Full Tilt Ponzi

By Felix Salmon
September 20, 2011
Ponzi? It certainly looks that way after reading the official FullTiltPokerComplaint.pdf from the US Attorney.

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Is Full Tilt Poker a Ponzi? It certainly looks that way after reading the official FullTiltPokerComplaint.pdf from the US Attorney. And the perpetrators include two of the best-known poker players in the world — Howard Lederer and Chris Ferguson.

The complaint is long and not particularly interesting; the juicy bits are actually quite short. The meat is here:

According to a balance sheet prepared by Full Tilt Poker, as of March 31, 2011, Full Tilt Poker owed players from around the world over approximately $390,695,788 but had only approximately $59,579,413 in its bank accounts. Full Tilt Poker relied on new deposits from players to ensure its ability to fund withdrawals to players’ accounts.

Rather than protect player funds as promised, Full Tilt Poker distributed hundreds of millions of dollars to its owners…

Defendant Lederer personally received at least approximately $42 million, including approximately $37,856,010.92 in ownership distributions and at least $4 million in “profit sharing” payments…

Defendant Ferguson was allocated approximately $85,161,305.88 in distributions. Tiltware records reflect that approximately $25 million of this sum was actually transferred to Ferguson’s personal accounts, with the remaining balance characterized as “owed” to Ferguson.

Full Tilt Poker said repeatedly and vehemently that players’ funds were kept strictly segregated; this, it seems, was a bald-faced lie. Instead, those funds were intermingled with everything else. As any banker will tell you, deposits are liabilities, but Full Tilt Poker treated deposits as assets, handing them out to its shareholders and counting on two things to keep its business going: the fact that most people lose at poker, and a continued inflow of new funds to help pay the players cashing out.

In a weird way, strict anti-gambling regulations in the US are responsible for this fiasco. If poker sites were legal and regulated, we could trust the regulator — an arm of the US government — to protect gamblers’ funds. Casinos are strictly regulated; online poker sites should be as well. Instead, they became international fugitives, going to great lengths to make it possible for US gamblers to skirt regulations and use their sites. Up to and including buying banks:

In or around September 2009, Elie, together with Andrew Thornhill and a partner of Elie’s (“Elie’s Partner”) approached Campos, the defendant, the Vice Chairman of the Board and part-owner of SunFirst Bank, a small, private bank based in Saint George, Utah. Campos, while expressing “trepidations” about gambling processing, proposed in a September 23, 2009 e-mail to accept such processing in return for a $10 million investment… On or about November 29, 2009, Andrew Thornhill told an associate “things are going well with the bank we purchased in Utah and my colleagues and I are looking to purchase another bank for the purpose of repeating our business plan. We probably could do this for a grand total of 3 or 4 banks.”

Back in May, I attempted a defense of the online-poker crackdown. But there was lots of very smart pushback in the comments, and now this news is more than enough to make me change my mind. If you need to be conducting all manner of wire fraud and money laundering just to stay in business, it’s a relatively small step to going Full Ponzi. On the evidence in the complaint, Lederer and Ferguson were willing accomplices in a scheme which ended up stealing hundreds of millions of dollars from poker players around the world; I wouldn’t be at all surprised to see criminal indictments coming soon. Would they have preferred to be able to set up an entirely legitimate, regulated company? I suspect they would have jumped at any such opportunity.

But now that it seems that even the most respectable poker sites were run by criminals, the chances of that happening are more remote than ever. If you want to play poker for money, go to a casino. Because there’s simply no way of being able to tell whether the site you’re on is a Ponzi.

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Comments
32 comments so far

I appreciate the coverage of this topic, but I’m not sure this part is accurate:

“Full Tilt Poker said repeatedly and vehemently that players’ funds were kept strictly segregated”

Do you have a source?

Posted by Dr_Smooth | Report as abusive

That quote is from the complaint. Complaints are not always fully sourced.

Posted by rbittman | Report as abusive

I’m shocked, shocked to find that a ponzi scheme is going on in here!

Posted by MaggiesFarmboy | Report as abusive

If the complaint is true, then this isn’t a ponzi scheme, it is theft. The complaint alleges that they paid themselves from customer accounts and hid this fact by paying people from other customers’ accounts.

