New Jersey rushes to push through online gaming bill to keep pace with Nevada

The pre-Christmas documents released by the Department of Justice concerning the status of the sale of lottery tickets was interpreted by many observers as a green light to all online wagering, save for the one item that the DOJ claimed was definitely illegal: online sports betting. The letters were in response to the attorneys general that had challenged the 1961 Wire Act interpretation that selling lottery tickets online was illegal. It was a long-held federal position that the Wire Act prohibited the transmission of all gambling activity and information via telephone lines (and the internet) was illegal.

But the DOJ changed that position in December when it ruled that only online sports betting was specifically prohibited by the Wire Act. And since the ruling was so specific, many observers said it opened the door to any kind of gaming outside of sports betting.

Not so fast, say some experts.

“Whether intended or not, the DOJ memorandum presents dramatic opportunities for the internet gaming industry in the United States and finally (albeit belatedly) presents the opportunity for the world’s largest potential internet gaming market to start catching up with an internet gaming industry that is already far down the road in Canada and many parts of Europe,” wrote Robert W. Stocker II, a Michigan attorney with Dickinson Wright, in a newsletter about the decision.

I. Nelson Rose, a gaming law professor at the University of California’s Whittier Law School, says the ruling is a smack at online gaming proponents in Congress.

“The reality is that Congressional advocates, like Barney Frank and Joe Barton, have had some of the wind knocked out of their sails,” Rose wrote on his Gambling and Law website. “Since states are now clearly free to legalize intra-state online poker, and perhaps even interstate, there is not much reason to even bother with a federal law. Only the major operators, like Caesars Entertainment, need a federal law, because they don’t want to be competing with politically connected local gaming companies for a limited number of licenses in 50 states.”

The decision was roundly criticized by the usual anti-gaming voices in Congress. Some have speculated that the decision will spur new legislation designed to clarify that online gaming is indeed illegal. Rep. Frank Wolf (R-Virginia) is likely to take that stance. In a letter the Senator Jon Kyl (R-Arizona) the Justice Department responded to an earlier communication that it clarify what is considered illegal. The anti-gaming Kyl is unlikely to appreciate the DOJ’s stance.

Greg Gemignani, an attorney with Lionel Sawyer & Collins in Las Vegas, recommends caution.

“You need to take a step back and look at this in context," he told the Las Vegas Review Journal and Reuters. "This is not a green light to fire up the online poker servers by any means. This is just an opinion of the Department of Justice and only reflects what the Obama administration would bring charges on. Future departments of Justice could interpret the Wire Act differently.”

While she doesn’t think a future DOJ ruling would reverse the one issued last month, Linda Shorey, a partner at K&L Gates LLP in Harrisburg, Pennsylvania, says a court case could trump everything.

“Under the U.S. Constitution, only the courts have the authority to determine whether the Wire Act applies to poker wagers,” she said. “The Department of Justice memo is not binding on the courts.”

Federal Focus

With online gaming legalization likely to proceed at the state levels, some are pressing for federal legislation to move forward.

“If there is not a federal bill then you will see individual states each passing unique sets of rules,” Caesars Entertainment Chairman Gary Loveman told Reuters. “It's obviously a far less rational way to proceed and it runs the risk of not addressing the illegal operators in any way.”

Nevada Senator and Majority Leader Harry Reid remains committed to passing federal legislation to allow online poker. But political pressures have intervened and are expected to increase in this, a presidential election year. Some harbor expectations that Reid will try to attach an online poker provision to the next attempt in February to extend the payroll tax cuts, but since he avoided that strategy back in August when President Barack Obama agreed to a compromise to raise the national debt ceiling, it would be a stretch to place all your eggs in that basket.

Congressman Barney Frank (D-Massachusetts) says he feels vindicated that the Justice Department affirmed his long-held opinion, but holds out little hope for the bill he introduced earlier in the session. He now believes that state-by-state legalization will proceed, which he considers better than nothing.

