Read Fatal System Error Online
Authors: Joseph Menn
Tags: #Business & Economics, #General, #Computers, #Security, #Viruses & Malware, #Online Safety & Privacy, #Law, #Computer & Internet, #Social Science, #Criminology
Fatal System Error (14 page)
IN CONGRESS, NUMEROUS ATTEMPTS to authoritatively ban online gambling, some of which cited links to money laundering and organized crime, all met with failure. One reason was that the established gaming companies in Las Vegas and Atlantic City, which initially saw online betting as a competitive threat, decided it was helping them. Companies like PartyPoker were teaching a new generation of people how to play cards, and a good number of those players decided that tapping away on a screen at home paled in comparison to the fun of tempting fate in person. Every year that online gambling grew—and by 2005 it was past Las Vegas’s haul—the sales in Vegas grew too. And of course, if Congress legalized computer gaming, no one would be in as great a position to benefit as the likes of Harrah’s and MGM Mirage. Congress was “making a major mistake by not legalizing this type of gambling,” warned MGM Chief Executive Terry Lanni. “Almost all wagers going to offshore sites come from the United States.”The main gaming lobby moved to an official position of neutrality, while calling for a study of how online betting could be regulated best.
But as Barrett nervously watched in 2006, Congress finally moved to make it clear that Internet betting, even on poker, was illegal. In September it surprised many of its own members by approving a sweeping and poorly worded anti-gambling bill, the Unlawful Internet Gambling Enforcement Act. The bill made it an offense to accept or transfer money for an illegal gambling transaction but didn’t define what exactly made a gambling transaction illegal. Senate Majority Leader Bill Frist backed it just ahead of the midterm elections, attaching it to an unrelated bill on port security that passed in the small hours of the morning. It took clearest aim at financial companies that processed transactions for gambling concerns, but analysts said the law also barred the betting companies themselves from accepting U.S. wagers.
A few things had changed to let this bill pass where its predecessors had stumbled. Voters decided the 2004 election on moral-values issues, politicians believed. The number of online gambling addicts who had lost everything was growing. Greg Hogan, for one, went from the president of his Lehigh University class to federal prison after he robbed a bank to pay off a $5,000 online poker debt. But perhaps the most salient reason was super-lobbyist Jack Abramoff. He had fought fiercely against the proposed bans on behalf of a legal online lottery company before getting disgraced in a bribery probe. For the Republican majority, a vote against Internet gambling gave them distance from the Abramoff scandal.
Whatever the motivation, the Unlawful Internet Gambling Enforcement Act crashed poker company stocks in a New York minute. More than $7 billion in market value evaporated in a single day. PartyPoker’s parent, PartyGaming, lost 75 percent of its worth in the next four weeks, and the company said it would drop the three-fourths of its business that originated in the U.S., some $4 million daily. Those investors who still had a stomach for the industry turned to gambling companies with few or no customers in the U.S.
After President George W. Bush signed the online gambling ban into law on October 13, 2006, Justice Department prosecutors really turned on the gas, starting with one of the big companies that handled payments, Neteller Plc. Based in the Irish Sea tax haven of the Isle of Man, Neteller had been founded in 1999 by Canadians John Lefebvre and Stephen Lawrence as an Internet payment system like PayPal. It became increasingly important to online gamblers after credit cards and big banks stopped sending money to companies that were obviously in the betting business. That forced many in the U.S. to transfer money first from their online bank accounts to a service such as PayPal, then from that service to the casino or sportsbook.
After a civil investigation in 2003, federal authorities rattled their sabers at PayPal. PayPal had been bought by the Internet auction giant eBay, which was publicly traded and sensitive to bad press. It agreed to stop handling bets and forfeited $10 million in estimated profit from past gambling transactions. That capitulation sent more business Neteller’s way, and the company went public on the London stock exchange.
Neteller got even more important when PartyGaming and some of its rivals officially stopped taking bets from the U.S. in late 2006. Some players avoided the ban by using Neteller to help disguise their locations. Meanwhile, some privately owned gambling firms boosted the company when they defied U.S. authorities and openly kept taking American bets. PokerStars, Full Tilt Poker, and their ilk all steered prospective customers to Neteller, which handled more than $7 billion in transactions during 2005. Little got Lefebvre and Lawrence in as much trouble as their company’s own statements. Neteller’s 2005 annual report bragged that the company handled transactions for 80 percent of the world’s gaming firms. In a conference call the following year, executives said that 75 percent of their revenue came from the U.S. In January 2007, after Lefebvre was arrested in Malibu, California, and Lawrence was picked up in the U.S. Virgin Islands, prosecutors charged the pair with conspiring to promote illegal gambling, and both pleaded guilty.
The biggest quarry, though, was Ruth Parasol. The feds started by issuing subpoenas to more than a dozen banks involved in PartyGaming’s 2005 IPO. Accountants involved in that probe said the top targets appeared to be Parasol and her three co-founders.
PartyGaming responded to the legal pressure by hiring a lawyer, Mitch Garber, as CEO, and allowing him to sound out the Justice Department about possible settlement terms. Parasol and her husband also hired a lobbying firm founded by Hunter Biden, son of Joe Biden, then head of the Senate’s Judiciary Committee. The younger Biden tried to convince Congress to pass a law that would declare that Internet gambling had been legal before 2006. He quit lobbying after his father was named the vice presidential nominee to Barack Obama. Anurag Dikshit, a software engineer and one of PartyGaming’s co-founders, was the first inside the company to crack. He pleaded guilty in December 2008 to one count of violating the Wire Act and agreed to pay an astonishing $300 million fine. Sentencing in the case was delayed until December 2010, suggesting that he was expected to cooperate as the probe continued. Parasol resisted making any plea and forced out Garber. But the board approved a guilty plea from the company itself, convinced that it would position PartyGaming for a return to the U.S. market if poker were legalized. Parasol fought on, burnishing her image by getting increasingly involved with a few charitable funds she established. All the same, she kept Polish and Israeli passports on hand, preserving her options in case a return to the U.S. would be ruled out forever.
