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FEATURED ARTICLE
01/08
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UNITED STATES
The BetonSports and Neteller
DoJ agreements: analysis
Following BetonSports and Neteller’s
decision to cooperate with the US
Department of Justice (DoJ) in its
investigation into illegal internet
wagering, PartyGaming and 888
Holdings have reportedly entered into
similar discussions with the DoJ.
Linda J. Shorey, Jeffrey L. Bornstein,
Fred D. Heather, Anthony R.
Holtzman and Ashley Camron of
Kirkpatrick & Lockhart Preston Gates
Ellis LLP examine these agreements.
Why have BetonSports and Neteller,
non-US companies that provided
internet-wagering-related services
to US based bettors, agreed to
cooperate with the US Department
of Justice (DoJ) and to ‘disgorge’ the
profits they earned from US based
bettors? Why have other internet
gaming companies that once
provided internet wagering
opportunities to US based persons
also approached DoJ? Are there
lessons to be learned?
BetonSports and Neteller are two
non-US companies that provide
services that relate to internet
wagering. Each is or was publicly
traded in the United Kingdom,
where internet wagering is legal
and now licensed. Each, at one
time, provided services to US based
bettors.
PartyGaming Plc and 888
Holdings Plc are two non-US
internet companies that also, at
one time, offered online wagering
opportunities to US based persons.
Both are reported to be having
‘discussions’ with DoJ concerning
their business activities in the US.
The criminal cases
In 2006 and early 2007, three nonUS citizens who were serving or
had served in a management
capacity at BetonSports or Neteller
were detained by US federal law
enforcement authorities. On 16
08
July 2006, BetonSports’ then-CEO,
David Carruthers, a UK citizen,
was arrested in Dallas, Texas, while
en route to Costa Rica. The
Carruthers arrest surprised and
alarmed the internet gaming
industry, which did not generally
understand that an officer of a
foreign company could be arrested
while simply passing through the
US. Six months later, on 15
January 2007, Neteller’s cofounders, Stephen Lawrence and
John Lefebvre, both Canadian
citizens who had held senior
management positions with and
had ownership interests in Neteller,
were arrested by US law
enforcement officials. Lawrence
was detained in the US Virgin
Islands. Lefebvre was detained in
Malibu, California, where he
owned a residence1.
After Carruthers was arrested, the
government unsealed the criminal
indictment filed against Carruthers,
BetonSports, and others in the US
District Court for the Eastern
District of Missouri. In the
indictment, BetonSports was
charged with racketeering
conspiracy2 and mail fraud3. The
charges were based, principally, on
allegations that BetonSports had
accepted online sports wagers from
US based bettors. On 24 May 2007,
just over ten months after the
indictment was unsealed,
BetonSports entered into a plea
agreement with the US Attorney’s
Office for the Eastern District of
Missouri.
Pursuant to the plea agreement,
BetonSports pleaded guilty to the
racketeering charge4. The US
Attorney’s Office agreed to move to
dismiss the mail fraud charge at
sentencing, agreed to bring no
further criminal charges against
BetonSports related to the events
in the indictment, and indicated
that, based on what it then knew, it
had no intention of charging any
as-of-then uncharged current or
former directors of BetonSports.
Also, BetonSports - which intends
to dissolve itself under the laws of
the UK - agreed, if it has funds
available after the dissolution, to
pay an amount to the US
(potentially millions of dollars)
that the US District Court for the
Eastern District of Missouri
determines is representative of the
profits generated via its acceptance
of online sports wagers from US
based bettors and, if the other
defendants in the case go to trial, to
provide one or more custodians of
records to testify, if requested.
As to Neteller, no criminal
indictment was filed. Instead,
following the arrests of Lawrence
and Lefebvre - who were charged
under 18 U.S.C. §371 (the general
criminal conspiracy statute) with
conspiring to operate an
unlicensed money transmitting
business in violation of 18 U.S.C.
§1960 and conspiring to promote
illegal gambling in violation of 18
U.S.C. §1955 - DOJ froze Neteller’s
assets in US banks5, thereby
precluding Neteller from making
any payments to US based account
holders. Ultimately (and after
Lawrence and Lefebrve entered
guilty pleas6), Neteller and the US
Attorney’s Office for the Southern
District of New York, on 17 July
2007, entered into what is styled a
deferred prosecution agreement.
Under a deferred prosecution
agreement, the DoJ agrees to
postpone prosecution to give a
company time to comply with the
law and take other steps to
completely avoid prosecution.
