United States v. Scheinberg

Based on Wikipedia: United States v. Scheinberg

The Day Online Poker Died in America

On April 15, 2011, millions of Americans woke up, poured their coffee, and sat down at their computers to play poker. When they navigated to their favorite poker sites, they found something unexpected: a stark FBI seizure notice where the familiar green felt tables used to be. The poker community would come to call this day "Black Friday," and it would mark the end of an era.

This wasn't a minor regulatory skirmish. In a single coordinated strike, federal prosecutors had effectively shut down the three largest online poker companies in the world, frozen seventy-six bank accounts across fourteen countries, and filed criminal charges against eleven individuals that could land them in prison for decades. The alleged crimes? Running what prosecutors called an elaborate fraud scheme to keep billions of dollars flowing from American poker players, despite laws designed to stop exactly that.

The case, formally known as United States v. Scheinberg, would eventually result in a three billion dollar settlement, the largest in online gambling history. But to understand how we got there, we need to rewind to a time when online poker wasn't just legal—it was a cultural phenomenon.

The Poker Boom That Changed Everything

In 2003, an accountant from Tennessee named Chris Moneymaker won the World Series of Poker main event. He had qualified through an online satellite tournament that cost him just forty dollars. His prize? Two and a half million dollars, plus a last name that seemed almost too perfect for a poker champion.

ESPN had recently expanded its coverage of the World Series, and Moneymaker's cinderella story captured the public imagination. Here was proof that anyone—not just professional card sharks—could sit down at a table and win life-changing money. The dream was intoxicating.

What followed was unprecedented growth. The main event at the World Series of Poker exploded from 839 contestants in 2003 to a staggering 8,773 by 2006. That's a tenfold increase in just three years. Online poker sites like PokerStars and Full Tilt became household names, sponsoring tournaments, television shows, and professional players who achieved celebrity status.

The industry was growing at about twenty percent per year. Hundreds of millions of dollars changed hands daily. For the companies operating these sites, America was the golden goose.

Then Congress decided to kill it.

A Law That Changed the Game

On October 13, 2006, Congress passed the Unlawful Internet Gambling Enforcement Act, known by the acronym UIGEA (pronounced you-ee-gee-ah). The law was tucked into the SAFE Port Act, a bill primarily about maritime security. Most lawmakers who voted for it probably didn't even know the gambling provision was in there.

The UIGEA didn't actually make playing online poker illegal. What it did was something more clever and more devastating: it made it a federal crime for gambling businesses to "knowingly accept" payments "in connection with unlawful Internet gambling." The penalty? Up to five years in prison.

In other words, the law attacked the plumbing. You could still technically play poker online, but the companies couldn't legally move your money.

Here's where it gets legally murky. The UIGEA didn't define what constituted "unlawful Internet gambling." It simply referenced existing state and federal laws. Under federal law, the Wire Act—a 1961 statute originally aimed at mobsters using telephone wires to coordinate sports betting—only clearly applied to sports betting, not poker. Many legal experts argued that poker, as a game of skill rather than pure chance, might not be covered at all.

Some companies took the hint and left immediately. Party Poker, then the largest provider serving American players, withdrew from the United States market the moment the UIGEA passed. So did Pacific Poker, Paradise Poker, and several others. They decided the legal risk wasn't worth it.

PokerStars, Full Tilt, and Absolute Poker made a different calculation. They believed—or at least argued—that the law didn't actually cover poker. They stayed.

The Cat and Mouse Game

If you can't legally move money through normal banking channels, what do you do? You get creative.

According to prosecutors, the poker companies embarked on an elaborate scheme to disguise their transactions. They allegedly coded poker deposits and withdrawals as purchases from fake businesses—jewelry stores, golf equipment retailers, pet supply companies. Banks processing these transactions had no idea they were actually facilitating online gambling.

When banks caught on and shut down the accounts, the companies would simply find new processors and create new fake merchant accounts. It was a constant game of cat and mouse.

Then the poker companies allegedly found a more permanent solution: they invested in their own bank.

SunFirst Bank was a small community bank in Utah. According to the indictment, executives from the poker sites bought a stake in the bank and began using it to process player transactions directly. John Campos, the vice chairman of SunFirst's board, was among those eventually indicted.

The irony is striking. Utah is one of the most conservative states in America regarding gambling—it's one of only two states with no legal gambling whatsoever. Yet allegedly, a Utah bank became a crucial conduit for billions in online poker transactions.

The Informant Who Brought It Down

Every criminal case needs evidence, and federal prosecutors got theirs from an unlikely source: a former payment processor who had been on the other side.

Daniel Tzvetkoff was an Australian entrepreneur who had run Intabill, a payment processing company that handled transactions for online poker sites. In April 2010, the FBI arrested him in Las Vegas. The charges against him—money laundering, bank fraud, and wire fraud—carried a potential sentence of seventy-five years in prison.

Tzvetkoff had an interesting relationship with the poker companies. PokerStars and Full Tilt had previously accused him of stealing at least one hundred million dollars from them. Now he was in a position to return the favor.