The SEC provides the following information (http://www.sec.gov/answers/ponzi.htm) about ponzi schemes “A Ponzi scheme is an investment fraud that involves the payment of purported returns to existing investors from funds contributed by new investors. Ponzi scheme organizers often solicit new investors by promising to invest funds in opportunities claimed to generate high returns with little or no risk.”

Poker is not a potential investment where players were guaranteed returns. It is only similar to a ponzi scheme in the sense that the complaint alleges new players’ funds paid old players’ who cashed out. If the complaint is true, people gave their money to FTP and they stole or lost it and then tried to cover it up.

Posted by jmh530 | Report as abusive

@jmh530 & Felix – what happened here is closer to “account lapping” in order to cover an asset theft.

Posted by SteveHamlin | Report as abusive

I think it is a bit harsh to say no poker sites are safe. Ladbrokes and William Hill have long established businesses so are likely to be quite reliable, and Partygaming has been around long enough, listed and audited, (no guarantee I realise, but you have to trust something)that it should be safe

Posted by ABT | Report as abusive

@SteveHamlin
Not very familiar with fraud terms, but lapping appears similar to what has happened. As far as I can tell, lapping is a broader term that may be used in a ponzi scheme but not necessarily.

Posted by jmh530 | Report as abusive

Speaking as someone who played online professionally AND paid my taxes on my winnings, It makes ZERO sense to outlaw this type of activity for two reasons:

1. It is not the Government’s job to tell me what I can and cant do with my money after I pay my taxes. If people want to gamble online, then let them. It is called personal responsibility.

2. As Mr. Salmon pointed out, when you outlaw an activity it makes it more susceptible to the morally challenged elements of our society.

Both arguments are equally valid when speaking to the legalization of other ‘victim-less’ crimes, like drug use and prostitution.

Posted by USAPragmatist | Report as abusive

LOAD OF CRAP . . FULLTILT didn’t need to steal anything . They made millions of dollars weekly from the “RAKE” they collect from hosting online poker. .

who we kidding here . .

re open the site and let the players play and everyone will get paid . . . JESUS . .

Posted by junglexace | Report as abusive

” Full Tilt Poker relied on new deposits from players to ensure its ability to fund withdrawals to players’ accounts”

untrue bullshit .

Its like me saying Bank Of America needs new deposits from customers to allow withdrawals . .

Posted by junglexace | Report as abusive

The craziest thing is that FullTilt had a beautiful money printing business model already… as @junglexace noted, “they didn’t need to steal anything.”… I would love to see their cash flow statement and balance sheet to see how much rake they actually made, and how much they paid out to their investors…

Posted by KidDynamite | Report as abusive

I guess there really is a sucker born every minute. I think the government is right to ban online gambling outright. I have no interest in paying government workers to properly regulate these schemes. Why should I have to pay taxes for this? These players do not deserve my protection or my sympathy.

Posted by silliness | Report as abusive

The primary purpose of banning online gambling (which included online poker) was to stop money laundering. Online gambling was the easiest and safest way to launder illegal money.

Gambling in general is the best way to launder money. You convert cash to chips, play with the chips for a bit, then cash it out. The cash out then becomes legally generated wealth. With casinos, this is easily regulated. You can set up all kinds of measures that if somebody did try it, it’s very much traceable.

Online gambling proved to be a different animal. The anonymity of online transactions, logistics (2 people making transactions could be on opposite ends of the earth) and impracticality of setting up the kind of measures used in casinos led to the banning of online gambling which unfortunately included online poker.

The issue of banning online gambling is not about personal freedoms. It’s about protecting society by making sure it can’t be used to launder money. Democracy is not about total freedom. You still follow rules that protect society like the simple act of wearing a seatbelt. If you want total freedom, then go to an African country where anarchy rules and everyone does whatever they want.

Posted by marsjr | Report as abusive

$390 million seems like a very small amount compared to the size of online gambling. The market is estimated to be around $14 billion in wagers. We don’t think Full Tilt had only 3% of the market.

Posted by InsiderMonkey | Report as abusive

The Federal Reserve is the biggest Ponzi Scheme in history that defrauded US citizens out of trillions and they dare to utter to word “ponzi”? They just shot themselves in the foot by linking themselves to their own ponzi scheme.

