How Things Became So Screwed Up At Full Tilt Poker
I haven’t been able to stop thinking about how things could have gone so horribly wrong at Full Tilt Poker. None of the people I know there are stupid. Nor are they malicious. It’s easy to go for the simple answer that Howard Lederer, Ray Bitar, Chris Ferguson, and Rafe Furst are greedy, thieving, conmen who set out to rip off Full Tilt players for their own benefit but that doesn’t really fit with the people I know.
So, I started to try to imagine, logically, how things came so unglued.
Keep in mind, this is all my own personal speculation. I have no inside knowledge. I haven’t consulted any of the indicted or other people within the company. It’s just me trying to take a scenario where we know certain facts and trying to determine what logical process brought about a decision.
I have no agenda. I’m not trying to make anyone look good. I’m not trying to make anyone look bad. If this were a poker game, all I’m doing is trying to read how the hand played and put a player on a hand or range of hands.
Lastly, I would like to point out that this is written with the assumption that all or at least major portions of the complaints by the DOJ against the indicated poker rooms are true. Rather than write “allegedly” fifty times, please just assume the alleged portion.
I think you have to go back to September 2006. Full Tilt was just completing their migration over to Dublin from Los Angeles. Part of the selling point for relocation was a nice stock option package and promises that the company would attempt to float of public offering soon.
The UIGEA changed all of that. Full Tilt Poker was forced into a very difficult decision. Stay in the US as a rogue operator or retreat to the European market. In some ways, I think the decision was even more obvious since non-US traffic on the site probably didn’t amount to more than 10% – 20%. Even in 2011 after Black Friday, FTP’s traffic dropped off 50% when it lost the US while PokerStars only slipped about 20% so even during those 5 years FTP hadn’t done a particularly good job at diversifying its revenues.
Now, Full Tilt has repeatedly claimed or inferred that their legal counsel was of the opinion that FTP was breaking no laws. Poker is a game of skill. There are no specific federal laws making poker illegal. Yes, we can almost recite these arguments from heart.
But, I highly doubt any lawyer ever told FTP this. If they did, they should have their right to offer legal services revoked.
Every year some new chucklehead claims that the US government doesn’t have the legal right to tax income. They usually write books where they lay out all of the legal theory behind their position and urge people not to pay their income taxes. And every year the US government prosecutes and convicts guys like this and the people who take their advice (i.e. Wesley Snipes) for failure to pay their income taxes.
The point is, no matter how strongly YOU believe what you’re doing isn’t illegal, in the end, it’s what the DOJ and/or the courts believe is illegal. And the US government was sending some pretty clear signals that online poker fell into the category of stuff they felt was illegal.
So the most likely scenario is that Full Tilt’s legal counsel did not give them a thumbs-up to keep offering online poker. It’s far more likely that what the lawyers did was outline FTP’s risks. What are the chances of the DOJ coming after them? What are the chances of anyone doing time? What are the chances of a negotiated settlement with the DOJ?
But, as I mentioned, the decision had already been made for Full Tilt to some degree. Leaving the US market was pretty much the end of the company. Losing that much liquidity that quickly would have hurt Full Tilt very badly. Chances are they wouldn’t have been able to continue operations.
So, the legal justification seems like something that only buttressed a decision that had already been made.
I think this is a very important decision because it sets up everything after it. The online poker world was operating in a grey area up until the UIGEA. The UIGEA sort of drew a line in the sand and forced companies to stand on one side of the line or the other. Those who left the US market did not have the risk tolerance that those who stayed had. More importantly, it was a key decision because those who stayed in the US did so knowing they were breaking the law. They were publicly declaring that profits were more important than ethics. Of course, that eventually proved to be FTP’s downfall five years later.
However, what would you have done? Some people would never cross the line. It’s just not in their DNA. But these guys are gamblers. The upside is hundreds of millions of dollars and the downside seemed fairly minimal. Back then the DOJ seemed somewhat impotent in doing anything about online gaming. Plus FTP had itself shrouded behind so many shell companies and their claim that the companies who did all of the work at FTP, Tiltware and Pocket Kings, were only consultants to FTP.
For them it seemed like getting all of your money in as a 3:1 favorite.
