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Internet Gambling

Why is Washington out to stop it?
Bruce Schoenfeld
From the Print Edition:
Gene Hackman, Sep/Oct 00

(continued from page 5)

His bookie wasn't around when he needed him. Sometimes he wouldn't handle action on games Chris wanted. And Chris, who runs a sports memorabilia business from his home, always wondered what would happen if he hit big, like a five-figure score on a four-team parlay. Would he ever see his winnings? Whom could he complain to if he didn't?

He'd heard about sports gambling sites on the World Wide Web, so he typed "sports" and "gambling" into his search engine. What he found was a virtual Strip of Web sites touting Las Vegas-style wagers and more. A list scrolled up his computer screen of sports books offering parlays, teasers, gimmick bets, tennis and golf tournaments, soccer, even odds on camel races.

One in particular intrigued him. It was called World Sports Exchange, and during certain events it operated like the stock market. You could buy stock in the Dallas Cowboys, for example, at $50 to win $100. As the game progressed, you could sell for a profit if the stock had gone up, buy more shares, even hedge your bet by buying the other side. "At any point in the game, you can buy shares on either team against the point spread for anywhere from $1 to $99 to win $100," Chris explains now. "That's what attracted me. Las Vegas doesn't have anything like that."

One Sunday evening, Chris turned on his television and his computer and settled in to watch New Orleans play Chicago. "The kind of game you couldn't possibly be interested in if you weren't betting," he says. The Saints were giving three and a half points, meaning they had to win by four to cover the point spread. Considering that unlikely, Chris invested $800 in the Bears, buying 20 shares at $40 each.

The game was stultifying. By the fourth quarter, with New Orleans ahead 10-6, television sets had been flipped off across America. Because Chris still held his shares, the game still held his interest. As the remaining minutes dwindled away, he watched his Bears move the ball into Saints territory and saw the price of a share move from $40 to $60. He could have sold for a tidy profit. He chose to wait.

The Bears scored a touchdown in the final minute. Chris cashed out at $87, making a profit of $47 times 20, or $940. But he wasn't finished. With only a few seconds remaining in the game, shares in the Saints had sunk to $10. Chris bought 20 on a lark. When the Saints returned the kickoff for a touchdown, the price shot to $100. Chris pocketed another $1,800. "All of that took 10 minutes," he says. "Ten of the most exciting minutes of my life."

Chris no longer uses his bookie. He also no longer makes his annual trip to Vegas. He wires money to World Sports Exchange at the start of the football season because it doesn't accept credit, and he attempts to keep it alive through the Super Bowl. Like many Internet gamblers, he requested payment shortly after his first win to make sure the virtual bookies were on the level. When the money arrived the following day, he sent it back to reestablish his account.

U.S. law enforcement officials are well aware of what gamblers like Chris are doing. Two years ago, the cofounder of World Sports Exchange, which has grown from 800 customers to more than 12,000 today, returned home to the United States from the Caribbean island of Antigua to face charges of violating the 1961 Interstate Wire Act by accepting sports bets over telephone lines. He was handcuffed, booked and fingerprinted.

In February, 32-year-old Jay Cohen was convicted, and faces a jail term of up to five years. Sentencing is pending.

The suit-and-tie world doesn't like Internet gambling. Many lawmakers consider gambling a vice rendered fit for public consumption only through careful monitoring and regulation. Perhaps no industry, neither alcohol nor tobacco and certainly not firearms, is regulated as stringently in the United States as legal gaming. You can buy a gun in all 50 states, but you can legally wager on most sporting events in only one.

The suits and ties in Nevada really hate Internet gambling. They've spent years building up the reputation of Las Vegas as a reputable place, controlled by the government and not the Mob. They sell Vegas as an orderly place where winners get paid and cheaters get thrown into the street, as opposed to the other way around. Conversely, unchecked Internet operators freely run casinos online, handle pari-mutuels like horse racing and take sports bets in the middle of games, all without U.S. government regulation. They could be mobsters, charlatans or anyone. The state government gets no cut of the proceeds, unlike when the gambling is sanctioned as in Vegas or Reno. And local businesses like restaurants and hotels show no earnings. Instead, the money flows offshore to the Caribbean, Costa Rica--and beyond.