Typically under such an agreement,
the DoJ requires the company to
admit facts that would establish the
elements of the crime alleged to
have been committed, but does not
file the charge. And, the company
also agrees to take various steps to
make amends, such as paying back
any ill-gotten proceeds and
changing its practices to prevent
world online gambling january 2008
UNITED STATES
future misconduct, and to
cooperate with the DoJ in any
ongoing investigation and
prosecutions. Assuming the
company follows the conditions
spelled out in the agreement, the
DoJ then either dismisses any
pending charges or refrains from
filing threatened charges. Usually
the agreement lasts from 18
months to two years.
The Neteller agreement is
somewhat different and more like a
pre-trial diversion agreement.
Under it, Neteller, among other
things, consented to the DoJ filing
a one-count information against it
in the US District Court for the
Southern District of New York. In
the information, Neteller is
charged with conspiracy7 to
commit various crimes, including
that defined by the federal Wire
Act, 18 U.S.C. §1084, arising from
Neteller’s alleged processing of
online wager payments made by
US based bettors to internetgaming companies and vice versa.
While Neteller pleaded not guilty
to the charge in the information, as
part of the agreement it admitted
to a ‘Statement of Admitted Facts’,
that would establish the elements
of the charge against Neteller in the
information. The DoJ agreed to
defer prosecution of the charge
until July 2009, at which time the
charge will be dismissed if Neteller
has fulfilled its obligations under
the agreement. Neteller’s
obligations include:
● paying $136 million to the US,
which represents the profits
generated by Neteller’s processing
of online wager payments made by
US based bettors to internetgaming companies and vice versa,
and paying $94 million to its US
based customers with positive
balances in their Neteller accounts;
● continuing, even if the
information against it is dismissed
in July 2009, to cooperate fully
with the DoJ ‘in connection with
world online gambling january 2008
Case law is
unsettled as
to the reach
of the Wire
Act as to
wagering on
non-sports
activities
any investigation, criminal
prosecution or civil proceeding ...
relating to or arising out of the
conduct set forth in the
Information and Statement of
Admitted Facts and relating in any
way to’ the DoJ’s investigation of
illegal internet gambling being
conducted by the Office of US
Attorney for the Southern District
of New York; and
● implementing and monitoring
restrictions and controls on its
online payment services to prevent
‘member accounts at Neteller from
being used to conduct illegal
transactions between internet
gambling merchants and persons
located in the United States’.
Partygaming and 888
PartyGaming and 888, like
BetonSports and Neteller, are
publicly-traded (London Stock
Exchange) foreign companies.
PartyGaming was established in
1997 and went public in 2005. 888
was established in 1995 and went
public in 2005, not long after
PartyGaming. Prior to October
2006, both had accepted online
wagers from US based bettors.
In October 2006, the Unlawful
Internet Gambling Enforcement
Act of 2006 (UIGEA), 31 U.S.C.
§§5361 et seq., became law. An
entity commits a crime under the
UIGEA if it is engaged in the
business of betting or wagering
and knowingly accepts money or a
money substitute in connection
with a person’s participation in
‘unlawful internet gambling,’
defined as the knowing placement,
receipt, or other transmission of a
bet or wager via the internet ‘where
such bet or wager is unlawful
under [] applicable Federal or State
law...’8. In addition, and more
important from a day-to-day,
business-operations standpoint,
the UIGEA requires certain federal
agencies that regulate the financial
industry to promulgate regulations
to delineate the ‘designated
payment systems’ that the statute
requires to block ‘restricted
transactions,’ which essentially are
transfers of funds relating to a US
based bettors’s participation in
‘unlawful internet gambling.’
Proposed regulations were issued
for comment on 1 October 2007.
Interested parties had until 12
December 2007 to submit
comments.
As a result of the enactment of
the UIGEA, numerous internetwagering entities, including
PartyGaming and 888, announced
they would no longer accept
wagers from US based bettors, and
many, but not all, e-wallets stopped
permitting their US based
customers to use accounts in
connection with online wagering9.
PartyGaming and 888, unlike
BetonSports and Neteller,
voluntarily withdrew from the US
market. Unlike BetonSports and
Neteller, neither company offered
sports-wagering opportunities to
US based persons. Prior to
withdrawal from the US, and
continuing today, PartyGaming’s
primary business is online poker
games, and 888’s primary business
is online poker and casino games.
Why seek a DoJ agreement?
One might wonder why non-US
internet companies that accepted
wagers from US based persons, or
assisted in that activity, would
enter into agreements with the DoJ
rather than contesting the
jurisdiction of US courts over
them or contesting the charges
against them at trial. Reasons that
might underlie such a decision
include:
● The cost of litigation in terms of
the amount of money that would
be expended for defense and the
disruption of day-to-day business
operations.
● The unsettled nature of the law
in the US with respect to the
09
UNITED STATES
applicability of US federal criminal
laws to wagering on the internet.
