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.