The decision to stay in the US had another fallout that was less than obvious to the rest of the industry. One of the big selling points to the FTP staff in LA to follow the company to Dublin was a grant of stock options. Staying in the US basically killed any chance of the company going public so the stock options became far less attractive.
So, at some point, FTP decided to pay out a dividend or profit distribution to shareholders. Whatever the official reasoning behind it, the move seemed to be designed to quiet people who were wondering when the big payday would be.
These payments, which the DOJ would later highlight in their complaint against FTP, originated when the company was paying them out of profits. They weren’t stealing player money to pay anybody. This was all coming out of what was left over after all the bills were paid.
At this point, all would apparently seem right with the world as far as FTP is concerned. They’re making tons of money, essentially doubling overnight, and everyone is happy that they’re getting a cut of the profits.
Now, fast forward a few years. The DOJ has been systematically going after the payment processors facilitating payments to the US facing poker rooms, Stars, Tilt, and UB/AP. It’s becoming more and more difficult to process payments and its beginning to impact business.
Again, this is another pivotal moment because they could have shrugged, thanked the business gods for a good run, and left the US to focus on Europe. FTP was in a much different position by this time and could have survived without the US market. Granted, a good chunk of their liquidity and revenues would have disappeared but they were diversified enough to be able to survive.
Instead, FTP made the decision to engage in all sorts of risky and illegal behavior in order to keep the money train running. They bought a piece of a struggling bank they could get to look the other way and they engaged the services of people so shady that one person was under two different indictments while FTP was shipping him payments to process.
I flag this as a pivotal moment because it again allowed FTP, Stars, AP/UB to establish just how far they were willing to go. When you start committing bank fraud, money laundering, and other similar crimes there’s no turning back. Even if they legalized online poker in the US tomorrow you still have the banking and financial crimes hanging over your head.
So why isn’t anybody mad at Stars? Mostly because Stars was able to pay people back. The fact that they were driven by the same greed and disregard for the law as Tilt doesn’t seem to concern many people but I think it should.
But let’s just delve a little deeper into how Tilt became the industry pariah.
When the bank fraud, money laundering, and other financial crimes still couldn’t pull in the money fast enough, Full Tilt embarked on a bold plan to capture market share.
Stars backed off. There was a limit as to how far they would go and they reached it. The executives at Full Tilt saw this as an opportunity. If Stars couldn’t get money onto their site all Full Tilt needed to do was come up with a way to get that money and those players would flock to Tilt.
The plan? Lend the players the cash to play until another payment method could be concocted that allowed Tilt to recover the funds.
I’m sure the finance, marketing, and other teams were called in to make the numbers work. I’m sure that on paper this looked like a brilliant move.
Somewhere in a PowerPoint presentation is a worst case scenario showing how the company would be impacted by various default/noncollectable rates on these “loans” and they all indications were that Tilt, over the long term, could afford to lose a certain percentage of deposits due to nonpayment and still make a profit.
But is that a Ponzi scheme?
Not really. It’s a calculated business risk. There was no intent to steal the money.
But as we’ll soon see, when you start to compromise your ethics it becomes a slippery slope.
One of the first decisions you’re faced with is how to finance the loans. One option would be to cut the profit sharing distributions and scale back spending. But that would draw attention to Tilt’s flanking move. In order to keep Stars, the DOJ, and the players unaware of their scheme they had to keep operating business as usual.
If too many people found out that Tilt was floating the money to the players, players would begin to take advantage of it and make deposits without having the funds to back them up. No, this needed to be done in strict secrecy so that nobody was the wiser. Stars might even catch on and counter with their own loan program.
That only leaves other player deposits to finance the loans. Again, I’m sure there’s a PowerPoint slide out there showing the historic deposit and withdrawal levels over the last several years indicating that Tilt could float a significant portion of player deposits without ever having to worry about cash flow issues.
And since nobody would ever know, minimal cash flow risk, and no real government regulation, why not?
Of course, what everyone forgot to ask is whether or not it was the moral and ethical thing to do. It’s one thing if Tilt wanted to give out loans from their own pocket but now they were playing with player funds which made it an entirely different gamble.
