Sunday, October 15, 2006

I'm getting Guinness-fueled and starting an uber post.

But to hold you over, I found this very interesting article covering Party Poker in Barron's Online Magazine.

Bonus Code IGGY on Party Poker, indeed.


Only the House Wins

LAST MONDAY WAS Black Monday for the internet-gambling industry on the
London Stock Exchange. Industry giant Party Gaming lost about $5
billion in market value as its stock plummeted 58% to 45 from 107
pence. Falling more than 60% were the listings of Sportingbet and
online-gaming cash-transfer services Neteller and FireOne Group.

The cause of the debacle was the passage on Sept. 30, during the waning
hours of the U.S. congressional session, of a law to make it illegal
for banks or credit-card companies to process payments to online
gambling outfits. The measure, sponsored by Republican Rep. James Leach
of Iowa and Republican Sen. John Kyl of Arizona, had been knocking
around for months, stymied by various internal congressional squabbles
and special interests such as the horse-betting industry's request for
special exemptions. Finally, however, the ban made it, heaving across
the finish line as a rider to the port-security bill. President Bush is
expected to sign that into law in early November.

The immensity of the disaster to the online-gambling industry is
readily apparent: the majority of its business comes from U.S. gamblers
even though the companies are all domiciled in offshore tax havens like
Gibraltar, Antigua and Costa Rica. Some 80% of PartyGaming's revenue,
for example, originates in the U.S., mostly from poker players
attracted to the site's 24/7 card playing. Now, most of the online
companies have announced plans to pull out of the American market

Some investors, of course, will try to find bargains amid the wreckage;
perhaps thinking the companies could excel as vehicles for foreign
betting. Fat chance. In fact, the outlook for this sector may well get
worse in the months ahead, as the implications of the U.S. ban play
through financial statements. One of the few investors likely to get
out alive is PartyGaming's founder, a one-time backer of the porn
industry named Ruth Parasol. She and her husband had the good sense to
start cashing out more than a year ago. More about them later.

IF NOTHING ELSE, the collapse in the gaming shares bespeaks an
obtuseness on the part of investors in the stocks. First of all, it's
no secret that the Justice Department has long considered companies
offering online gaming to U.S. residents to be violating existing
federal laws, such as the Wire Act and the Illegal Gambling Business
Act. Moreover, some eight states have specific bans on online gambling
and most other states prohibit all forms of unlicensed gaming (needless
to say, none of the Internet-gambling companies has such a license).

Perhaps Party Gaming (ticker: PRTY.London) posed the issue most starkly
- and brazenly - in its prospectus for its initial public offering
of stock in 2005: "Offshore gaming companies rely on the apparent
unwillingness or inability of regulators generally to bring actions
against businesses with no physical presence in the relevant country."

Likewise, there have been plenty of warning signs of a coming U.S.
crackdown. In July, BetOnSports chief executive David Carruthers, a
British citizen, was arrested by federal agents in a Dallas-Fort Worth
Airport lounge during a short layover en route from London to the
company's headquarters in Costa Rica.

The company fired him immediately for his blunder. And Carruthers was
held on a previously-sealed indictment charging him, the company and 10
other of its operatives with mail and wire fraud, money-laundering, tax
evasion and taking in more than $3.3 billion in illegal wagers from the
U=2ES. over the life of the company. Carruthers is now living in a hotel
outside St. Louis, sans passport and sporting an ankle bracelet, grimly
awaiting his next hearing date in federal court in that city.

Last month, Peter Dicks, non-executive chairman of Sportingbet, was
likewise arrested at JFK Airport when he nonchalantly showed up in the
Big Apple to attend a directors meeting of a tech company. His arrest
was a result of a sealed warrant issued by Louisiana state authorities,
charging him with "gambling by computer" offenses. Louisiana is rumored
to have dozens of other sealed warrants covering virtually the entire
executive rosters of the online-gambling industry.

In any event, Dicks was able to beat the Louisiana warrant in late
September when New York Gov. George Pataki refused to order his
extradition. Perhaps this was because Dicks had already resigned his
position. He's now safely back in Great Britain.