The Neteller and PartyGaming probes drew political cover from the 2006 law, which stopped many poker companies from soliciting or knowingly accepting U.S. business. But the law itself wasn’t put into much use for more than two years. The regulations took that long to draw up, and they didn’t become final until January 19, 2009, the day before President Bush left office. Even then, they didn’t make much sense. They ordered the credit card companies and others to reclassify gambling transactions, based on opinions as to whether a given type was legal. But they also told the processors that they needn’t bother examining individual payments to see if they actually met the new criteria. However flawed, the law was still an insult to powerful opponents, including American casinos and European countries, and key members of the majority-Democratic Congress that swept into power in November 2008 pledged to finally introduce bills to legalize and regulate Internet poker. The following May, House Financial Services Committee Chair Barney Frank did just that, urged on by Parasol’s new lobbyists.
IN THE CRIMINAL CASE THAT SWEPT up Prolexic, most of the thirty indicted parties pleaded guilty to felonies. Prolexic itself pleaded to promoting gambling and coughed up $200,000. The feds also used the Prolexic raids Barrett made possible to take a fresh look at the Central American operations of Mickey Richardson and Ron Sacco. More help came later, with the documents that changed hands as part of the deal selling Prolexic to IPVG, the Philippines Web company. The paperwork used Mickey’s real name in describing him as a key stockholder. And it listed Prolexic’s bank accounts, including three that were active. One of those, in Panama, apparently had been set up after the 2006 raids for receiving customer payments. Only one person had authority over the account—a non-Prolexic employee, Karen Molnar, who happened to be the BetCRIS comptroller. (Her LinkedIn page, which used the altered spelling Monar, described her as overseeing “day to day financial operations for the entire company” of BetCRIS.) Figuring that Molnar might be the way to crack the flow of Mickey’s money, the FBI peppered Barrett with questions about her and even sent a picture to confirm that they had the right woman in mind. They did.
The feds were even more excited when Barrett told them that Sacco still traveled to the U.S. from time to time. At a minimum, it appeared that if they could find him in the country, they could pick him up for violating the terms of his 2004 parole. The probation ruling dictated that for the three following years Sacco “shall not engage in any form of gambling and shall not frequent any establishment where gambling is conducted.” Barrett was an eyewitness to Sacco working in the BetCRIS office during the probation term. “He sat in Mickey’s office and worked, and when the phone rang, 90 percent of the time Ron answered,” Barrett told the FBI. “He was taking calls and doing bookmaking.”
But the FBI might have gotten serious about looking for Sacco just a month or so too late—either that or the agents hadn’t bothered to check civil records, which showed that Sacco had gotten roped into a lawsuit in which he wasn’t a defendant. In September 2006, Sacco flew from Costa Rica to Los Angeles to sit for a deposition in a case filed in Los Angeles federal court. The lawsuit involved the estate of a Canadian con man who raised tens of millions of dollars from investors backing his supposedly surefire formula for whitening teeth. The scammer claimed that he lost $40 million of the proceeds betting on sports through a Costa Rican outfit run by one Maynard Garber, no relation to Mitch, who allied with BetCRIS. The estate’s lawyers weren’t so sure, and they were doggedly trying to trace what had happened to the money. In the process, they organized a raid of the BetCRIS offices in Costa Rica and came up with financial records showing where Sacco hid his funds.
They didn’t get much more. In the deposition at a law firm in Orange County, California, Sacco cited the Fifth Amendment and refused to answer such questions as whether he still controlled BetCRIS; whether he was known as the Old Man, the Cigar, and the Boss; and whether he took a $2.5 million loan from Maynard Garber or knew that Garber was a convicted felon. (Sacco’s parole also barred him from associating with felons.) The FBI apparently had no idea he was in town.
The feds were still on the trail in the fall of 2007, when Darren Rennick called Barrett and told him he wanted to bury the hatchet. They hadn’t met in the year since Barrett had quit, but Darren had no reason to think Barrett was so reckless as to have blown the whistle on his own business partners. Now it was three days before Barrett’s wedding, Darren was coming through San Francisco, and he wanted to get together. Barrett suspected Darren wanted to snoop around BitGravity and make sure it wasn’t really in the anti-DDoS business, which would have violated Barrett’s departure deal.
Barrett called Paul Betancourt and asked what he should do. Betancourt was thrilled. He got on the phone to his FBI colleagues out west. Then he called Barrett back and told him to meet some agents right away, that night, outside an address in San Francisco’s China Basin district. When Barrett arrived, he felt like he had just been drafted into a mob movie. Barrett was standing on a dead-end street by an empty warehouse when the agents’ dark sedan pulled up. The rear door opened and Barrett climbed into the backseat, next to a man in a suit. “What kind of car do you drive?” the man asked, opening a briefcase on his lap. Inside the case were dozens of key fobs for every type of car, the kind with buttons that lock and unlock the doors. Only these fobs, the agent explained, were actually digital recorders. One click started a recording, and two clicks stopped it. The tiny machine could hold six hours of conversation. Barrett should begin each recording by speaking the date and time, giving his code name, and announcing whom he was meeting.
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