● The more onerous monetary
sanctions that would likely be
imposed, in addition to
disgorgement of profits, upon
conviction, i.e., a fine in an amount
up to two times the amount of the
gain (gross or net profits). See 18
U.S.C. §3571(d).
● The damage to business
reputation that convictions would
likely bring, including the impact
on share price and value of the
business.
● The possible arrest/detention of
other former and current officers,
directors and large shareholders
resident in the US or who might
travel to or through the US.
● The attempt to minimize the
damage to the company, if it
remains viable, and preserve its
attractiveness to investors or
potential merger or acquisition
partners.
Principles applied by the DoJ
When considering whether to
prosecute business organizations,
US federal prosecutors are guided
by the principles set forth in a 12
December 2006 memorandum
from former US Deputy Attorney
Paul J. McNulty to the Heads of
Departments and United States
Attorneys (McNulty Memo)10. The
McNulty Memo includes nine
factors that a US federal prosecutor,
to the extent applicable, is to
consider when ‘conducting an
investigation, determining whether
to bring charges, and negotiating
plea agreements’ concerning a
business organization:
● the nature and seriousness of
the offense, including the risk of
harm to the public, and applicable
policies and priorities, if any,
governing the prosecution of
corporations for particular
categories of crime;
● the pervasiveness of wrongdoing
within the corporation, including
10
The DoJ is
likely to
continue to
aggressively
pursue those
offering
online
wagering
opportunities
the complicity in, or condonation
of, the wrongdoing by corporate
management;
● the corporation’s history of
similar conduct, including prior
criminal, civil, and regulatory
enforcement actions against it;
● the corporation’s timely and
voluntary disclosure of
wrongdoing and its willingness to
cooperate in the investigation of its
agents;
● the existence and adequacy of
the corporation’s pre-existing
compliance program;
● the corporation’s remedial
actions, including any efforts to
implement an effective corporate
compliance program or to improve
an existing one, to replace
responsible management, to
discipline or terminate
wrongdoers, to pay restitution, and
to cooperate with the relevant
government agencies;
● collateral consequences,
including disproportionate harm
to shareholders, pension holders,
and employees not proven
personally culpable and impact on
the public arising from the
prosecution;
● the adequacy of the prosecution
of individuals responsible for the
corporation’s malfeasance; and
● the adequacy of remedies such
as civil or regulatory enforcement
actions.
In applying these factors,
prosecutors are cautioned to
‘ensure that the general purposes of
the criminal law - assurance of
warranted punishment, deterrence
of further criminal conduct,
protection of the public from
dangerous and fraudulent conduct,
rehabilitation of offenders, and
restitution for victims and affected
communities - are adequately met,
taking into account the special
nature of the corporate “person”’.
The press release issued by the US
Attorney’s Office for the Southern
District of New York in connection
with the Neteller case discusses the
McNulty factors in connection
with the decision to file a charge
against Neteller and to enter into
the deferred prosecution
agreement: ‘[T]he decision to file a
charge against Neteller was based
on several factors set forth in the
[McNulty Memo or Principles],
including: (i) the seriousness and
duration of Neteller’s conduct
involving the processing of billions
of dollars of gambling transactions
in violation of state and federal
law, and (ii) the involvement of
senior corporate officers in the
company’s criminal conduct.
The decision then to enter into
the Deferred Prosecution
Agreement with Neteller ... was
based on a variety of factors and
considerations also set out in the
Principles, including: (i) the
company’s frank acknowledgment
of its misconduct and its
willingness to cooperate with the
investigation; and (ii) the
company’s remedial actions,
including cessation of its
participation in illegal gambling
transactions involving persons
located in the United States;
implementation of procedures and
controls to prevent its services
from being used to conduct U.S.
gambling transactions; retention of
a monitor to ensure compliance
with those procedures and
controls; and disgorgement of
$136,000,000 in criminal proceeds’.
The press release issued in
connection with the BetonSports
plea agreement did not contain any
discussion of the McNulty factors.
Conclusion
The BetonSports and Neteller
agreements provide important
insights into the dangers posed by
the DoJ’s approach to internet
gaming companies that previously
allowed or currently allow US
based bettors to place online
wagers with them. The risk extends
world online gambling january 2008
UNITED STATES
to companies that facilitate, or
once facilitated, such wagering
activity by providing services to
such companies. The range of
entities with potential exposure is
not limited to companies that run
websites that accept, or in the past
accepted, online wagers and to the
e-wallets and payment processors
who facilitated the transfer of
wagers and winnings. It extends to
any company (or individual) that
used to provide, or continues to
provide, services to such entities,
including, among many others,
software providers, fraud-detection
providers, consultants, advisors,
and investors.