By August 2010, Tzvetkoff was quietly released. He had turned state's evidence, reportedly providing federal prosecutors with detailed information about how the poker companies had circumvented banking laws. The grand jury that would eventually indict the poker executives began hearing evidence.

On March 10, 2011, that grand jury handed down a sealed indictment. Five weeks later, the hammer fell.

Black Friday

The coordinated takedown on April 15, 2011, was designed for maximum impact. The Department of Justice seized the domain names of PokerStars.com, FullTiltPoker.com, AbsolutePoker.com, UltimateBet.com, and UB.com. Anyone trying to access these sites found only an FBI seizure notice.

Eleven individuals were charged with four separate crimes each. The list included Isai Scheinberg, the Israeli-Canadian founder of PokerStars; Raymond Bitar, the CEO of Full Tilt; Scott Tom, a part-owner of Absolute Poker; and several payment processors and bank executives.

The potential penalties were severe. Violating the UIGEA carried up to five years in prison. Money laundering conspiracy could mean twenty years. The conspiracy to commit wire fraud charge topped them all at thirty years. Theoretically, defendants faced the possibility of spending the rest of their lives behind bars.

Preet Bharara, the United States Attorney for the Southern District of New York, held a press conference. He was not subtle.

As charged, these defendants concocted an elaborate criminal fraud scheme, alternately tricking some U.S. banks and effectively bribing others to assure the continued flow of billions in illegal gambling profits. Foreign firms that choose to operate in the United States are not free to flout the laws they don't like simply because they can't bear to be parted from their profits.

The FBI's statement was equally pointed, with Assistant Director Janice Fedarcyk declaring that the defendants had "bet the house" on their scheme continuing—and lost.

The Players Caught in the Middle

For the executives and payment processors, Black Friday meant potential prison time. For ordinary poker players, it meant something more immediate: they couldn't access their money.

With seventy-six bank accounts frozen across fourteen countries, players who had deposited funds with these sites had no way to withdraw them. Some players had millions of dollars locked up. The total amount held in player accounts was estimated at around five hundred million dollars—a conservative figure.

"Some players have literally millions of dollars in their online poker accounts," said Brandon Adams, a professional poker player who had appeared in televised tournaments. "The expectation was that there would be warning signs. These sites went from multibillion-dollar enterprises to on the ropes overnight."

Five days after the initial seizure, prosecutors returned the PokerStars.com domain to the company specifically so that American players could withdraw their funds. It was a small but significant acknowledgment that the government's beef was with the companies, not the players themselves.

The Full Tilt Scandal

As the weeks turned to months, a darker story emerged about Full Tilt Poker. It turned out that the company's problems went far beyond payment processing violations.

In an amended complaint filed in September 2011, prosecutors alleged something stunning: Full Tilt didn't actually have enough money to pay back its players. The company, prosecutors claimed, had been operating essentially as a Ponzi scheme—using new player deposits to pay out withdrawals to existing players, while siphoning off hundreds of millions for its owners.

According to the government, Full Tilt had paid its board members and other owners more than four hundred forty million dollars since April 2007, even as it failed to maintain sufficient reserves to cover player balances. The money that players thought was sitting safely in their accounts had actually been distributed to the people running the company.

The amended complaint named three prominent poker professionals: Howard Lederer, Chris Ferguson, and Rafael Furst. These weren't just executives—they were celebrities in the poker world, players who had won major tournaments and appeared on television. Ferguson, known as "Jesus" for his long hair and calm demeanor, had won the 2000 World Series of Poker main event.

Lawyers for the defendants pushed back hard against the "Ponzi scheme" characterization, calling it "inaccurate, unfair and disingenuous." They suggested that any shortfalls might have resulted from mismanagement rather than deliberate fraud. But the damage to Full Tilt's reputation was catastrophic.

The Alderney Gambling Control Commission, which had licensed Full Tilt to operate in Europe, suspended and then permanently revoked the company's license. By the fall of 2011, Full Tilt was completely dead—no operations anywhere in the world, and hundreds of thousands of players still owed money they might never see.

PokerStars Steps Up

While Full Tilt collapsed in scandal, PokerStars took a different path. The company, which had always maintained that it had done nothing wrong, began negotiating with federal prosecutors.

On July 31, 2012, the two sides announced a settlement. PokerStars would pay approximately seven hundred thirty-one million dollars to the United States government. More significantly, PokerStars agreed to purchase Full Tilt's assets and use them to repay all the players who had lost money in the Full Tilt collapse.

In exchange, the government dismissed all civil complaints against PokerStars and Full Tilt "with prejudice"—legal language meaning the cases could never be brought again. Neither company admitted any wrongdoing.

The settlement included a provision that seemed almost hopeful: the government acknowledged that both companies would be eligible to apply for licenses to operate legally in the United States, if and when a legal framework for online gambling was established. It was a tacit admission that the prohibition of online poker might not last forever.

The criminal cases continued separately. Over the following years, the individual defendants reached various plea agreements. All three defendants who were prosecuted received prison time, though the sentences were far shorter than the theoretical maximums that prosecutors had initially brandished.

