PayPal, Spitzer Come to Terms

New York Attorney General Eliot Spitzer has extracted another promise and another payday from a company with Internet gambling connections.

PayPal announced today that it has reached a settlement with Spitzer regarding his subpoena of the company. PayPal is agreeing to block all illegal Internet gambling transactions from New Yorkers as of Sept. 1. In New York, the only form of online gambling that is legal is off-track horse race betting. The e-cash company will also pay $200,000 to the state of New York for disgorged profits, investigation costs and penalties.

"To their credit, PayPal stepped up to the plate and decided to settle this matter before we went to court."

-Brad Maione
NY Attorney General's Office

In mid July, Spitzer's office subpoenaed PayPal to gain information about online gambling payments that have been made using the company's system. Between 10 and 15 percent of PayPal's revenue was expected to be attributable to Internet gambling in fiscal 2003.

Brad Maione, a spokesman from Spitzer's office, said the subpoena was part of the attorney general's investigation into PayPal regarding its use in for Internet gambling. He said the investigation was strictly a civil matter. It is unclear whether New York was going to charge PayPal with anything as a result of the investigation; Maione said the settlement renders that issue irrelevant.

"It's kind of a moot point since we are announcing a settlement," he said. "When you find evidence of wrong doing, there's two avenues: settlement or litigation. To their credit, PayPal stepped up to the plate and decided to settle this matter before we went to court."

In July, auction Web site eBay announced that it planned to acquire PayPal for $1.5 billion in stock. Yesterday the two companies announced they had passed the anti-trust waiting period without receiving a formal request for more information from the U.S. Justice Department. The deal is still subject to regulatory and stockholder approval.

As part of eBay's acquisition of PayPal, it said it would shut down PayPal's transaction processing for online gambling merchants as soon as the merger was complete. Maione said the attorney general wanted to assure that PayPal blocked online gambling payments without having to rely on the deal with eBay going through. "[The acquisition] may be some ways down the road in terms of the close of the deal," he said. "I've heard anywhere between six and eight months. Sept. 1 is two weeks away, so that's a major difference. Sometimes deals don't come to pass, and we wanted to make sure we had some kind of deadline that was enforceable."

On June 14, Sptizer announced an agreement with Citibank in which Citibank pledged that it would no longer permit its credit cards to be used for Internet gambling. In addition, Citibank said it would donate $400,000 to problem gambling groups.

Spitzer said today's announcement about PayPal is a continuation of his work toward eradicating illegal gambling in New York.

"This agreement continues the work of my office to enforce the law prohibiting illegal gambling, online or off line," Spitzer said in a statement. "This case shows that we intend to stop any company who facilitates illegal gambling transactions."

Spitzer, a Democrat, is running for re-election on Nov.5 in New York.

Kevin Pursglove, a spokesman for eBay, said the settlement does not change eBay's plans to phase out the gaming section of PayPal's business. PayPal's media relations department did not return IGN's phone calls.

Even though it has reached a settlement with the New York attorney general, PayPal is not out of the woods in terms of its online gambling business. On July 24, the U.S. attorney general for the Eastern District of Missouri sent the company two federal grand jury subpoenas in an effort to seek documents related to PayPal's Internet gambling dealings. In a regulatory statement, PayPal said it intends to cooperate fully.

A spokesman with the U.S. Federal Court in the Eastern District of Missouri said he couldn't comment on reported legal actions or subpoenas that had been issued against PayPal regarding Internet gaming transactions in Missouri.