When David Carruthers was arrested last Monday night at Dallas Airport, panic spread through the online gambling industry. „Never mind the falling share price,“ many will have wondered, „am I going to go to jail?“
The indictment of the Glaswegian chief executive of BetonSports and his associates on charges of tax evasion, racketeering, fraud and conspiracy was a defining moment for an industry which has ridden its luck for years. More than GBP 600m was wiped from the value of the sector as investors took fright.
But there was no noticeable effect on the millions who gamble online every day at work and home. The market is still there, despite the hard line being taken by the US authorities. And industry watchers believe the US rules will be loosened, if only to protect its own gambling industry.
Carruthers, who started his career with Ladbrokes as a betting shop manager in Edinburgh, was arrested while changing planes en route from London to his new home in Costa Rica.
Gambling across state and international lines is generally illegal in the US, and Carruthers‘ company made money from bets placed by American punters.
Clive Hawkswood, chief executive of the Remote Gambling Association – of which BetonSports was not a member – says: „I think the US authorities looked at BetonSports and saw them in a different category. BetonSports has gone out of its way to target the US market, so if anything was going to happen, the feeling is that it would happen to them.“
Some, including sources at BetonSports itself, suspect Carruthers was not the real target of the raid, for the charge sheet also mentions Gary Kaplan, the company’s founder and major shareholder.
Kaplan has a colourful past, having been arrested in New York on bookmaking charges in 1993. Legends about the man abound, including a story that he once pulled out a gun and shot his computer screen after a game went wrong.
Kaplan stepped down from the BetonSports board to ease the way for the company’s flotation on the Alternative Investment Market in 2004. He fell out with Carruthers, and it may be that US authorities feel that they have a chance of getting Carruthers to testify against his former colleague.
Certainly relations between Kaplan and BetonSports seem strained. A BetonSports spokeswoman said: „I have no idea where Kaplan is. I would like him to come forward so that he can take some of the heat.“
If Kaplan was elusive, Carruthers was anything but. He regularly boasted of how he was able to travel through the US, and wrote articles for American newspapers calling for changes to the law which would make online gambling legal.
Hawkswood says: „The indictment caught everyone by surprise because David Carruthers has been through the US loads of times. It looks like [the US authorities] were trying to build up a case for some time.“
But there are many who believe the case goes far wider than one rogue bookie and his Scottish successor.
John Hagan of Harris Hagan, a law firm which specialises in gambling cases, says: „It is in the interests of [the US authorities] to have the industry believe this is part of a wider campaign. The US has been trying for a long time to ban online gambling.“
At the heart of the case is the highly ambiguous Wire Act, a US law which was passed in 1961 and originally aimed at combating the Mafia’s telephone betting operations.
One interpretation is that the act covers telephone betting on sports. That would imply that internet-only betting companies and poker companies are off the hook.
Until last week, BetonSports took bets via phone, although the company claims most were from punters who had trouble placing bets over the internet.
A more hawkish interpretation is that the internet is essentially the same as the telephone, so internet gambling is covered by the act. Further, there is nothing in the Wire Act which specifically excludes card games such as poker – it is just that those games would have been hard to play down a phone line before the advent of the web.
That stricter interpretation means many more companies will be caught up in the US Department of Justice net, including UK quoted companies such as Sportingbet, which on Friday was still offering odds on US baseball games, and PartyGaming, the online poker market leader.
Hence the fears of many last week – heightened by the recent extradition of the so-called NatWest Three for activities in London.
Hagan asks: „If somebody can be arrested passing through the US, what is there to stop the authorities seeking the extradition of other directors?“
If the US is taking a tougher line, there are two views on its motives. The first is that Republicans and Democrats are bidding against each other to win the votes of the Bible Belt electorate in advance of this year’s mid-term elections. Some see it as more than coincidence that Carruthers was arrested less than a week after the US House of Representatives passed a bill promoted by Virginia Congressman Bill Goodlatte to outlaw online gambling, which the Republican representative called „a scourge on society“. The bill still has to be passed by the Senate.
The charges drawn up by the US attorney’s office for Eastern Missouri include tax evasion on GBP 3.5bn of bets. This charge, similar to one that brought down legendary gangster Al Capone in 1931, places online gambling companies in an impossible situation, because they cannot pay tax on an activity which is considered illegal.
An alternative interpretation of the US action is that its long-term strategy is to legalise online gambling and give its own companies a piece of the action.
