Alternative asset of the day: Poker claims

By Felix Salmon
December 3, 2012
Michael Kaplan has a wonderful story about a market in claims on money which was frozen at Full Tilt Poker.

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You know about the market in distressed debt, of course — the idea that non-performing debt can be bought and sold, at some discount to face value, is the whole driving concept behind Strike Debt. But those aren’t the only assets of dubious future value which get traded at a discount today. There’s a small but reasonably healthy market in court judgments, there’s a market in Madoff investments, and there’s even a dubiously-legal market in the life-insurance proceeds of the terminally ill.

Now Michael Kaplan has a wonderful story about an even sketchier market: claims on money which was frozen at Full Tilt Poker and Ultimate Bet on April 15, 2011. The sites, which are clearly illegal in the US, were shut down by the Department of Justice, and Full Tilt, for one, was then alleged to be an outright Ponzi scheme which had netted its poker-pro owners tens of millions of dollars.

Still, there was money in Full Tilt, as well as a valuable brand, which was ultimately sold to PokerStars. And when the DOJ seizes assets from criminals, it does try to return those assets to the victims of the crime — in this case, the people who thought their money was safe and segregated at Full Tilt Poker.

So for the past year and a half, there’s been a market in frozen account balances, which has got pretty volatile at times:

Anticipating that Fult Tilt’s money problems could be resolved, players quickly began buying account balances from other players. Those whose stakes (and net worths) were mostly tied up in Full Tilt needed cash; their better-capitalized peers gave it to them in exchange for the rights to whatever money was returned by Full Tilt and the DOJ down the road. Transactions were conducted via Twitter, e-mail, and a popular poker-oriented chat board called twoplustwo.com. Says Dan Fleyshman, former CEO of the site victorypoker.com: “The price on the dollar scaled down as things went on [with no resolution in sight]. It started at 85%. Then it went down to 30 or 40%.” Says Rich Ryan, a senior staff writer and producer for PokerNews: “By September of 2011, people were selling their Full Tilt account balances, via Twoplustwo, for as little as one cent on the dollar.” In typical poker-player fashion, most of these deals, regardless of the sums, were completed without contracts.

Fleyshman now says that a fair price for frozen Full Tilt assets is 70-80 cents on the dollar, although it’s unclear whether anybody is actually paying that. I’d advise against, if Kaplan’s reporting is right:

According to Steven L. Kessler, an attorney based in New York City who specializes in forfeiture law and is representing high-stakes pro Adam Webb’s attempt to recover nearly $59,000 in this case, it’s business as usual to make seized funds difficult to recover… Recouping Full Tilt funds will be “a long, drawn-out process to the point that you will need to be out five or six or seven figures for it to be worth pursuing… There is the cost in terms of emotion, time, effort, and cash… It’s virtually impossible to do without an attorney…

In a statement issued on Nov. 14, John Pappas, executive director of Poker Players Alliance, an online-poker lobbying and support group, said that he believed “completion of a claims process is a long way away.” Attorney Kessler believes that none of the money will be paid out before the DOJ receives all $547 million Poker Stars is paying it, and that won’t happen until 2015.

Even if Kessler is talking up his own services here, there seem to be two huge obstacles for anybody buying Full Tilt claims. First, there’s no clarity at all on when those claims might get paid out. And second, the owner of the claims will have to do a substantial amount of work in order to get them back. If that owner has already sold most or all of their claims on the secondary market, they have no incentive to do that.

Given those obstacles, I can’t see how it makes sense to buy claims at 70 or 80 cents on the dollar — not unless the claimant is already lawyered up and has a clear path to recovery. Or, to put it another way, the value of any given claim is highly claimant-specific: unlike Madoff claims, say, these things are far from fungible, especially given that all of these deals involve substantial counterparty risk.

But this is poker — a world where money always feels a bit unreal. (If you’re conscious of the value of the money you’re gambling in a poker game, you’re almost certainly going to lose.) There’s some unknown amount of money coming from the DOJ, and a bunch of poker players who are basically making bets on how big that number will be, and where it might appear. Some of those bets will pay off; others won’t. That’s gambling for you. In a weird way, it feels more honest than a lot of the investment advice I see.

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