THE ARRESTS FOLLOWED a heady growth spurt for the industry (see "Full
House: Suddenly, the Whole World is Playing Online Poker," the Barron's
cover story of Feb. 21, 2005). And they quickly changed the behavior of
executives. A number of industry figures, including Party Gaming
chairman and English "suit" Michael Jackson, disclosed that they no
longer planned to travel to the United States. World Gaming Chairman
James Grossman and Director Clare Roberts both resigned their positions
with the London-listed and Antigua-based concern. Both had business
interests in the U.S. that required continued access to America.

Party's Over: Shares of once-promising online gambling concerns have
been under increasing pressure this year as legal and regulatory woes
have mounted. Congress' move - banning the transfer of U.S. funds for
betting - was the capper. Likewise, CryptoLogic, a provider of
online-gambling software, saw fit to announce plans to move its
headquarters in January from Canada to Ireland. At the same time, its
Canadian CEO announced he was stepping down "for family reasons." The
company said that the change of domiciles was dictated by the need to
be nearer to its customers. No mention was made of the U.S. regulatory
mortar fire that seemed to be landing steadily closer to the company's

Offshore Internet-gaming companies and their major operatives had long
lived in a world of denial, assuming that their operations were beyond
the long reach of U.S. regulators. For one thing, such industry figures
as PartyGaming's Parasol and BetOnSports founder Gary Kaplan, an ex-New
York bookmaker, were assumed to be extradition-proof. After all, they
were living in domiciles - Gibraltar in the case of Parasol and Costa
Rica for Kaplan - where online gaming is legal. Moreover, all their
company computer servers, cash balances and other assets are also in
offshore locations that the government would likewise find all but
impossible to access.

But the Leach-Kyl measure hits the Internet gaming industry where it
hurts the most. It effectively cuts the companies off from all U.S.
wagering, the very lifeblood of the business. The bill makes any
transfer of U.S. funds for the purpose of wagering or settling accounts
illegal. Among other things, financial institutions will receive
ongoing assistance from the Treasury, the Fed and the Department of
Justice to identify new domain names and other conduits used by
online-gaming companies to circumvent the rules for U.S. funds. A
fairly ironclad "coding and blocking" system will be capable of
identifying and thwarting Internet-gambling transactions.

For example, Party Gaming of late has directed U.S. gamblers to send
money to a phone-card company front called PccPay.com, apparently to
disguise the real purpose of the transfer requests from U.S. financial
institutions. Other companies that probably will be targeted are such
offshore "electronic wallet" concerns as Neteller and FirePay, which
have become popular payment conduits for the offshore gaming industry
since eBay's PayPal service, under regulatory pressure, stopped
facilitating such transfers.

The legislation also will impose severe civil and criminal penalties on
online-gambling companies and officials accepting illegal U.S. wagers.
Seizing executives or gaming-company assets in their offshore redoubts
will, as always, be difficult. But any major U.S. legal action against
industry players, particularly those publicly held, would severely
damage the companies' reputations and force them to incur heavy legal

At a minimum, U.S. authorities under the new ban would be able to
easily win injunctions and default judgments in U.S. courts against
offending gaming companies that fail to close down their U.S.
operations, virtually eliminating the companies' abilities to advertise
or maintain a U.S. Web presence. U.S. officials are also exploring
whether international tax treaties might allow regulators to go after
companies and executives on their home turfs for U.S. tax evasion.

Under the Internal Revenue Code, there's a 2% excise tax imposed on all
wagers not authorized by state law. Such an imposition on Party Gaming
last year on the U.S. portion of its $48 billion in wagering would come
to about $800 million before penalties and interest. That alone
would've nearly wiped out its net revenues of $977.7 million for the

Representative Leach, for one, thinks that the industry's prospects
have been blighted by his legislation. "This may well be the death
knell of offshore Internet gambling," he tells Barron's. "Only time
will tell, however."

THE DOMINANT FIGURE in the online-gaming business remains the
39-year-old Ruth Parasol. In this month's Forbes 400 Richest Americans
list, she and her husband, J. Russell DeLeon, are shown to have a
combined net worth of $3.6 billion, which exceeds that of even longtime
Las Vegas gambling mogul Steve Wynn, who weighs in at $2.6 billion. The
magazine hit the newsstands just the week before the collapse in the
stock, which lopped an estimated $1.5 billion off the couple's net

Parasol has long shunned the spotlight and today lives a quiet life
with her husband and two kids on Gibraltar. A Party Gaming spokeswoman
told us curtly that Parasol doesn't grant interviews.

