This week U.S. investigators accused Full Tilt, the online gambling website, which was shut down during the black Friday raids of being a “Ponzi scheme.” While it is true that the Full Tilt management team lied to their customers and certainly mismanaged company funds, they are not a Ponzi scheme. Furthermore, it is important to remember that one poorly managed company should not condemn an entire industry just as one bad person is no reason to condemn an entire group of people.
Full Tilt promised players that their accounts were segregated from the money used to operate the business and pay investors and executives.
Unfortunately, it appears that the company lied about that fact. Yet, all was fine until the U.S. government passed the Unlawful Internet Gambling Enforcement Act. When payment processing companies stopped processing deposits from American players Full Tilt did not stop allowing Americans to play on their site. Money was never taken out of Americans’ accounts because no bank would process the payments they thought might be deemed illegal by U.S. authorities. Instead of banning U.S. customers Full Tilt essentially created “phantom money” for American players to gamble with. The money that the players lost or won was paid out by the deposits from players in other countries who payments were actually put into the Full Tilt accounts. It appears that Full Tilt executives hoped they’d eventually find a bank to make the transaction of the American players’ deposits. Unfortunately they ran out of time when the Department of Justice shut them down, caused a global panic among their players and a subsequent mass attempt to withdrawal accounts. Of course, that is when everyone learned that the company did not, as they said, have funds equal to player deposits on hand. Oops.
But does this a Ponzi scheme make? According to a lawyer for Chris “Jesus” Ferguson, one of the celebrity owners of Full Tilt, (as well as any person who has read the definition of a Ponzi scheme) it isn’t:
While the government has obviously taken issue with the underlying activities of FTP, under any reasonable interpretation, the worldwide operations of the online cardroom are not a so-called Ponzi scheme,” Imrich pointed to the Securities & Exchange Commission’s definition of a Ponzi scheme, which states that a Ponzi scheme is an investment fraud that involves the payment of purported returns to existing investors from funds contributed by new investors.
A Ponzi scheme is where a company convinces people to invest in the company by promising returns on the investment which they provide from new investments — not the profitability of the investment. First, players were not making an investment in the company Full Tilt hoping to get returns. Second, Full Tilt, for all of it’s problems, was actually a profitable company. They just simply didn’t keep enough cash on hand to pay all of their liabilities at once — but many companies, including banks do the same.
Sure, Full Tilt’s executives perhaps committed some kind of fraud by lying to their customers and telling them their funds were 100 percent safe and separate from operating funds. However, their style of money management would not likely have been a problem if it hadn’t been for Congress passing UIGEA and then the DOJ causing a run on the Full Tilt banks. In essence, it’s as if Congress kneeled behind Full Tilt and then the DOJ pushed it over and then they blamed the company for falling down.
To stop this sort of thing from happening in the future, we don’t need more government intervention; we need more freedom and more online gambling sites so that players can have many options and can choose a company that guarantees player funds are 100 percent accounted for — if that’s what the player wants.