Crypto Exec Attempts to Extinguish Fire Lit by Canadian Press

CryptoLogic Inc. President and CEO Jean Noelting expressed to analysts and members of the press this morning during a conference call that the Toronto-based gaming software developer is in good shape despite a recent report claiming that the company could be headed for legal troubles.

The call was reciprocated after Canadian Business Week reported that CryptoLogic could come under fire for having some of its servers located in Canada. According to the report, the company was in danger of having its offices raided and charges filed against it for operating online casinos in the country, the same fate which was brought to Vancouver-based Starnet Communications (recently reincorporated as World Gaming plc) in 1999.

That news, along with a hacker attack in late August and a stock sell-off around the same time, has sent Crypto's stock plummeting from an early August high of over CA$46 to nearly $10--the stock was trading at $11.90 at midday today.

Noelting wanted to clear the air with investors and members of the media and repeatedly told the audience that, in his mind, there's a big difference between the system his company has and what Starnet was accused of using.

"All of the servers that we have that are located inside of Canada are not involved in any gaming transaction," he said. "We have our front-end servers and support servers, but they are not controlling or running any functions which determine the outcome of games or the relevance of gambling activity conducted on a site."

Noelting took issue with the Canadian Business report in which the publication said it spent months playing at Crypto-operated casinos and tracing the play back to servers in Canada. He said tracing play back to servers that give sites Web support is drastically different from tracing it back to servers that run games being based in Canada.

"We have seen our results overshadowed by innuendoes and half-truths," he said. "Simply tracing a Web server doesn't lead to the location of a gaming transaction. Web servers can be located wherever the licensee likes. Game transactions don't go through the Web server."

The article also touched on the rocky relationship between Crypto and Bill Scott. In 1997 Scott's World Wide Tele-Sports was picked to launch InterCasino. The online casino domain name and the trademark is owned by Crypto, and Crypto sold the rights to manage the operation to Scott despite pending federal charges against Scott in the United States for violation of the Federal Wire Act for accepting bets from Americans.

Noelting said his company forced Scott to either close InterCasino or sell the domain name to someone else once due diligence was done on Scott. He promptly turned over ownership of the site once Crypto requested, according to Noelting.

Noelting said Crypto still owns the domain name and trademark for InterCasino. Crypto sold the rights to the site to CCMH, but receives a portion of the revenues from the casino.

Noelting did confirm reports that Mark Rivkin, one of the founders of the company, sold 500,000 shares of his stock at $42 a share in August prior to it bottoming out. Noelting said the $21 million Rivkin made off the deal represented roughly half of the shares he still owns and that his feelings had been made known before he unloaded his stock.

"We knew there was some interest there in some of the stock being crystallized," Noelting said. "It is important for him to have a diversified portfolio, so that meant selling off some of his shares."

Noelting said the company has been busy buying back its own shares to keep the stock price as competitive as possible.

"We have bought back over 200,000 shares in the last week or so and we will continue to do so in the future," he said. Noelting said the official numbers will be released at the end of the month when the company releases its third quarter statement.

Noelting also said that the hacker attack in late August, in which a hacker was able to rig games at a couple of Crypto-licensed online casinos to increase the frequency of winnings, has been put in the past.

He said that all of the nearly 150 players who were playing at the casinos during the time of the attack have been paid their winnings, totaling nearly $2 million. Much of the winnings were paid through an insurance policy through which Crypto was only liable for $600,000.

Although the incident did give the company a black eye, Noelting said the way it was handled and caught right away, within hours of the attack systems were shut down, showed those in the industry how reliable CryptoLogic is.

"We have not seen any hesitancy from our current licensees or any of our possible future ones as a result of the attack," he said.

Looking ahead, Noelting said his company is working with its Littlewoods licensee in developing a site in the Isle of Man.

"It is our full expectation to be certified in the Isle of Man by mid November," he said.

Noelting said he isn't worried about any criminal charges being brought before the company because it has a standard of not operating online casinos in jurisdictions where the government doesn't issue licenses.

"We only have operators in places where full government approval is possible," he said. "That is why we don't have any licensees in Costa Rica, for example."

As Crypto heads into the future Noelting is somewhat worried about developing a system that will meet regulatory standards in Nevada only because the company was forced to deal with operators who were knowingly accepting play from U.S.-based players.

"The market situations called for us to do that in the past," he said. "I think they may have to rework the wording in the bill because right now the only companies that the land-based operators in Nevada are being allowed to deal with are the second-tier ones."

The bottom line for Noelting remains that the company is free and clear of any and all charges that may be reported in the media.

"There is no indication that we are under investigation by anyone," he said. "There is no gaming data brought into Canada."