Professional and amateur sports leagues like the NBA, NFL and NCAA, they hate Internet gambling, too. They fear gamblers with millions of dollars in play, that they'll pay players to shave points or throw games, although that was happening long before the Internet existed. And they loathe seeing so much money being made--reportedly up to $50 million annually for some offshore sports books--on their product.

In the halls of legislative power in Washington, the suits and ties are hard at work making Internet gambling even more illegal than it already is. "The Internet is an especially pernicious form of gambling because there is no check or balance on it," says Senator Jon Kyl of Arizona. "You get up in the morning and log on to your computer and start to gamble. It plays to the addictive nature of many people, especially kids. As one Harvard professor has said, it is the crack cocaine of gambling."

Kyl has sponsored a bill that would take the 1961 law and extrapolate it to the Internet era. The bill would attempt to make service providers cease carrying Web sites of accused gamblers once an indictment has been handed down. It remains unclear how this would be accomplished, but if nothing else, Kyl wants these sites to be forced to continually alter their Internet addresses. "It's possible that you can keep thwarting law enforcement by hopping around, but in order to be commercially viable, you have to be found," he says.

Kyl wants to be clear that he isn't necessarily morally opposed to gambling. His main purpose, he says, is to protect problem gamblers from themselves. Though sports gambling is readily available at Las Vegas casinos, Kyl points out that gamblers have to make a special effort to get to them. For most people, such bets are unavailable on a daily basis. However, the Internet allows gamblers to roll out of bed and get money down on the NCAA Tournament before the Pop-Tart is out of the toaster.

"You're sitting at a bar watching a game, and you say, 'Bet you $10 they don't score another touchdown,' that's one thing," Kyl says. "But you can get in serious trouble by logging on at your computer with nobody around. You can get in very, very deep."

Kyl is a conservative Republican. A strong backer of Kyl's bill in the Senate is the liberal Democrat Dianne Feinstein of California. When Kyl brought the bill to a voice vote in the Senate in its most recent incarnation this year, it passed unanimously. At press time, a similar bill was set for a floor vote in the House of Representatives.

Sitting in a booth in an Italian restaurant tucked into a suburban Virginia shopping mall, Geoff Bacino runs his hand through his hair. An engaging man in his late 30s and a lifelong sports fan, he has been hired by several Internet companies, including World Sports Exchange, to tell their side of the story to the right people. Given weeks to find a senator or representative to counter Kyl's arguments, this well-connected lobbyist produced none. (Some governors, however, oppose legislation as it would also apply to Internet lotteries.)

It's not Bacino's fault. Every possible interest group, from state tourism councils to sports franchises to gaming interests, is lined up on one side of the bill: Kyl's side. Bacino's only ally is an association of several small Indian tribes that see the bill as a possible assault on their sovereignty. They aren't actually running casino or sports gaming sites, but they might want to in the future.

Beyond that, he stands alone. "The casinos worked a long time to establish legitimacy," Bacino acknowledges. "They worked long and hard to ensure that when you walk into a casino in Las Vegas or Atlantic City, you're not going to get ripped off. And because of the explosion of these Internet sites, you can't make the same claim for all of them. It's a problem."

The solution, he is paid to believe, is regulation. Instead of attempting to enforce a ban on these sites, the better action is to sanction those that meet stringent requirements. "Every one of the legitimate sports books that operates on the Internet is saying, 'Regulate us!' 'Tax us!'" Bacino says. "They're not trying to escape the law, they want to be covered by the law."

The Internet is in its infancy. Technology will only get more efficient at bringing the wonders of the world into the home. "We're heading toward more things that raise these issues, not fewer," Bacino says. "Why not start regulating them now? You can get their tax dollars, and they'll even provide details of their transactions to the IRS so big winners can be taxed. The legitimate businessmen out there know you have to pay a price to be in business, and they're willing to do that. But so far, they've been told, 'You're money's no good here.'"

Bacino takes a sip of his soft drink. He has made the argument to one congressional staffer after another, in the overstuffed chairs of Senate conference rooms, in the closet-sized offices of legislative assistants, over countless iced teas in the malls and shopping centers that dot the Virginia countryside. He has combed his hair and knotted his tie and spoken eloquently, but he is up against people who have no reason to hear what he is saying. No reason at all, except the reality of the modern world.