The American Gaming Association is going to continue lobbying for a federal bill legalizing online poker. Even before the DOJ decision, the AGA was characterizing the bill as a “law enforcement” measure that would protect American consumers from unscrupulous fly-by-night operators and deliver them into the security of recognized casino brands online. That message hasn’t changed. The only thing that has changed is the urgency the association is citing now. Frank Fahrenkopf, AGA president and CEO, told Reuters that the new DOJ position makes it questionable how the federal government can stop the operation of illegal online gaming sites. A federal bill is needed, he says, to clarify what is legal and what is not.

State Stories

Nevada has already legalized online poker and created regulations to oversee online operations. Last month’s DOJ ruling fulfilled the last requirement of the bill setting up online gaming sites—the opinion of the federal government that it is not illegal. The Nevada Gaming Control Board has drawn up the regulations and has begun accepting applications to operate online poker sites and the sell technology to operators.

Late last month, officials of South Point Hotel & Casino in Las Vegas vowed to be the first to go live with an internet poker site—a for-money version of its current free-play poker site “South Point Poker.”

Rick Kulis, South Point’s vice president of internet gaming, told Card Player magazine that South Point Poker is well on the way to achieving a license to operate as a for-wager site. “We hope to move into real-money play as soon as our license is granted,” Kulis said, adding that being first into a new market does carry risks. “On the one side you have to make sure you get it right from the beginning. You want your players to sign up and play, and have loyalty and continue playing. But also, from a brand-recognition perspective, it’s the same argument we have regarding who was the first in paid TV, HBO, or who was the first do a photocopy—Xerox. Those names stick. You want to break through early so you don’t have to catch up with a lot of noise in the marketplace and differentiate yourself.”

South Point has been working toward its for-pay site since Governor Brian Sandoval signed the bill last summer legalizing intrastate online casinos. On December 22, the Nevada Gaming Commission adopted regulations for the new internet poker industry. Commissioners say they will iron out internal control standards before considering applications for licensing.

Meanwhile, the slot manufacturing sector is lining up to participate in the new business with web poker content. Aristocrat Technologies recently became the latest supplier to apply for a license to participate, joining six other firms—International Game Technology, Bally Technologies, Cantor Gaming, 888 Holdings, Shuffle Master and South Point Poker.

South Point Casino is the only entity to apply for an operator’s license, while the other companies will be on the technology end and have to do business with an existing brick-and-mortar casino.

In New Jersey, Senator Raymond Lesniak (D-Union) has sponsored a bill to allow Atlantic City casinos to accept online wagering on games such as poker, blackjack and baccarat, restricted to residents of the state 21 years or older. The governor vetoed a similar bill last year, but the new measure has been reworked to address his concerns.

“We could be the Silicon Valley of internet gaming and it could mean billions of dollars in revenue for Atlantic City, and thousands of jobs,” said Lesniak.

It is a position Christie now seems to support, though the governor is taking a more cautious approach. Lesniak originally pushed to have the bill fast-tracked to be voted on by January 9, the last day of the legislative session. But that effort was delayed as all factors in clearing the way for online gaming are being addressed. The bill is now expected to reach the governor’s desk in the next few weeks.

"I think we should be an epicenter for that business, but I want to do it right,” Christie said. “I do not want to rush and get legislation that either doesn't pass state constitutional muster, or creates other problems for us."

If the bill were to pass it would allow the state Casino Control Commission to issue licenses to casinos to operate computer servers based in Atlantic City. Gamblers would have to set up online wagering accounts with the casinos. Computer software would then determine if the player was a New Jersey resident, whether the game was being played in New Jersey and if the player was at least 21.

Only card games currently offered in Atlantic City casinos would be featured. Bars, restaurants and similar places would be prohibited from advertising that they offered online gambling, a concession to Christie to keep it in Atlantic City. Lesniak said the new bill contains safeguards to address the governor’s concerns, including fines of $1,000 per player per day for running an illegal internet betting parlor, and $10,000 for advertising illicit operations.