The Political Fallout

Black Friday sparked a fierce political debate about online gambling that continues to this day.

Barney Frank, then a Democratic Congressman from Massachusetts and himself a poker player, gave an interview expressing frustration that the Justice Department seemed more interested in prosecuting poker sites than the people responsible for the 2008 financial crisis. It was a pointed comparison—the subprime mortgage meltdown had cost Americans trillions of dollars and nearly collapsed the global economy, yet few executives faced criminal charges.

Alfonse D'Amato, a former Republican Senator from New York and longtime poker advocate, penned an editorial in the Washington Post calling the prosecution "an attack on Internet poker and American poker players." He accused prosecutors of trying to ban online poker through "strong-arm tactics" without the support of legislators or the public, and called on President Obama to rein in the U.S. Attorney's office.

The Poker Players Alliance, an advocacy group, mobilized its members to contact their congressional representatives. But despite occasional legislative efforts to legalize and regulate online poker at the federal level, no bill has ever passed.

The international implications were significant as well. Antigua and Barbuda, the tiny Caribbean nation where some of the poker operations were based, threatened to file a complaint with the World Trade Organization. Online poker was the second-largest industry in Antigua's economy, and the country had previously won a WTO case against the United States over its restrictions on offshore gambling.

The Aftermath

The immediate economic impact was substantial. The three indicted companies had combined for an estimated two hundred million dollars in annual advertising in the United States. Without them, poker-related television programming collapsed almost overnight.

ESPN, which had a twenty-two million dollar contract with PokerStars, immediately withdrew all PokerStars advertising. Two days after Black Friday, ESPN2 cancelled a scheduled broadcast of the North American Poker Tour. Shows like Poker After Dark and High Stakes Poker, which had been fixtures on late-night television, lost their sponsors and eventually went off the air.

The World Series of Poker, which had grown so dramatically during the boom years, saw its main event shrink. From nearly nine thousand players in 2006, participation dropped to around six thousand and stayed there for years. The poker boom was definitively over.

For the estimated fifteen million Americans who had played online poker, the options were grim. They could travel to brick-and-mortar casinos, play in home games with friends, or simply stop playing. The convenient, always-available poker that had revolutionized the game was gone.

A Decade Later

More than a decade after Black Friday, the landscape of online gambling in America has changed significantly—though not in the way the poker community had hoped.

Several states have legalized online poker within their borders. New Jersey, Nevada, Pennsylvania, Delaware, and Michigan now allow residents to play on regulated sites. But these markets are small, fragmented, and often restricted to players physically located within state lines. The dream of a vibrant, nationwide online poker ecosystem remains unrealized.

Meanwhile, sports betting has been legalized across much of the country following the Supreme Court's 2018 decision in Murphy v. NCAA. The same kind of betting that the Wire Act was originally designed to prohibit is now advertised constantly during football games. The inconsistency is not lost on poker advocates.

PokerStars, now owned by Flutter Entertainment, continues to operate internationally but cannot serve most American players. Full Tilt, after being acquired by PokerStars and used to repay players, was eventually shut down and its players migrated to PokerStars. Absolute Poker and UltimateBet simply disappeared.

The individuals who were indicted have mostly moved on with their lives. Some paid fines, some served prison time, some fled to countries without extradition treaties. The poker professionals implicated in the Full Tilt scandal saw their reputations permanently damaged, though none were ultimately charged with crimes.

The Question That Remains

Was online poker in America killed by overzealous prosecutors enforcing a poorly conceived law? Or were the poker companies reckless operators who thought they were above the law and got what they deserved?

The truth probably lies somewhere in between.

The UIGEA was a clumsy piece of legislation, passed through a procedural trick with minimal debate. It didn't clearly define what gambling it covered, didn't clearly make poker illegal, and attacked the problem sideways by targeting payment processors rather than players or operators. The poker companies' argument that the law didn't apply to them was at least colorable.

But the payment processing schemes described in the indictment were undeniably deceptive. Creating fake merchants, coding transactions as golf equipment purchases, investing in a bank to circumvent oversight—these aren't the actions of companies confident in their legal position. They're the actions of companies that knew they were operating in a gray area and chose to barrel through anyway.

Full Tilt's apparent misuse of player funds was indefensible regardless of one's views on gambling law. Whatever the legal status of online poker, operating a de facto Ponzi scheme is fraud.

Perhaps the most lasting legacy of United States v. Scheinberg is the conversation it forced about how America regulates gambling in the digital age. The case exposed the absurdity of laws written for a pre-internet world, the arbitrary distinctions between games of skill and games of chance, and the tension between federal prohibition and state experimentation.

For millions of poker players, Black Friday remains a bitter memory—the day their hobby was criminalized not by act of Congress, but by prosecutorial discretion. For the companies and executives who were charged, it was a reckoning they had long avoided but perhaps always knew was coming.

And somewhere, in dozens of foreign countries, the online poker industry continues to thrive—just not in the United States, where it all began.