April 23, 2011
DRAFT: Poker, Securities, Etc.
DISCLAIMER: The following is a draft of a post I've wanted to put up for the last few days but wherein I have been unable to find the time to nail down some of the relevant law. Therefore, you should read the following as a "Is this correct?" post.
Steve's earlier post on crowdfunding reminded me of a post I wrote a while back on the securities implications of "ChipMeUp," a website that allows people to stake poker players in particular tournaments. You can read the post here. Here's the most relevant part:
What makes staking poker players (which is nothing new) a bit more interesting under the Howey test than staking authors or ballplayers is the question of whether you would be relying solely on the efforts of the poker player for your profit. In other words, we quickly get into the age-old poker debate: Is poker predominantly a game of skill or luck? Interestingly, two recent state court decisions have come out on the skill side (see here and here).
The recent DOJ indictment of various online poker sites again raises the issue of whether poker is predominantly a game of skill--but not as centrally as one might think. First, the main thrust of the indictment is the allegation that the sites violated the Unlawful Internet Gambling Enforcement Act of 2006 (UIGEA). If the underlying facts hold up, this is not a claim that implicates the question of skill in poker because applicability of the UIGEA apparently boils down to the placing of bets and wagers and defines the same as "the staking or risking by any person of something of value upon the outcome of a contest of others, a sporting event, or a game subject to chance." Well, not even the staunchest advocate of poker being predominantly a game of skill would dispute that it is nonetheless "subject to chance" (insert here latest bad-beat story). It should be noted here that the UIGEA does not appear to make playing online poker illegal--it merely prohibits financial institutions from transfering funds in connection therewith (and the facilitation thereof via fraud--which is apparently the ultimate relevant charge against the sites). It is also worth noting that it was deemed necessary to expressly exclude at least some securities transactions from this definition.
However, the indictment does also include allegations of running an illegal gambling business. I assume that this charge is being brought under the Illegal Gambling Business Act of 1970 (18 U.S.C. § 1955), and here the issue of poker as a game of skill seems to be more centrally implicated. The act defines illegal gambling as, among other things, "a gambling business which … is a violation of the law of a State or political subdivision in which it is conducted." It further expressly identifies "pool-selling, bookmaking, maintaining slot machines, roulette wheels or dice tables, and conducting lotteries, policy, bolita or numbers games, or selling chances therein" as illegal gambling, though it does not limit illegal gambling to those activities.
Putting aside for the moment the question of where the activity of online poker is being conducted, at least some states do define illegal gambling as including games where chance predominates (thus, the court cases linked to in my excerpt from the ChipMeUp post). So, perhaps the question of skill in poker is raised under the indictment via this route (though this strikes me as unlikely). Some states, like Ohio, specifically name poker as a form of gambling--but I think the better view here is that unless they have expressly extended those statutes to cover online poker, the definition should be deemed to cover only home games occurring within the state that are not subject to the statutory exemptions and similar activities. I believe support for this view can be drawn from the recent events in the state of Washington, where the legislature specifically addressed online poker via statute. (Cynics will note that this legislation was apparently not intended to battle the evils of gambling, but rather to protect land-based casinos--until recently some of the strongest opponents of regulated online poker.)
To the extent the issue of skill in poker is raised under the indictment, it seems to me one easy way to prove that (IMHO) skill predominates in poker is to get the University of Alberta Computer Poker Research Group to compare the results of a bot that plays completely randomly against the bot that currently employs the most skill in its decision-making. Given a large enough sample size, one should be able to identify the portion of winnings attributable to skill. Even given the likelihood that a bot is unlikely to be able to implement all the skills of a live poker player, I'd still bet (say, 50 cents ... one time) that skill predominates.
Finally, if you believe this indictment constitutes some combination of a waste of taxpayer dollars or an offense against freedom, you might want to consider joining the Poker Players Alliance. (In the interest of full disclosure, I am a chip-carrying member.) Even if it turns out that the illegal money laundering charges hold up under the current indictment, which would lead me to support prosecution, I still don't believe merely playing poker online should be criminalized.
Great post. It's hard to argue poker is not a game of skill. A quick scan of the career winnings of the top online/tournament players would be more convincing than an experiment with bots. However, both techniques would lead to the same (obvious) conclusion.
Harry Reid almost pushed a poker bill through in December that would have benefited the brick-and-mortar casinos that contributed to his tough re-election campaign. Do you think the recent actions will lead to a regulated version of online poker in the next few years?
Posted by: NoFoldEmHoldEm | Apr 23, 2011 10:53:48 AM
I wonder what would be the effect on day trading if Las Vegas Bookies began posting odds and accepting bets on the prices of stocks and/or commodities?
Posted by: N. E. Frye | Apr 24, 2011 4:45:48 AM
By the way, why do I have to pass an astygmatism/dyslexia test to post here?
And I take it 'moderation' as used here is some sort of censorship.
Posted by: N. E. Frye | Apr 24, 2011 4:48:22 AM
I have a friend who grew up in Cleveland Heights back in the 60s, and he likes to tell a story about how the cops came in and busted up the local number-running ring because gambling was illegal ... shortly thereafter the state started generating revenue by selling lottery tickets in Cleveland Heights and throughout Ohio. While it is hard to predict with any certainty, my best guess is that we will have some form of federal and/or state regulated online poker in place within the next 18 months. A number of states (as well as the District of Columbia) are already actively pursuing establishing regulated intrastate sites (I believe the potential annual national tax revenue is estimated to be in the billions). I'm not suggesting this is some sort of organized conspiracy. Rather, a confluence of events and opportunity. However, as always, it is ultimately too soon to tell.
Posted by: Prof. Padfield | Apr 24, 2011 7:47:31 AM
N.E. Frye: "Moderation" as practiced here is not censorship in any substantive sense. Its main purpose is to filter out a surprisingly large amount of spam, advertising, and what appear to be auto-generated comments. And, for what its worth, I agree that the image filter can sometimes be difficult to read. I have to ask for an alternate about one-third of the time.
Posted by: Steve Bradford | Apr 25, 2011 7:06:58 AM
Great info, thanks. Been visiting your pages frequently and found alot of great tips. Keep up the great work!
Posted by: Fred Messinas | Jul 25, 2011 3:50:55 AM