Too bad. For hers is one fascinating life story. An excellent profile
from the Los Angeles Times last year describes her unconventional
upbringing in San Francisco's Marin County as the daughter of a
holocaust survivor, Richard Parasol, and his Swedish wife.

Ruth Parasol went to an exclusive private school in the area where in
her senior year she posed in a fur coat, with the caption underneath
proclaiming that "Diamonds Are a Girl's Best Friend." Then it was on to
the Jesuit-run University of San Francisco, followed by law school at
Western State University in Fullerton.

Her father, according to The New York Times, had a long career in the
porn industry, starting out with a chain of successful San Francisco
massage parlors. The apple didn't fall from the tree: Shortly after her
graduation from law school, Ruth joined her father as a legal adviser
to his phone-sex billing operation. And soon she branched out into her
own business, investing in, among other things, a porn Internet site
that made a killing in 1996 by distributing a sex video featuring
actress Pamela Anderson and her then-husband, rocker Tommy Lee, in
flagrant delicto.

As regulators turned the heat up on the sex industry, Parasol
diversified into online gambling in 1997. Her venture, Starluck Casino
(now Party Gaming), was strictly small potatoes until she teamed up
with a bright young Indian computer programmer, Anurag Dikshit, who
devised the software for online poker players to join remotely in games
involving literally thousands of other players. Internet poker exploded
in popularity, creating a tidal wave of demand that the company has
ridden ever since.

But if Parasol has learned nothing else operating in the demimonde of
the business world, no good thing goes on forever. One must always have
an exit strategy to get out of Dodge before the regulators arrive.
Thus, she and her husband have been monetizing their ownership in Party
Gaming as fast as possible in recent years, even with the company's
booming business and succulent operating margins of about 60%.

The year before the company's IPO, Party Gaming bought an entity called
ElectraWorks for $826 million. While ownership of ElectraWorks wasn't
revealed at the time, Parasol and her husband were clearly major
holders of the unit. The transaction was similar to the way
private-equity firms often pay themselves huge special dividends before
taking their controlled company public.

Then, in the IPO last year, which raised =A31 billion, Parasol and her
hubby sold 40% of the shares in the offering, reaping 436 million
British pounds, or $815 million dollars at current exchange rates. The
IPO was followed in June of this year with another insider sale of 200
million shares of Party Gaming stock for =A3232 million. In that sale,
Parasol and DeLeon dumped exactly 66,666,666 shares for =8077.3
million, or $145 million. The share total implies a certain puckish, if
not devilish, intent. The insider secondary issue would have been far
larger if market conditions had permitted.

So all in all, it appears that there will be no tag days for Parasol
and her husband, even as Party Gaming shareholders are suffering huge
losses. The pair has already cashed out an estimated $1.5 billion from
the company. That certainly reduces much of the pain of the $1.5
billion loss they've taken on their remaining 30% stake.

MORE TROUBLE COULD LIE ahead for Party Gaming. Gamblers anxious to
clear out their accounts could cause a run on the bank. For according
to the company's June 30, 2006, balance sheet, Party Gaming owes its
clients $192.6 million in liabilities and prize pools, while having
only $132.9 million in cash and cash equivalents to meet that
obligation. And those cash holdings are likely to have fallen sharply,
because of $130.5 million of cash spent on an acquisition in August.
Meanwhile, The Financial Times reported the cancellation of a $500
million bank credit line that the company had made some use of. Party
Gaming recently cancelled a $115 million special dividend to shore up
its cash.

The problem all this poses for gamblers is that, unlike the brokerage
industry, customer accounts aren't segregated and insured. Your money
and the house's money tend to be one.

Several phone inquiries by Barron's to Party Gaming on its current cash
situation went unanswered.

Of course, the company could make good on its obligation with its
retained earnings and shareholders equity, if there were any. But
unfortunately the company has a negative tangible net worth of minus
$53 million. And after what happened in Washington, one can bet that
its servers and other physical assets are no longer worth the $58.3
million shown on the balance sheet. Nor are its goodwill and other
intangible assets likely worth anywhere near their $144.4 million
balance-sheet value. Not when the business has just gone up in smoke.

Party Gaming offers a sad tableau. Investors have already lost a ton.
Its players may have their money frozen, or never get all of it back.
There are no winners in this sordid tale, except Parasol and the other
insiders. You don't beat the house.

All Content Copyright Iggy 2003-2007
Information on this site is intended for news and entertainment purposes only.

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