Posted by Johns7171 | Report as abusive

Of course, with the ease of the Ponzi, it should be clear that any regulator would have been quickly purchased. I’m not convinced that Full Tilt’s operations could have been diagnosed by the same crack auditors that let Madoff operate for decades without trading anything. If anything this poker scam was more difficult to operate, because you had to do more than simply forge a bunch of statements; there was a whole functioning business attached.

As for the victims, who’d have thought it would be risky to trust your money with career gamblers? I bet they aren’t even angry. A true poker player would tip his cap, say “nice play,” and wait for the next hand.

Posted by bearspirit | Report as abusive

“In a weird way, strict anti-gambling regulations in the US are responsible for this fiasco.” As opposed to the millions of people who willingly ignored the laws of the democracy in which they live? I love playin poker… I’m not anywhere near as good as KD but I find it challenging and mentally stimulating… but this whole thing about online poker defrauding their customers is a bit surreal.

When you chose to do business with a company opperating in clear and open violation of one law how shocked can you be when it turns out they were taking a few liberties with some other laws? OH MY GOD THE PROSTITUE GAVE HER PIMP MY CREDIT CARD NUMBER… HOW COULD SHE?DOSEN’T SHE KNOW THAT’S ILLEGEAL!

Posted by y2kurtus | Report as abusive

A poker deposit is an uninsured bank deposit. That’s not an analogy. It’s clearest way to define the transaction.

All reading this page understand how bank balances differ from the contents of casino cages. Deposits aren’t bailments: they’re demandable debts. World of difference there.

If Full Tilt’s operations are solvent (which, save for rogue programmers telling their tables to stop collecting rake tomorrow, is a given), and if its players wish to hold balances above zero on average (which they self-evidently do), the next step for any solvent business holding millions in deposits is to lower its reserve ratio in prudent proportion to daily cashout volume. That’s what Full Tilt does, along with every gambling site a tenth its size or larger.

Full Tilt’s reserve ratio looks to be 15%. Cautious, if anything.

Posted by gazuga | Report as abusive

Actually, there is a way to be sure that your poker site isn’t a fraud: use one that is adequately regulated. The US is not the only government in the world.

Posted by DrFuManchu | Report as abusive

@Gazuga: Your analogy is flawed. The difference between a bank and Full Tilt is that banks can use fractional reserves because they have a variety of sources of funds, including assets which can be used as collateral.

By contrast, the only source of funds for Full Tilt is customer deposits, which become assets only when a rake is deducted.

Posted by DrFuManchu | Report as abusive

How is this any different than how banks operate? Banks make the majority of their money by loaning out the money their customers deposit. They count on continued deposits to fund peoples withdrawals and debit card purchases. If every bank customer wanted to withdraw all of their money in one day do you think the bank could accommodate them?

I played on Full Tilt for many years and have always been payed when I cashed out. I don’t know anyone who didn’t. it is true that most people lose every dime they deposit and many players kept large bankrolls only cashing out what they needed. Every dollar is raked over and over again so I am sure they had a formula in order to justify the profits they took and would cover themselves for cashouts. Just another government tool to scare the public away from what they feel isn’t int he confines of their moral turpitude.

Posted by jfreeman420 | Report as abusive

jfreeman420: Banks keep less cash than deposits, but they invest the rest by making loans and buying other assets. If everyone wanted to withdraw their deposits all at once, there wouldn’t be enough cash, but over time the bank could call in loans and sell its investments and pay everyone.

Full Tilt is alleged to have paid out the money to owners and board members. Full Tilt promised to keep a 100% reserve ratio, and the government is alleging that they didn’t keep this promise.

(Note that all the other poker sites named in the lawsuit are not alleged to have done anything similar, it’s a problem specific to Full Tilt.)

Posted by guanix | Report as abusive

Full Tilt ran a number of TV adverts on late night TV in the UK and have sponsored sports. This was a big poker site.

They were regulated by the Alderney Gambling Control Commission which (formerly?) had a good reputation. I think regulators are really just a bunch of shysters who cream off some money from gambling websites and then proceed to do nothing to make sure these websites operate
correctly – I know this from personal experience of trying to get help from the Maltese regulator a few years ago. Regulators should not be paid by gambling websites and must have strong powers to investigate
and punish.

