If you were worried that Social Security is a Ponzi scheme and planned to fund your retirement with poker winnings, today turned out to be a bad day for you. While we here at Dealbreaker generally endorse keeping all of your money in poker, keeping all of your money in Full Tilt Poker was not the correct way to do so. Insofar as it now looks like you’ll only get back at best fifteen cents on the dollar. From the US Attorney’s complaint today:

105. Full Tilt Poker’s repeated representations that (1) player funds were held separately from operating accounts, (2) player funds were “safe” and “available,” and (3) it did not allow play on credit but instead allowed play only with “cleared” funds were, in reality, lies. In truth and in fact, Full Tilt Poker provided no protection whatsoever to deposits it received from players in the United States and other countries, and simply used the funds it claimed it was holding on account for its players to cover business expenses and to pay hundreds of millions of dollars in distributions to professional poker players affiliated with Full Tilt Poker and others who owned interests in Tiltware LLC. As a result, according to a balance sheet prepared by Full Tilt Poker, as of March 31, 2011, Full Tilt Poker owed players from around the world over approximately $390,695,788 but had only approximately $59,579,413 in its bank accounts. Full Tilt Poker relied on new deposits from players to ensure its ability to fund withdrawals to players’ accounts.

106. Rather than protect player funds as promised, Full Tilt Poker distributed hundreds of millions of dollars to its owners. Beginning in April 2007 and continuing through April 2011, Tiltware LLC’s Board of Directors, to wit, the FTP Insider Defendants, authorized the distribution of approximately $443,860,530 to the owners of Tiltware LLC, including themselves.

Felix Salmon at Reuters says “In a weird way, strict anti-gambling regulations in the US are responsible for this fiasco,” because US gambling rules made avoiding banking law a key element of the online-gambling-operator skill set:

If you need to be conducting all manner of wire fraud and money laundering just to stay in business, it’s a relatively small step to going Full Ponzi. On the evidence in the complaint, Lederer and Ferguson were willing accomplices in a scheme which ended up stealing hundreds of millions of dollars from poker players around the world; I wouldn’t be at all surprised to see criminal indictments coming soon. Would they have preferred to be able to set up an entirely legitimate, regulated company? I suspect they would have jumped at any such opportunity.

And actually the anti-gambling crackdown seems to have driven the Ponzi scheme even more directly. From the complaint again:

113. Beginning in or around August 2010, Full Tilt Poker was often unable to find payment processors to withdraw funds from the bank accounts of its United States players. Instead of disclosing this fact, Full Tilt Poker secretly began to credit funds to players’ online gambling accounts that Full Tilt Poker had never actually collected from players’ bank accounts. As players gambled, and lost, these phantom funds, Full Tilt Poker developed an undisclosed shortfall of approximately $130 million owed to players that Full Tilt Poker had never collected because, in reality, these funds were never withdrawn from players’ bank accounts. The management of Full Tilt Poker, including the FTP Insider Defendants, operated Full Tilt Poker with the hope that only a small number of players would try to withdraw funds at any one time, and that Full Tilt Poker would regularly receive additional deposits in amounts greater than any withdrawal requests.

This raises a number of questions, like, for one thing, if you noticed that you could get money at Full Tilt without paying for it, what would you do? (a) Call customer service to try to correct the error, (b) think that maybe it’s a Ponzi scheme and you might want to call the FBI, or (c) do it again and see how much free money you can get? I suspect a lot of the $130 million number comes from choosing option (c).

For another thing – was this a sustainable Ponzi scheme before the US clamped down on payment processing for online poker? The complaint makes it seem like the answer was no – in particular, the numbers suggest that even if they’d gotten in the $130mm in US funds, Full Tilt would have a huge shortfall – but then, that’s what you’d expect from a complaint. Lots of Ponzi schemers start legitimate and go Ponzi to make back unexpected losses; you could imagine that happening here since, if you can actually process US payments, operating a legitimate online poker site would seem to be too lucrative to risk by doing stupid things like stealing client assets.