The US is by far the world’s biggest online gambling market, with punters expected to hand over a total of GBP 3.5bn this year, measured as total stakes minus winnings – cash which is eluding US companies along with Federal, state and local tax authorities.
But this is not a country where gambling is unknown, points out Simon Holliday of Global Betting and Gaming Consultants. He says: „The US is pretty contradictory. It is the biggest gambling market in the world. If you look at Las Vegas, it is probably the most aggressive industry on the planet in terms of what it does to retain people’s money.“ Tricks of the trade in the desert city include pumping oxygen into casinos to make punters feel more energetic, making it hard to find exits, playing recordings of fruit machines paying out, and shutting out daylight so people don’t realise how much time is passing.
According to Holliday, the real-world casino operators are itching to get some of the online pie. He says: „This could be a way of marginalising the key [overseas] players in order to let the US players in.“
Suspicion that the US is set on a protectionist path has been fuelled by the fact that online betting on horse racing and lotteries is allowed in certain states. Last week’s crackdown prompted the World Trade Organisation to launch an investigation into the fairness with which the US treats overseas competitors.
And most industry experts are sceptical about whether the US can maintain its tough stance. Hagan says: „Just as with Prohibition [when alcohol was banned in 1920], they are fighting a losing battle and eventually they will go the same way by taxing and regulating it, just as the UK government has done.“
If that happens, the decision on whether to allow internet gambling will fall to individual states. Some legislators in North Dakota are proposing just such a move, as they estimate the tax revenues from poker and baseball betting would allow them to eliminate all property taxes. Nevada, which includes Las Vegas, is unlikely to be slow off the mark.
Michael Caselli, editor of Online Gambling magazine, says: „There are increasingly sophisticated technologies which allow companies to work out whether you are in the same state or not. You can attach a device to the side of your computer, or you can send in a copy of your driver’s licence.“
That means last week’s events are unlikely to dent the extraordinary rise of the sector. The industry takes £7bn a year worldwide, a figure which is rising at between 20% and 30% every year.
Holliday has been monitoring usage of gambling websites over the past week and says he has seen no change in the number of online bets. The major players were already looking beyond America for growth, he explains: „The US is getting to be a mature market. At the same time, companies are being encouraged to spread the risk by building up sales outside the US where they can get higher [valuation] multiples because there is less risk.“
On Friday, Mitch Garber, chief executive of PartyGaming, said that he planned aggressive expansion in markets outside the US, and hinted that last week’s plunge in the value of online gambling stocks had opened up takeover opportunities.
Poker is the big online gambling phenomenon of the moment, particularly in the UK and the US, where celebrity players including Hollywood actors Brad Pitt and Ben Affleck have raised its profile. Women too are getting in on the act, with journalist Victoria Coren and Sky football presenter Helen Chamberlain both playing. Blackjack and backgammon are not far behind.
The next big wave is likely to be gambling via mobile phones and interactive television. „Gambling is increasingly strong around the world. It is being accepted as a more mainstream leisure pastime. Casinos are seen as leisure destinations now.“
This weekend, Carruthers will be more concerned about the threat of a five-year jail sentence.
But Caselli believes there is a fair chance the Scot will get off with the equivalent of a rap across the knuckles: „I think it is quite possible we will see a plea bargain, which will mean this case will not proceed to trial. BetonSports do have a defence, which is that they are based in Costa Rica. They may agree to pay back taxes and agree not to take bets on the telephone.“
Beleaguered industry forced to rethink agenda
Last week’s arrest of David Carruthers prompted some swift changes in the online gambling industry’s annual programme of events.
Bodog Entertainment Group, an operator of online gaming sites, cancelled an internet gaming conference set to start in Las Vegas next week as industry chiefs feared they could be arrested.
World Online Gambling Law Report, a respected industry publication, moved last week to set up an emergency meeting on online gambling and the US.
The London meeting will pick over the 22 charges against Carruthers and his colleagues and, perhaps more importantly for directors of other online gambling companies, will examine extradition rules in the light of the recent NatWest Three case, where UK citizens were forced to travel to appear before US courts for crimes allegedly committed in the UK. Two other conferences – Poker & Beyond in London in September, and the European Interactive Gaming Conference in Barcelona in October – are still going ahead although conference programmes may have to be redrafted.
Meanwhile, the UK government is seeking to set up an international conference to develop a system of international rules for the online gambling industry.