Were They Doing Anything Illegal?
As we all now know, Canadians Stephen Lawrence, 46, and John Lefebvre, 55, former directors and founding shareholders of NETELLER, have been charged in the United States with laundering billions of dollars in illegal gambling proceeds.
The federal government is taking a fascinating position, purporting that these men knew that operating NETELLER was illegal because of what was written in their prospectus when they went public. Allow me to digress.
When a privately held company goes public, it issues shares of stock to the public via an initial public offering (IPO).
In order to go public in the U.S., the business must first apply to the Securities and Exchange Commission (SEC) for permission to sell its stock to the public. The SEC registration process is complicated and requires the company to disclose a ton of information to potential investors. In the UK, the process is very similar, except that going public in the UK is authorized and regulated by the Financial Services Authority (FSA).
Once a small business has decided to go public, it selects an underwriter, who acts as a sort of financial backer. A team of lawyers, independent accountants, and a financial printer also are assembled.
The attorneys for the underwriter draft the agreements; the attorneys for the company advise the company how to satisfy SEC regulations. The accountants issue opinions about the company's financial statements, to reassure potential investors. The financial printer prepares a booklet that contains all of the pertinent information about the company, called a prospectus, which will be distributed to potential investors.
The prospectus contains a risk section in which potential investors are advised of potential risks. The lawyers for all sides require the company to overstate the risks so that no one can be sued in the future for not properly stating the risks accurately.
For example, when a gaming site goes public, it routinely states that online gambling is or may be illegal in the U.S. The fact is that the companies don't know this to be true, but their attorneys strongly advise them to include such overstatements to protect everyone involved.
In the NETELLER situation, Stephen Lawrence and John Lefebvre helped take the company public in the UK in 2004. NETELLER is authorized and regulated by the Financial Services Authority in the United Kingdom as an electronic money institution. NETELLER stock is publicly traded on the London AIM Stock Exchange.
U.S. Attorney Michael Garcia has come up with a creative argument that will eventually fail. He says that when Lawrence and Lefebvre took the company public, they "conceded that they were risking prosecution by the government of the United States under existing or future federal laws."
They never conceded that Internet gambling was illegal in the U.S. Rather, they put into the prospectus what their lawyers advised them to disclose to potential stockholders.
That still begs the question. Let's say I "concede" that it is illegal to walk on the sidewalk singing and then I do so. Have I committed a crime? Of course not, because there must be a crime on the books to have violated. This brings us back to the same old question of what law has been broken.
To be engaged in money laundering, money must go from or to an illegal activity. In regard to poker, what law is being broken? Since the gaming sites are located offshore, they follow the laws where they reside. What U.S. law is being broken?
The federal government is still asserting that the 1961 Wire Act forbids online poker. The government is just wrong, and I have written extensively on this subject. When the case finally goes to court, the attorney general will have to prove beyond a reasonable doubt that these gentlemen violated the law. Other courts have already ruled that the 1961 Wire Act applies only to sports betting. That being the case, the former NETELLER owners have violated no law unless they conducted substantial business within the borders of the U.S.
Remember, it is legally permissible to have an online site offshore, or to invest in such; it is not permissible to run that business while sitting in the jurisdiction of the U.S.
We May Be in Uncharted Waters
To the extent that the charges filed against Lawrence and Lefebvre relate to online poker transfers, I think they are on solid ground. However, I want to suggest two caveats.
For many years, I have been preaching to my friends in the industry about a law, little known to the poker community, that makes it illegal to "help" an offshore site by performing certain actions within the United States.
Breaking Federal Law
Federal Code section 18 U.S.CS §1955 (2003) prohibits the operation of an illegal gambling business where such gambling is a violation of law in the state where it is operating. The code section essentially says that anyone involved in the gambling business shall be imprisoned in state prison for no more than five years and have all of his assets confiscated if the state proves:
1. The gambling violates a state law.
2. There are five or more people running the whole operation.
3. The company is in continuous operation for a period in excess of 30 days or has a gross revenue of $2,000 in any single day.
If a gambling operation is not licensed by a state, that gambling business is illegal, and therefore this statute applies. What §1955 means is that the gambling business, the servers, the workers, the telephone operators, the coffee makers, and certainly the decision-makers cannot operate within the borders of the United States.
The offshore sites are not housed in the U.S.; therefore, they are not regulated by U.S. laws. However, this particular law widens the scope of illegality by including helpers. I am not speaking of the gambler, but rather, individuals who assist the offshore sites by engaging in certain behaviors within the borders of the U.S.
Too Much Help May Be Illegal
The U.S. Supreme Court held that in order to convict under 18 U.S.CS §1955, the jury must find that the gambling business involved five or more persons who "conduct, finance, manage, supervise, direct, or own all or part of such business"; the word "conduct" includes all who participate in the operation of the gambling business, regardless of how minor their jobs or how they are labeled, excepting the person who simply places the bet.
To "conduct" business within the meaning of 18 U.S.CS §1955 means to perform any act, function, or duty necessary to or helpful in ordinary operation of business. In other words, if an offshore company had an office here with pencils, staplers, computers, and the like, for the purpose of furthering the business, this would violate the section.
I raise this issue because I do not know precisely what behavior the founders of NETELLER engaged in. I don't know if they conducted business while within the boundaries of the U.S., which would create legal liability within the U.S. for someone directly assisting an offshore site, and may create liability for NETELLER workers who indirectly assist the site and are considered one step removed because they merely provided the funding.
Ex Post Facto
Another basic concept to understand is the ex post facto law. This rule of law, basic to the Constitution, says that the government cannot pass a law and then hold one responsible for an act that occurred before the law was passed.
So, to clear up a common misconception, the former NETELLER executives cannot be charged under the new law that was recently passed, because the Unlawful Internet Gambling Enforcement Act (UIGEA) was not in effect when they were executives in 2005. If the news reports are correct that Lawrence resigned in May of 2006 and Lefebvre resigned in December of 2005, they cannot possibly be charged with violating the UIGEA, which wasn't signed by the president until 10 a.m. EST on Friday, Oct. 13. 2006. If, in fact, they both had resigned, they could not be held liable as mere shareholders.
Assisting Sports Betting
The second caveat I want to address is the activity of sports betting. The now famous 1961 Wire Act does emphatically apply to sports betting. Whether it applies to online wagering as opposed to telephonic wagering is still an open question. In the Jay Cohen case, his company was charged with having accepted both, so it was not a deciding factor in that case, and his case was never reviewed by the ultimate authority, the Supreme Court. However, to the extent that Lawrence and Lefebvre funded sports-betting sites, this behavior may be found to violate the Wire Act by way of aiding and abetting. I say it may violate the Wire Act, because funding an American's offshore account by an offshore publicly traded company is not a violation all by itself; however, the specific circumstances and what precisely occurred within the U.S. may cause the behavior to come under the Wire Act.
The issue becomes more complicated, because if NETELLER sent money to a site like Bodog, which offers both sports betting and poker, even if it could otherwise be held liable, NETELLER would not be charged with knowing what was being done with the money. If you take the position that there is no law prohibiting online poker, it's not NETELLER's job to learn whether the bettor is betting on poker or sports.
These are uncharted waters. Some of the laws with which we are familiar will have to be tested and given a judicial interpretation.