But the other question is – what happens to all those people who got free money now that the government is coming after Full Tilt? Presumably, some of them got $100 in credit, say, without paying for it, played poker for a while, ended up with $80 or $100 or $200 or whatever, and tried to cash out. The complaint makes it clear that Full Tilt was cashing out players well after August 2010, so presumably those people got their money “back” – even though they never put up any money in the first place. Can whoever winds up responsible for Full Tilt’s estate go after them, Madoff style? Could a trustee go after even those who never withdrew money but who had a deposit at Full Tilt that they never paid for, on the theory that they owed money to the estate?

You could imagine a full-on, Irving Picard-style hunt for “winners” here – except that it’s not clear that the US Attorney is all that interested in getting money back for Full Tilt players. In fact, the amended complaint isn’t seeking to get money back to players at all. After all, Full Tilt Poker was not SIPC insured, and unlike (some of) the Madoff victims, anyone playing online poker was knowingly involving themselves in mildly illegal activities. Which suggests that the US government is not going to work all that hard to get money back to anyone who was burned by Full Tilt – and that anyone who took advantage of being able to play for free, and cash out, may get to keep their winnings.

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Comments (14)

  1. Posted by Guest CFA | September 20, 2011 at 7:27 PM

    "The management of Full Tilt Poker, including the FTP Insider Defendants, operated Full Tilt Poker with the hope that only a small number of players would try to withdraw funds at any one time, and that Full Tilt Poker would regularly receive additional deposits in amounts greater than any withdrawal requests."

    …or you could say Full Tilt Poker operated like the fractional banking system.

    –Ron Paul '12

  2. Posted by P the cable guy | September 20, 2011 at 9:02 PM

    Keep banking my friends.

    -The most greedy banker in the world.

  3. Posted by Matt's Admirer | September 21, 2011 at 5:53 AM

    The first time I read Matt's essay from back to back and I enjoyed it !

  4. Posted by Bandersnatch | September 21, 2011 at 7:16 AM

    Agreed
    - Not an admirer ot Matt yet but willing to give him time

  5. Posted by Mike McDermott | September 21, 2011 at 11:12 AM

    Here's the thing. If you can't spot the sucker in your first hour at the table, you are the sucker.

  6. Posted by Guest | September 21, 2011 at 11:30 AM

    same story for Groupon

  7. Posted by guest | September 21, 2011 at 12:47 PM

    Going to the "Brick & Mortar" and sitting next to the 400lb dude with the next killer sinus virus for 6 hours, the NKI!

  8. Posted by wahoo | September 21, 2011 at 1:04 PM

    Everyone knows you never go Full Ponzi.
    Check it out. Tom Petters, diversified holdings company. looked retarded, act retarded, not retarded. Counted toothpicks, cheated Sam's Club sales. Autistic, sho'. Not retarded. You know Lou Pearleman, discovered boy bands. Slow, yes. Retarded, maybe. frosted tips all up in his salad. But he charmed the pants off dem back street boys and won a ping-pong competition. That ain't retarded. You went full ponzi, man. Never go full ponzi. You don't buy that? Ask Bernie, 2009, "My legitimate years". Remember? Went full ponzi, went home empty handed…

  9. Posted by Auditard | September 21, 2011 at 3:31 PM

    "Which suggests that the US government is not going to work all that hard to get money back to anyone who was burned by Full Tilt – and that anyone who took advantage of being able to play for free, and cash out, may get to keep their winnings."

    I don't think it will happen right away, but I'm willing to bet that the records of those winnings somehow eventually find their way to the IRS, possibly after many years of penalties and interest. They don't tend to have much of a sense of humor about these things.

  10. Posted by madhatter | September 22, 2011 at 12:33 PM

    Since FTP was rigged and fixed games so they wouldn't loose money, will players get back any of the deposits they made or just the balance in the account? Might be a stupid question but these people have millions and really stole our money by rigging the software-we should get back all money we put into the stupid site!!

  11. Posted by Matt's Dad | September 22, 2011 at 5:11 PM

    DID NOT READ, LOL!

  12. Posted by Player | September 23, 2011 at 4:52 PM

    No one got free money. You had to deposit money for it to show up in your account. It could have been stolen by payment processors or disbursed or wasted by Full Tilt.

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  14. Posted by SoorneNen | September 3, 2012 at 7:56 PM