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Best of Howard Stutz

Gaming Guru

Howard Stutz

States now look towards regulated online gaming

16 January 2012

LAS VEGAS, Nevada -- Federal prosecutors may have cracked opened the door for individual U.S. states to operate Internet poker websites without Congress passing online poker legislation.

At least a half-dozen states -- including Nevada -- and the District of Columbia have enacted laws or are contemplating regulatory changes that would allow some form of Internet poker within their boundaries.

States that operate lotteries could also move forward with Internet poker initiatives.

How pervasive individual states become in online poker activities has been the subject of debate among gaming industry financial analysts and gaming attorneys.

The U.S. Department of Justice announced Dec. 23 that it revised a long-standing opinion on the federal Wire Act of 1961, which made all forms of Internet gambling illegal. The new opinion, sought by the New York and Illinois lotteries, Justice Department attorneys said the Wire Act applies only to sports wagering, not to the sale of lottery tickets over the Internet. The reinterpretation seemingly cleared a path for federally regulated Internet poker websites catering to American gamblers.

Not so fast, Deutsche Bank gaming analyst Andrew Zarnett said.

In a recent research report, he told investors that the hyped-up enthusiasm expressed by many Internet poker proponents toward the prospects of federal legalization was misplaced.

"We do not feel it provides clarity that the Department of Justice has softened its stance on all Internet gaming," said Zarnett, who analyzes and researches the high-yield debt of several casino companies.

Still, Zarnett said the debate over Internet poker has evolved from "whether" some forms of the activity will be legalized to "when" Americans would be able to gamble for money on their home computers.


Las Vegas gaming attorney Jennifer Carleton, a shareholder with Brownstein Hyatt Farber Schreck, cautioned that future Justice Department opinions could reverse the latest interpretation.

"Without a doubt, the opinion has significantly altered the gaming landscape with regard to the placing and receiving of wagers over the Internet and possibly opens the door for states to allow online poker and other forms of Internet gambling," Carleton said. "Gaming practitioners and entrepreneurs interested in Internet gaming must remain alert, attentive and proactive during the period of rapid legislative and regulatory changes that is likely to follow."

Nevada Gaming Control Board Chairman Mark Lipparelli said further analysis of the opinion is needed.

"Clearly, there was a major shift in policy understanding," Lipparelli said. "But it's too early to jump to any final conclusion."

With Congress showing little outward movement toward passing any gaming legislation -- lawmakers are sitting on two Internet poker bills -- Zarnett said the attention has turned toward individual states.

Using history as a guide, Zarnett said Internet poker would roll out on a state-by-state basis in the same manner as other forms of gambling, including lotteries, horse racing and casinos.

"Already some states are working hard to prepare for-profit online gaming," Zarnett said. "It is clearer now that not-for-profit state lotteries will be involved, maybe even have a first-mover advantage."

Nevada approved Internet poker regulations on Dec. 22 to capitalize on a business opportunity should Congress overturn a ban on Internet wagering. The state would serve as the licensing and regulatory arm for online poker providers.

The regulations also allow the state's casino companies to operate Internet poker sites limited to in-state players.

Lipparelli said the agency has received 10 applications for interactive gaming from casino operators, equipment providers and manufacturers. It's unclear how long investigative process will take. The technologies being proposed will need proper vetting.

"The devil is in the details," Lipparelli said.


South Point Hotel Casino and Spa owner Michael Gaughan said he will continue to operate, a free play Internet poker website launched in October. The site offers cash and noncash prizes, including trips to the South Point to compete in live poker events.

But Gaughan said he applied with state gaming authorities to operate an intrastate poker website that would accept wagers only from Nevada residents or gamblers within the state's borders. Gaughan said the free play website has found marginal success. It has more than 22,000 customers, but not many from Nevada.

"It's gotten my name out there, and I need to get the pay site up so I can get a leg up on everyone else," Gaughan said. "I think I'm first in line."

He said the Department of Justice opinion "changed the game" for everyone, landing the push for Internet poker with individual states. He said Nevada's small population means an Internet poker website catering to just the state won't be "as lucrative as everyone once thought it would be."

Gaughan said he would have to find partners in other states that legalize Internet poker -- a tribal casino in California, for example -- if he wants to expand the player pool.

Mark Hichar, a partner with the Edwards Wildman Palmer law firm in Boston who represents lottery system and gaming technology providers, said states could increase their potential player pools by forming compacts with other states.

He said the Justice Department opinion doesn't prohibit that action as long as the states have similar Internet poker regulations.

The arrangement would be similar to the Interstate Horse Racing Act, which authorizes interstate Internet wagering on horse races. States have the right to regulate gambling and the act provides states any necessary federal assistance.

More than 20 states are part of the Interstate Horse Racing Act.

"I would expect states will enact reasonable laws and regulations that measure age control and location controls," Hichar said.

Zarnett said states have a multitude of issues to plow through before the first poker hand is dealt, such as tax structure, tribal gaming sovereignty and the process for other states to opt in or opt out of a system.

"The introduction of Internet poker gaming, if legalized, creates a very modest new source of state tax revenue, somewhat helpful to those who are looking to bridge their budget gaps," Zarnett said. "While progress is upon us in a state basis, we believe that legalization is still in the distant future as many issues need to be worked out."

Internet poker

The race is on to legalize Internet poker by several states following the U.S. Department of Justice's Dec. 23 ruling that says the Federal Wire Act of 1961 applies only to sports wagering.

State lawmakers are considering two online gaming bills for early 2012. The first bill focuses solely on regulating Internet poker. The second bill looks at other forms of Internet gaming, in addition to poker.

The Nevada Gaming Commission approved online poker regulations on Dec. 22 that will allow legal, licensed and regulated Internet poker to be played within state borders. Gaming equipment manufacturers and casino operators have filed Internet gaming license applications. The attorney general's office is reviewing the Department of Justice's opinion.

Legislation that would allow an online lottery was approved in 2009. The Department of Justice opinion permits the sale of online lottery tickets and reopens the possibility of poker within the state.

In December the Iowa Racing and Gaming Commission filed a report outlining how the legislature could regulate the playing of online poker in Iowa. The commission estimated online poker operations could generate between $3 million and $13 million of new tax revenue.

New Jersey:
Gov. Chris Christie has indicated his support for a bill to legalize online poker within the state. Christie said he would only sign the bill if it only involves Atlantic City casinos. Last year, Christie vetoed legislation that would have legalized online gaming in the state. He said the law contradicted the state constitution and federal regulation.

Washington D.c.:
The District's council passed a bill in 2010 that allowed pre-approved users to wager money and play online poker on home computers or laptops in certain public areas. But implementation through the D.C. Lottery stalled over concerns of its legality. Council members are reconsidering the program following the Department of Justice opinion.

Source: Deutsche Bank AG
States now look towards regulated online gaming is republished from