The measure still includes a provision giving a portion of the revenue to the state’s horse racing industry, a subsidy that Christie opposes. The casinos once had to pay $30 million a year to the tracks in return for keeping slot machines out of the tracks. Lesniak said he would be willing to drop that provision if it were the only obstacle to passage.

Although Nevada and New Jersey by themselves might not contain the critical mass to make online poker sites successful, some experts believe the DOJ ruling also permits interstate online gaming, in addition to intrastate online gaming. Nevada and New Jersey could join with other states to create a pool of online gamblers within the legal jurisdictions bring a critical mass of players to the table. With a population of only 7 million, Nevada would be hamstrung, but in combination with other states, it could become a powerhouse.

The ruling will not in any way affect cases brought by the DOJ last year charging various online poker and online sports betting sites with bank and wire fraud and money laundering under terms of 2006’s Unlawful Internet Gambling Enforcement Act (UIGEA), but, tellingly, not with any violation of the Wire Act. The ruling will not hamper the prosecutions already under way—or future prosecutions, said the DOJ.

“In states that ban various forms of gambling—including internet poker—the department will be able to investigate and prosecute those gambling businesses under the Unlawful Internet Gambling Enforcement Act and other sections of the criminal code," said Justice Department spokeswoman Alisa Finelli.

On the other side of the coin, Utah could be the first state to actually “opt out” of online gaming. Utah state Rep. Stephen Sandstrom has introduced a bill to make it illegal to gamble online within the state.

"We want to keep Utah free from the negative impacts of legalized gambling," said Sandstrom. "Without courageous leadership to block Internet gambling, Utah could once again be forced to allow Indian casinos."

He attacked the DOJ decision as being politically inspired, demonstrating why Congress may want to keep hands-off on the issue.

"The U.S. Department of Justice's conveniently issued legal opinion is a desperate attempt to try and fix today's recessive economy,” he charged. “It's clear that President Obama's fiscal policies have been a complete failure. This latest move by the DOJ will only serve to harm all Americans economically and socially in the long run."

One state that may not take the plunge was actually a trailblazer, North Dakota. State Rep. Jim Kasper, a Fargo Republican, recently said he does not plan to revive the internet poker licensing bill he sponsored in the 2005 legislature. Kasper, who is running for re-election in the fall, said he is “just worried about getting endorsed and getting re-elected. I am not talking about promoting internet poker and I have not made any decision to do anything at all."

Kasper’s bill barely passed the House, and then was overwhelmingly defeated in the Senate. At the time the Justice Department stated in a letter to North Dakota Attorney General Wayne Stenehjem that federal law barred internet gambling, including casino-style gambling.

Taking a Chance on the Lottery

Let’s not forget that the decision didn’t really cover online poker or gaming. It was a memorandum issued at the request of the attorneys general of New York and Illinois requesting a legal opinion about online sales of lottery tickets.

“All state lotteries are looking at how we can expand our base and sell tickets,” said Andi Brancato, a spokeswoman for the Michigan Lottery.

But this could become about much more than tickets for lotteries.

Gambling law expert I. Nelson Rose, speaking with the Los Angeles Times, said the DOJ reading of the Wire Act could lead to quick adoption of online games by several state lotteries. “It undoes the single obstacle that was preventing the states from authorizing all forms of internet gambling,” Rose said. “I think we’re going to see an explosion in the next couple of years.”

Since lotteries are a major source of revenue for states, they could be some of the first organizations to experiment with online gaming. California, New York, Massachusetts and many other states are examining the DOJ decision to determine if it will allow them into the game immediately.

The AGA’s Fahrenkopf is aware of this possibility.

“It’s now clear that not only can lotteries sell tickets online, but also games that look like slot machines and poker,” Fahrenkopf told Bloomberg. “That’s where they want to go.”

Other interpretations of the ruling also focus on the possibility that wide-are linked progressive slot machines could be legal across state lines, creating jackpots of up to $100 million or more. Those systems are currently limited to single jurisdictions. Under the new ruling, slot manufacturers could potentially set up these WAP systems that would link multiple casinos in multiple jurisdictions. Or a large casino company such as Caesars or MGM could link slots at all their properties, creating one large jackpot.