I think that the US poker ban was a mistake, but the truth is Full Tilt could have left the US market when the ban came into force and focussed on other markets, just like all reputable sites. Nobody made them become a Ponzi scheme. I suspect they were already a Ponzi
scheme before the US ban and so needed US players cash to keep going.

Posted by theambler101 | Report as abusive

DrFuManchu, don’t lose sight of what banks are: credit intermediaries. Money changing is where their assets, liabilities, and the surmised difference between them all come from. Solvency for a bank means steering a dollar toward higher returns than the rate at which it borrowed that very dollar.

Unless Full Tilt is taking their excess reserves and throwing them in a hot tub rather than seeking profits with them, they’re credit intermediaries of the same dull stripe. Imagine a bank whose asset side favours investment over managed lending. And whose service fee intake is vastly more lucrative, because its customers are used to paying for every single downstream transaction. One more difference: a higher(!) reserve ratio than is typical for deposits. That’s one liquid, profitable bank, and its name happens to be Full Tilt Poker.

Posted by gazuga | Report as abusive

So what did Pokerstars do right that FullTilt didn`t?

Posted by fireshoe | Report as abusive

Pokerstars ran an honest site.

Posted by dsnews53 | Report as abusive

Pokerstars segregrated funds, so that it always had enough liquid assets to pay to customers if they wanted to cash out. (Which they did when the DoJ closed the American market). Full Tilt had instead moved $400 milion into the private bank accounts of the shareholders, meaning a massive shortfall, so it couldn’t pay its players after Black Friday.
Pokerstars is still on the hook for a $1.5 billion dollar fine for “money laundering and wire fraud”, although it remains to be seen how the legal action will play out. Although PS has always treated its customers very well, the DoJ seems determined to punish it for doing business with American customers, while taking its profits overseas.

As others have touched on, if the DoJ had never launched the initial civil case, we wouldn’t even know that Full Tilt was mis-managed. It was making huge profits, and – in normal circumstances – players wouldn’t suddenly be requesting withdrawals. Lederer and Ferguson presumably took their “dividends” (prior to Black Friday) because the company didn’t need all that cash lying around (and indeed wasn’t required to keep a certain %, like a bank is). But when the DoJ froze the company’s assets, there was a “run on the bank” and no liquid assets available. If anything good comes out of this, it will be that online poker companies are regulated more strongly in future, much like banks are.

Posted by ArtySmokes | Report as abusive

ArtySmokes has it right, except for his opinion that Full Tilt didn’t need to “have all that cash lying around.” Yes they did! Pokerstars was regulated to have funds segregated. Full Tilt was not. ABSOLUTE POWER BREEDS ABSOLUTE CORRUPTION. That is all that needs to be said. The directors at Full Tilt just plain stole from the players BECAUSE THEY COULD. That is what happened by any way you want to slice it. I hope that the DOJ will force these CROOKS to pay back EVERYTHING THEY STOLE from the players.

Posted by NICKATNITE | Report as abusive

For Social Security, it’s print as you go
http://blogs.reuters.com/christopher-wha len/2011/09/23/for-social-security-its-p rint-as-you-go/

Bubbles, Ponzi this and that? Great stuff.

Chris

Posted by rcwhalen | Report as abusive

The Ponzi term it used to allow for 1 count for every person swindled, of 10 million years imprisonment. If they had used simple theft, or grand theft, they could only ask for 5, maybe 10 years total.

I’m kind of upset that now I have to play live poker against the same people who set up the Full Tilt and stole my money.

William

Posted by blamm | Report as abusive

Maybe they’ll, all the player’s who are investors and part of the Full Tilt will be banned from live poker events as punishment for their crimes. Of course crime never kept sporting stars off the field for very long.

Posted by blamm | Report as abusive

Wow, shocking. When you criminalize something, it’s run by criminal enterprises with little regard for the well-being of its customers. If only there was some sort of precedent in history we could have used to foresee this, like the criminalization of alcohol or marijuana.

Posted by Nathan_514 | Report as abusive
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