Neteller’s agreement to ‘fully
cooperate’ with the DoJ’s
investigation of illegal internet
gambling should be worrisome to
all internet companies that
accepted wagers from US based
bettors, as Neteller is a primary ewallet for the internet gaming
industry. Neteller’s cooperation
could provide the DoJ with
valuable information that could be
used to investigate and prosecute
internet companies that provided,
or provide, wagering opportunities
to US based persons and the
entities that facilitate or used to
facilitate those activities.
Case law is unsettled as to the
reach of the Wire Act as to wagering
on non-sports activities. Under the
DoJ’s expansive view, the Wire Act
extends to online wagering on
poker and casino games and might
even encompass online activities
where money is paid (including
administration, registration and
tournament fees) to participate in
such things as bingo, backgammon,
freecell, gin rummy and other card
games, as well as video games. In
the absence of applicable case law or
further Congressional action, the
DoJ is likely to continue to
aggressively pursue those offering
online wagering opportunities to
US based persons and those who
world online gambling january 2008
facilitate such activity. Further, some
states are aggressively applying their
criminal laws. In September 2006,
Peter Dicks, a UK citizen and an
officer of Sportingbet Plc, an
internet company that, at the time,
offered online wagering
opportunities to US based persons,
was arrested in New York pursuant
to an arrest warrant that was issued
by the state of Louisiana. The
warrant was based on an alleged
violation of the Louisiana Gambling
by Computer statute. While New
York declined to extradite Dicks to
Louisiana, Louisiana prosecutors
were quoted in news reports as
saying that numerous sealed
Louisiana arrest warrants exist
charging various individuals
associated with internet gaming
companies with violating the
Louisiana statute. Subsequently, a
news release issued by Sportingbet
on 21 March 2007 indicated that
Sportingbet had settled with
Louisiana. On 15 November 2006, a
New York grand jury indicted a
number of companies and arrested
their agents in connection with
sports wagering being conducted, in
part, through an internet website11.
Included among the indicted were a
company that provided web design
services to the website and two
companies that provided
communications and connectivity
services to the website. The
defendants were charged under
New York law with committing the
crimes, inter alia, of enterprise
corruption, promotion of gambling,
money laundering and conspiracy.
In view of the ambiguous and
fluctuating legal landscape, any
company that is or was involved in
or affiliated with affording US
based persons the opportunity to
place online wagers (or is inclined
to do so now) would do well to
seek advice from US lawyers as to
its specific situation and the status
of US law, as it currently exists and
as it may change.
Linda J. Shorey Partner
Jeffrey L. Bornstein Partner
Fred D. Heather Partner
Anthony R. Holtzman Associate
Ashley Camron Associate
Kirkpatrick & Lockhart Preston Gates
Ellis LLP
linda.shorey@klgates.com
jeff.bornstein@klgates.com
fred.heather@klgates.com
anthony.holtzman@klgates.com
ashley.camron@klgates.com
1. After they were arraigned, Carruthers,
Lawrence and Lefebvre were released on
$1 million bail, with restrictions on their
ability to travel outside the jurisdictions
where the criminal charges were filed.
2. This charge alleges a violation of 18
U.S.C. §1962(d), a provision of the
Racketeer Influenced and Corrupt
Organizations Act (RICO), as well as
various state and federal criminal laws.
3. This charge alleges that BetonSports
and another entity-defendant ‘for the
purpose of executing and attempting to
execute the scheme to defraud, did
knowingly cause to be delivered by mail
[from one state to another] brochures,
magazines, coupons and flyers’ in
violation of 18 U.S.C. §§1341 and 1342.
4. Sentencing was recently continued
until 23 June 2008.
5. To seize funds and property located in
the US, the DoJ need only allege that
there is probable cause to believe the
funds represent the proceeds of illegal
activity. See, e.g., 18 U.S.C. §981(b)(2).
6. Lawrence pleaded guilty on 29 June
2007 and Lefebrve pleaded guilty on 10
July 2007. As of 10 January 2008, the
case docket contained no indication that
they had been sentenced.
7. Neteller is alleged to have conspired
with ‘others known and unknown’ to
‘conduct, finance, manage, supervise,
direct, and own all and part of various
illegal gambling businesses, namely,
internet gambling companies’, in violation
of numerous state and federal laws.
8. At the time this article was written, the
authors were not aware of any entity
having been charged with violating the
UIGEA.
9. See DoylesRoom.
10. http://searchjustice.usdoj.gov/
search?q=cache:gf9gA_lGr7YJ:www.usd
oj.gov/dag/speeches/2006/mcnulty_me
mo.pdf+mcnulty+memorandum&access
=p&output=xml_no_dtd&ie=iso-88591&client=default_frontend&site=default_c
ollection&proxystylesheet=default_fronten
d&oe=UTF-8.
11. See New York v Fuchs, et al.,
Indictment No. 2699/2006.
11
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