This is where I lay the real blame on FTP. I have nothing against Howard, Ray, Chris, or Rafe but whoever was fully aware of this plan and authorized it deserves everything they get. Because not only is this ethically unsound but it’s against the rules of the AGCC licensing authority. Not only is FTP now operating illegally in the US but worldwide since they are in material breach of their licensing agreement with the AGCC.
How do you know all of these risks and give it a thumbs up? How can you do that?
Was FTP’s board operational? Was the board made aware of these decisions?
That’s why I previously said that compromising your ethics can be a slippery slope. Tilt was already too comfortable with operating in ethically and legally grey areas. This is the point where maybe back in 2005 Tilt would have said this was a line that couldn’t be crossed. But in 2009 or 2010 with so many lines already having been crossed, this one seemed trivial in comparison.
The problem with this strategy is that it turns the relationship from a fiduciary responsibility to protect your customer’s interests to a total gamble on the player’s dime. Surely as the numbers grew and grew each month someone inside of Full Tilt had to have done a little math and figured out that the company was insolvent if anything caused a run on the bank or there was a major seizure of assets.
And, it’s not like assets hadn’t been seized from online poker sites in the past. Several times since 2006 the DOJ seized bank accounts believed to belong to online poker sites. Even if you get over the ethical problems with this loan strategy you would expect that FTP would have gone to great lengths to make sure that there was never too much money sitting anywhere within the grasps of the DOJ.
This is where the regulators deserve some blame as well. Even an accountant who earned his degree from a mail order study course should have been able to notice tens of millions of dollars disappearing from Full Tilt’s balance sheet. Shame nobody thought about including regular financial audits as a condition of holding player funds.
Also, like I wrote in Who to Blame for Black Friday? this is where the poker media should have been asking more questions. Some people have pointed out 2+2 threads going back to December and January in which the lack of their accounts being debited for deposits was discussed.
But none of that happened. Instead, Black Friday happened and Full Tilt couldn’t have possibly been in a worse cash situation than that fateful morning.
This is when the full extent of Tilt’s f-up became fully known. According to the DOJ this is when Howard and Ray both acknowledged that the company was screwed. There was that email from Howard that documented how bad the problem was as well as the Ray Bitar email that noted that they company couldn’t stand even a mild run on the bank.
Yet again, Full Tilt management is faced with an ethical dilemma. Publicly acknowledging their situation would create a run on the bank as players rushed to get their money off the site. Likewise it would have opened them up to civil lawsuits from players who weren’t able to get paid. There could even be criminal penalties as Full Tilt previously had advertised on its website that player funds were not commingled.
So what are we to make of all of this?
Well, for me, it’s like I told QuadJacks, I don’t think Howard Lederer, Chris Ferguson, Ray Bitar, and Rafe Furst are bad people. But I do think they’ve done bad things or bad things were done that they should have known about. I highly doubt any of them specifically set out to defraud anybody of their money. It just doesn’t fit with their personalities.
Having worked with Howard and Ray on a daily basis in the past I can tell you that whenever there was a question of what was in the player’s best interests Howard and Ray always came down on the side of the player. Chris never seemed especially engaged in the business. He didn’t really get involved in the day to day operations of the company even though he was often in the office playing poker until the wee hours of the morning. And Rafe is a smart guy who is more interested in raising money for cancer research and chatting about the future and potential of technology than he is in making a quick buck.
None of these guys comes off as a criminal to me.
However, that being said, Howard and Ray are very aggressive people. I can see them sliding down the ethical slippery slope. They have a poker player’s mentality of pushing small edges and wanting to be the best. I could see them taking the attitude of the whole payment processor mess being a giant cat and mouse game with the DOJ that they thought they were winning.
I don’t mean to sound like I’m apologizing for Full Tilt or to make excuses for them. I’m not. I just don’t subscribe to theory that everyone involved in what happened is evil or that they set out to steal the money. I still disagree with nearly every decision they made.
I’m just trying to offer a slightly more realistic picture of how the company got to where it is today. An analysis that includes people acting in a completely rational manner given their circumstances and knowledge at the time.
I may have hit the mark or I may have missed it by a mile. You tell me.