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Kevin Smith

The Other Investigation

28 August 2002

A three-line paragraph in PayPal's quarterly report has the interactive gaming industry standing at attention, but little else is known about a grand jury investigation into the company's relationship with online casinos and sports books.

In its most recent quarterly report, the popular alternative payment solutions provider included a brief mention of subpoenas it has received from the New York attorney general's office as well as from the U.S. Attorney for the Eastern District of Missouri.

Last week PayPal settled with New York Attorney General Elliot Spitzer, who sought information about online gambling payments made by persons in New York using the company's system. The company agreed to cease processing such payments by Sept. 1, 2002 and also agreed to pay the Spitzer's office $200,000 to cover the cost of the investigation.

While the repercussions of the Spitzer agreement take center stage, the Missouri case remains unsettled.

"PayPal has received federal grand jury subpoenas dated July 24, 2002, issued at the request of the United States Attorney for the Eastern District of Missouri," the company stated in its quarterly report. "These two subpoenas seek the production of documents related to online gambling activities. PayPal intends to cooperate fully with the United States Attorney's office in this matter."

Other than this brief statement to shareholders, officials with PayPal have been tight-lipped regarding any possible legal action. A company spokesperson confirmed that an investigation was underway and that PayPal was cooperating to its fullest extent, but declined to further comment.

A spokesman with the U.S. Attorney's office for the Eastern District of Missouri told IGN the U.S. Attorney cannot comment about any grand jury activities until charges have been filed.

"If someone is served papers by the court and they wish to go public with the information, that is their choosing," the spokesman said.

With the involved parties shedding little light on the matter, legal experts in the gaming field are left to hypothesize about what's at the heart of the investigation.

Frank Catania, a legal consultant for the gaming industry and the former head of the New Jersey Division of Gaming Enforcement, said the motivation factors for attorneys general differ from those of grand juries. Attorneys general are motivated by publicity, he said, and oftentimes they will go after easy targets that will give them good publicity for upcoming elections.

Grand juries are different. Catania said that although grand juries are serious business, it doesn't take much for one to be convened and an investigation to begin. He said someone in the justice department, either a U.S. Attorney, or even possible a state attorney general, presents a case that shows there is enough evidence for subpoenas or even criminal charges.

Online gambling is no stranger to Missouri Attorney General Jay Nixon, one of the first attorneys general to go after online gambling businesses. Nixon is responsible for Missouri's two highly publicized court battles with I-gaming operators, one with Sports International out of Pennsylvania and another with the Coeur D'Alene tribe in Idaho. A spokesman from Nixon's office told IGN that Nixon is aware of PayPal's situation in Missouri, but has had no involvement.

"Grand juries are really the easiest way for an indictment to be handed down," Catania explained.

There is only speculation as to why the government is seeking online gaming information from PayPal.

This week PayPal issued a declaration for all of its licensees to sign, stating that as of Aug. 28, 2002, the PayPal system wouldn't be used for any Internet sports betting activity. (See the link below for a copy of this document.) Whether the declaration was sent to all of PayPal's clients or just those in the gaming industry isn't clear.

This declaration, coupled with grand jury investigation, led one unnamed legal expert who is close to the PayPal system to guess that there is some sort of a federal investigation into the activities of Internet based sports books.

He pointed out that while the courts have ruled that Federal Wire Act makes online sports betting illegal, the federal government still doesn't have a federal statute that deals directly with online casinos. The grand jury investigation, he said, could be aimed at gathering as much information as possible about leading sports betting Web sites.

A federal investigation is the only feasible way to go after the industry, he said, in light of all the budget cuts and restraints that are facing numerous states throughout the United States. And if there is a push within the justice department to update or change federal laws, he added, there will have to be proof that the change is needed.

"The federal government needs to prove a specific intent to violate a state law in order to give rise to any other federal gambling statue," he said.

The spokesperson with the U.S. District Court in Missouri said that a grand jury investigation could last as little as two weeks and as long as two years, depending on how detailed the investigation is. If an indictment is handed down in relation to the investigation, he said, then the public will be informed.

Click here to view a copy of the PayPal declaration.

The Other Investigation is republished from
Kevin Smith
Kevin Smith