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What happens when an industry exists in a legal gray area under little regulatory oversight? If history is any guide, eventually that industry blows itself up in a fiery crash and someone will end up in jail.
We saw it with derivatives and hedge funds during the financial crisis, and now underground online poker companies appear to be falling into the same trap. The Wall Street Journal is reporting that the U.S. Department of Justice is going after Full Tilt Poker for being a Ponzi scheme.
I knew poker players liked to lie, but the site does, too?
Full Tilt Poker is a well-known company in online gaming. Full Tilt and PokerStars dominate commercials and players' attire on ESPN's World Series of Poker coverage as well as the World Poker Tour. With a reported $390 million in players' deposits, we aren't talking about small potatoes here, and there are thousands, if not millions, of players who may not get their money back.
The Ponzi-scheme reference comes because, of the $390 million Full Tilt apparently has in players' money, $150 million is owed to U.S. players, but ithas only $60 million in deposits. So owners were paying themselves, probably hoping that eventually these players would lose the money online.
Putting this news into even higher profile is the names on the complaint for the DOJ, which lists Howard Lederer, Chris Ferguson, and Rafael Furst -- household names for those who watch poker.
If there wasn't reason enough to regulate and tax online gaming sites on a state and/or federal level, hopefully this will convince Congress to take action. Online poker has a tremendous potential to provide tax revenue for the government, and as fellow Fool Morgan Housel pointed out earlier this year, fewer people have a gambling disorder than smoke cigarettes or meet the clinical definition of alcoholism.
MGM Resorts (NYSE: MGM ) and Caesars Entertainment probably have the most to gain from online poker's legalization. The two companies have some of the most recognizable brands in poker and a large network of casinos to provide rewards for players. But almost every casino company will want in on the action.
Wynn Resorts (Nasdaq: WYNN ) has already agreed to a partnership with PokerStars if online poker is legalized. Las Vegas Sands (NYSE: LVS ) has also dipped its toe in the online-poker waters in the past, so the big boys would jump in quickly. This might also be a chance for smaller, regional casino operators such as Boyd Gaming (NYSE: BYD ) , Ameristar Casinos (Nasdaq: ASCA ) , and Penn National (Nasdaq: PENN ) to grab some incremental revenue and pay off debt as gaming numbers struggle to return.
If a Ponzi scheme was needed to push Congress to regulate online poker, then that's sad, but so be it. I hope online poker is regulated sooner rather than later. The U.S. gaming industry could use it.
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