanks to an Obama administration ruling, a future U.S. president could reverse that decision and send the industry back to the drawing board if it is not codified into law.

Late on Friday, the eve of Christmas weekend, the U.S. Justice Department's Office of Legal Counsel issued a legal opinion stating that the 1961 Wire Act prohibited online betting only for sporting events and contests, not Internet games such as poker or lotteries.

That opens the door to online poker and leaves it to each state to decide whether to legalize the multibillion-dollar industry. Pressure likely will mount on the U.S. Congress to address the issue too.

A Justice Department memorandum can be withdrawn and a controversial decision can be reversed. Courts can intervene and render it void. One way to assure the future of the ruling is for Congress to codify it into law.

"This is just an opinion of the Department of Justice and only reflects what the Obama administration would bring charges on. Future departments of Justice could interpret the Wire Act differently," said Greg Gemignani, a lawyer and expert in Internet gaming with the Las Vegas firm Lionel Sawyer & Collins.

It seems hard to imagine a future U.S. administration pulling back should many states go ahead and approve online poker. But there is precedent for reversing a president.

At the beginning of President Barack Obama's term in 2009, the Justice Department took the rare step of withdrawing opinions that the Office of Legal Counsel issued during the Bush administration related to interrogations of terrorism suspects by the Central Intelligence Agency.

STAGE SET

"An opinion of the Office of Legal Counsel can be withdrawn or changed, although it is not often done," said Linda Shorey, a partner at K&L Gates LLP in Harrisburg, Pennsylvania, who focuses on gaming laws and regulations.

"Under the U.S. Constitution, only the courts have the authority to determine whether the Wire Act applies to poker wagers," she said. "The Department of Justice memo is not binding on the courts."

The U.S. Court of Appeals for the Fifth Circuit, based in New Orleans, has ruled in favor of the poker industry on the Wire Act, saying it only applied to sports betting, but a federal judge in Utah has ruled against it.

That could put pressure on Congress to address the issue. But with elections due in November, lawmakers are typically loathe to do anything controversial that could spark the wrath of their constituents.

"With the (conservative) Tea Party in such a powerful position (in the House of Representatives), that just seems to me impossible" that legislation would pass anytime soon, said I. Nelson Rose, a professor and leading gambling consultant and expert for states and the industry.

The ruling by the Justice Department hands the states the power to make decisions about what forms of online gambling, if any, are legal, he said. If they permit it, then states could reach pacts to allow their residents to play online in each other's jurisdictions as well, Rose said.

Republican Representative Frank Wolf, head of the panel that oversees the Justice Department's annual budget, was puzzled by the decision to reverse the long-standing position and planned to ask for an explanation, his spokesman said.

The casino industry is eager for Congress to pass legislation that would ensure uniformity in regulating the industry.

"If there is not a federal bill then you will see individual states each passing unique sets of rules," Caesars Entertainment Chairman Gary Loveman told Reuters. “It’s obviously a far less rational way to proceed and it runs the risk of not addressing the illegal operators in any way."

PROSECUTIONS UNTOUCHED

While the Justice Department decision will likely have far-reaching ramifications for the gaming industry, one area it leaves untouched is pending prosecutions against individuals and companies facing charges over online poker businesses.

Federal prosecutors may still come after online gamblers using state laws that prohibit such activity and they could always add federal fraud, conspiracy and other charges.

They did exactly that in New York when prosecutors charged a dozen people and their online poker businesses this year with conspiracy to commit bank and wire fraud, money laundering and violations of a 2006 law banning most Internet gambling.

Because they were not charged under the Wire Act, the new legal memorandum will have no impact on that case, said a Justice Department source who declined to be further identified.

The prosecutors appeared to carefully avoid using the 1961 law in making the charges, knowing that this controversy over the Wire Act was brewing, according to Rose.

"It's actually quite startling that they're charging people with money laundering and illegal gambling and yet never mention the major federal statute," he said, adding that they likely did so "because they knew they were in trouble with the Wire Act."

A Justice Department spokeswoman said online poker did not constitute betting on a sporting event under the Wire Act, but said that other state and federal laws will still apply to online gambling.

"In states that ban various forms of gambling -- including Internet poker -– the department will be able to investigate and prosecute those gambling businesses under the Unlawful Internet Gambling Enforcement Act and other sections of the criminal code," said Justice Department spokeswoman Alisa Finelli.

In the New York case, last week an executive for Absolute Poker, one of the three largest Internet poker companies, pleaded guilty to deceiving banks over the processing of gambling proceeds and conspiring to commit bank and wire fraud. Another individual pleaded guilty in May to similar charges.

As part of the prosecution, the U.S. government seized the Internet domain names of the three biggest online poker companies: Absolute Poker, Full Tilt Poker and PokerStars.

Lawyers for the defendants did not respond to requests for comment.

(Additional reporting by Basil Katz in New York, Nanette Byrnes in Chapel Hill, North Carolina and Edwin Chan in Los Angeles; Editing by Howard Goller and Steve Orlofsky)

((jeremy.pelofsky@thomsonreuters.com)(202-898-8396)) Keywords: INTERNET GAMBLING/LEGAL

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