"You want to outlaw 'em? Outlaw 'em," Bacino says. "But they're not going away. You can pass the bill. Meanwhile, click-click. I just took Utah State on Thursday. And it hasn't gone away."

The wind is blustering today, so Haden Ware has pulled on jeans instead of shorts with his white T-shirt. At 11:45 on a Wednesday morning, he is sitting under a thatched roof 10 yards from the Caribbean Sea, sipping on a beer and tugging at a Marlboro Light, waiting for his lobster-salad sandwich. Behind him, a woman sits at the bar in a yellow string bikini, sipping a rum punch. For the third time, the waitress calls out to Ware that a call has come in for him, the third in an hour. "I used to rule my world from a pay phone," Jimmy Buffett once sang. This isn't far off.

Ware, 25, has been a partner in World Sports Exchange since Cohen left Antigua to face felony charges in New York two years ago. He'd met Cohen and Steve Schillinger while working as a runner on the Pacific Stock Exchange during his freshman year at Berkeley. They were traders, and he'd go get them lunch.

Schillinger had grown up in Arlington Heights, Illinois, "by the racetrack," he says, and dropped out of college to work at the Chicago Options Exchange. He hustled backgammon with the traders and realized he was smarter than they were. Soon he was trading. He bought and sold stocks for nearly two decades in Chicago and San Francisco, but had more fun handling action on the side.

One year he ran an NCAA pool on the floor of the Pacific Exchange using stock-market methodology. Traders would come running over and ask him how much a share in UConn was going for. "There was incredible interest," Schillinger says. "It was everything I loved, with the numbers and the odds. But I also know a lot about sports, a lot more than about any of the companies I'd ever traded in."

When Schillinger and Cohen told Ware they were moving to the Caribbean to start a sports gambling Web site, it sounded like a grand adventure. They'd consulted lawyers and chose Antigua because sports books were legal there. Ware wasn't getting much done in college, so he figured he'd wander south for a year, help them set up and let the soft breezes and the rum punches clear his head. He'd be getting rich in Margaritaville. "All they had to say was, 'We're going to the Caribbean, are you in?'" Ware says. "That's all it took."

Cohen had the marketing insight to target stock traders who might not ever have placed a sports bet. This demographic was far more lucrative than that of the typical sports gambler, and stock traders innately understood the interactive methodology. He established the wsex.com URL for World Sports Exchange because it was memorable and had a frisson of naughtiness. The Wall Street Journal wrote about them early on, and word of mouth did the rest. The betting volume exceeded their expectations almost immediately. Life was good.

Then the indictments arrived.

Cohen, a stock trader who'd been trained as a nuclear physicist, decided to return to the United States and go to trial. He would draw attention to the hypocrisy of prosecuting Internet gambling and call for regulation. Not yet 30, he looked and sounded good on television. He'd be the articulate voice of World Sports Exchange and the industry beyond. Besides, he didn't believe he'd done anything wrong. He was running a business in a country where that business was legal--like selling Cuban cigars on the streets of Havana. If he had customers who lived in the United States, that shouldn't be his problem. He had faith in the American criminal justice system, he said, and left for the airport. Hours later, he was in custody.

Schillinger was already in his mid-40s. His wife, two children and two step-children were in Antigua with him. He had no interest in returning home to face a trial. "I wouldn't spend one day in jail if you paid me $20 billion," Schillinger says. "I would not get off the plane and be handcuffed and fingerprinted like Jay was for any amount of money." For him, the decision to stay was easy. This was a job of a lifetime, the culmination of a career spent calculating odds. And the money was rolling in.

The country of Antigua, population 68,000, holds a certain cachet in the Internet gambling world. Currently, 57 Antigua-based sports books (and about 48 Antigua-based casino sites that don't include sports) operate on the Internet, making it by far the industry leader. All have been sanctioned by the Antiguan government, which gets a $75,000 annual licensing fee from each.

Nearly half the virtual casinos on the Web operate with an Antiguan license, which means there are plenty that don't. As of late 1999, according to several published sources, there were 40 gaming sites--including sports books, blackjack sites, electronic roulette and beyond--based in Costa Rica; 28 in Dominica; 10 in St. Kitts; 10 in Curaçao; and eight in the Dominican Republic. Australia and some small islands off the English coastline added several more. Many of these countries require no licensing application at all. Just pay a fee, and get approved.


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