Archive for May, 2012

Prof Nelson Rose on Gambling in the USA

May 16th, 2012 No comments

How We Got Here & Where We’re Going

            The United States is about to join Canada and the rest of the world on the greatest expansion of legal gambling since New Hampshire rediscovered the state lottery.  But this time, it is going to be online.

We are in the middle of what I call the Third Wave of legal gambling.  This is the third time that legal gaming has swept across both Canada and the U.S.

The First Wave started before either country existed.  Lotteries in England helped finance the first settlements.  In the colonies, government-approved and private lotteries were actively encouraged.  But great scandals–mostly privately run lotteries where the operators absconded with the loot–led to lotteries being banned by most state and provincial constitutions.

The Second Wave began with the opening of the Western frontier, where gambling was tolerated, and often expressly authorized.  The Civil War devastated the South, and legal gambling is seen as a painless tax.  But by the 1890s scandals and a reawakened morality once again led to a crackdown.  The Louisiana Lottery, “The Serpent,” led to the first strong U.S. federal anti-lottery laws.  By the turn of the 20th century, all state lotteries had been shut down.  Casinos and racetracks soon followed.  Even Nevada outlawed casino gambling in 1909.

The Third Wave started with the Depression.  In 1931 Nevada re-legalized casinos.  Every year since, there has been an expansion of legal gambling.  Racetracks reopened in the 1930s; low-stakes charity bingo spread in the ‘40s; social games in the ‘50s.  Then, in 1963, New Hampshire Legislature authorized the first state lottery of the century, labeled a “Sweepstakes” and tied to horseraces to avoid 70 year-old federal anti-lottery statutes.

U.S. federal laws are designed to help the states enforce their public policies toward gambling.  The federal anti-lottery laws were enacted in the 1890s to help states like New York keep out The Serpent.  But the prohibitions were so great, states had to ask for exemptions once they started running their own state lotteries.

In 1961, Congress enacted the Wire Act, designed to cut “The Wire,” the telegraph that illegal bookies used to get the results of horseraces before their patrons.  Betting on horseraces is obviously legal in many states, so, like the federal anti-lottery statutes, the Wire Act applied to state-legal gambling that crossed state lines.

As with state lotteries, when states started authorizing remote wagering on horseraces, the federal laws had to be changed.  Congress first enacted an Interstate Horseracing Act.  In December 2000, it amended that Act to expressly allow states to decide for themselves whether they would let their residents bet on races by phone and computer.

There is only one other federal statute that could apply to state-legal gambling.  When the State Lotteries of Delaware and Oregon began taking bets on National Football League games, Congress passed the Professional and Amateur Sports Protection Act (“PASPA”), preventing new state-authorized sports betting.

The history of the Unlawful Internet Gambling Enforcement Act (“UIGEA”) is well known:  A failing politician, Bill Frist (R.-TN), used his position as Majority Leader of the U.S. Senate to ram through a bill that he hoped would boost his chances to become President.  This was in October 2006.

The largest publicly traded company taking online bets from the U.S., PartyGaming, home of Party Poker, believed the UIGEA made their activities illegal.  The announcement that it was cutting off its major customer base resulted in a 60% drop in the price of the company’s stock.  Other publicly traded online gaming operators were hit as hard:  The UIGEA was like a terrorist attack, instantly wiping out more than $7 billion on the London Stock Exchange.

The UIGEA did not actually change any substantive state or federal anti-gambling laws.  It did create a new federal crime, but only for operators who were already violating American anti-gambling laws.  And it called for new regulations on payment processors.

Those regulations actually turned out to be quite useful for legal businesses, such as skill games, fantasy sports, free alternative means of entry poker and pure intra-state gaming.  The last turned out to be the most important.

The federal Department of Justice (“DoJ”) has been waging a war of intimidation against all Internet gambling, but especially Internet poker.  But the DoJ is missing the two essentials for a successful prosecution: a statute that clearly makes the activity illegal and a defendant who can be brought to trial in the U.S.

For a statute, the DoJ has been relying upon the Wire Act.  Using a law designed for telegraph wires on horseraces against Internet poker is like using stone tools to perform brain surgery:  It might work, but it is awfully messy.

The DoJ took the position that the Wire Act covered all forms of gambling, even state-legal gaming, so long as a wire crosses even temporarily into another state.  But courts, including a federal Court of Appeal hearing consolidated class actions brought by losing players against MasterCard, ruled that the Wire Act applies only to sports events.  And now a new federal statute, the UIGEA, expressly stated that intra-state online gambling is legal under that statute, even if wires cross temporarily into other states.

After the MasterCard decision, Nevada and the American Virgin Islands passed legislation to allow Internet casinos.  Nevada regulators went so far as to begin holding hearings.  But the DoJ wrote them letters, threatening to arrest any licensee who took a bet online.

At least six states began taking orders for subscription tickets for their state lotteries online.  Illinois and New York asked the DoJ whether they could use out of state payment processors.  The UIGEA would allow that, since the customer and operator were in the same state.  But the DoJ’s interpretation of the Wire Act would not.

In early 2011, state-legal Internet gambling looked like it was going to explode, despite the DoJ and the Wire Act.  Caesars Entertainment received permission from Nevada gaming regulators to team up with 888, which had taken poker bets from the U.S.  The District of Columbia legalized Internet poker and other games.  So, Harry Reid (D.-NV), the majority leader of the U.S. Senate, and Jon Kyl (R.-AZ) the minority whip, wrote the DoJ, asking it to reaffirm its position that the Wire Act made everything illegal.

Two days before Christmas, the DoJ issued a formal announcement that it was reversing its position on the Wire Act.  To reconcile the apparent conflict with the UIGEA, prosecutors would from now on limit the Wire Act to sports bets.  It therefore would not be a problem for state lotteries to use out-of-state payment processors.

The DoJ had to also know that this reversal meant Reid and Kyl got their answer: There is no federal law preventing any state from authorizing almost any form of intra-state gambling.  PASPA still prevents new sports betting, but that is being challenged in the courts by New Jersey.

The gambling must be legal under state law.  On April 15, 2011, the DoJ announced the indictment of the principals of the five largest poker sites then taking real money bets from America.  But the Wire Act was never mentioned.  Instead, the UIGEA and federal organized crime charges were based on violations of New York state anti-gambling laws.

Once a state decides to legalize Internet gambling, there is almost no limit to what it can do.  Small states should be able to compact together to create player pools in the millions.  Even without a compact, a state could authorize its licensees to accept bets from foreign nations where the betting is legal, such as England.

In March, the Illinois Lottery starting selling individual tickets online: more than $1.14 million the first week.  Every lottery is now looking to see whether it can join the three Canadian Lotteries that are already operating Internet poker games.  More than half the states allow at-home betting on races.  Nevada has two online sports operators, one accepting credit cards, and will start issuing its first Internet poker licenses this summer.  Landbased operators are paying outrageous amounts for Internet expertise, while social game companies, like Zynga, are openly saying they want to join.

The question is no longer whether Internet gambling will be made legal, or even when.  The question is who is going to ride the Third Wave.


© 2012, I. Nelson Rose.  Prof. Rose is recognized as one of the world’s leading experts on gambling law, and is a consultant and expert witness for governments and industry.  His latest books, Internet Gaming Law (1st and 2nd editions), Blackjack and the Law and Gaming Law: Cases and Materials, are available through his website,