Tribal Trouble?

For Native Americans, the DOJ decision just added to the dilemma tribes already faced when considering the legalization of online gaming. The diversity of opinions on the wagering method is vast in Indian Country, and there was no less differences when considering the options now available.

Some tribal officials believe nothing has changed. Joe Valandra, a member of the Sicangu Lakota tribe, and owner and president of VAdvisors, told Indian Country Today that there was always the assumption that intrastate online gaming was legal.

“I don’t think (the opinion) is a big deal for the tribes because there’s only one state that has enabling legislation and that’s Nevada,” he says. “Other states have talked about it, but haven’t passed anything. It has to go through a whole legislative cycle before any state besides Nevada will be able to offer intra-state online poker. It’s something I’m sure the tribes in general are looking at but I don’t think it has any particularly negative implication in and of itself.”

Valandra believes, nonetheless, that the decision is going to create an urgency for the tribes that will force them to come to an agreement on the role of Native Americans in online gaming. It will become obvious to tribes currently opposed to all online gaming that it’s a losing battle, Valandra believes.

One of the states sure to consider online gaming in the next legislative session is likely to be California, where the division of opinion in Indian Country is most on display. Last year a group of tribes joined with the card rooms in the state to form the California Online Poker Association, and supported a bill that would have legalized online poker in the state. Other tribes were dead set against it and a standoff resulted in no action. Since then, the association launched CalShark.Com, an online free-play poker room. And the Barona Band of Mission Indians—always an innovator—started its own online card room.

Tribes have stubbornly resisted the suggestion of a state or federal tax on any revenues they may obtain via online gaming, citing tribal sovereignty, but some believe that position will begin to erode and the intrastate operations get off the ground.

“They are going to be left behind if they don’t compromise on this point,” one source told GGB News. “When they realize that states legalizing online gaming can join together with other states in the same situation, they’ll realize commercial ventures will be the only way they can participate. There are plenty of precedents, such as the Mohegan tribe’s commercial casino in Pennsylvania, so it’s not something they’ve never done before.”

Stock Sense

The news of the DOJ decision sent online gaming stocks soaring. Bwin.party Digital Entertainment saw its stock jump almost 30 percent in one day because of its “clean slate” in the U.S. and connection to American gaming companies. Other companies suck as Ladbrokes and William Hill saw shares rise in the 5 percent to 10 percent range.

Now that legality has been determined, says one U.K. observer, expect more participation from established online companies

Clive Hawkswood, head of the Remote Gambling Association, whose members include Ladbrokes, William Hill, Rank, Betfair and 888.com, said there has been a lot of activity between the U.S. and companies his organization represents.

“Many of our members will be spending a lot of time in the states to see what deals can be done,” he says. “The big American players may have brand awareness, but European companies have the knowledge and experience of working in regulated markets, and if the market opens up over there then there are lots of opportunities for them,’ he said. American companies will be looking for partners who are whiter than white to get past the strict regulatory environment. They want no skeletons to emerge, so this could favor the publicly listed firms, who have a higher level of transparency.”

The stock prices of land-based casinos are likely to be affected, as well. Although not publicly traded, Caesars Entertainment is well positioned with its Caesars and World Series of Poker brands, probably the most potentially powerful in a U.S. online market. Several months ago, MGM Resorts and Boyd Gaming formed a joint venture with Bwin.party. The deal gives MGM 25 percent of the profits, Boyd 10 percent and the rest going to Bwin.party. Rumors persist that Wynn Resorts is negotiating with a London-based online company, possible 888.com, which has a deal to service the Caesars online portals.

But it also threatens the stock prices of the smaller bricks-and-mortar casino companies with no online plans at present. Companies such as Pinnacle Entertainment, Isle of Capri, and Penn National Gaming could be left behind unless the come up quickly with a plan for a digital presence.

By Staff

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