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Will PokerStars be dealt out of legalized online poker in California?

Legalization of online poker depends almost entirely on what the Indian tribes want
Hiltzik: A dispute over PokerStars comes as online poker is close to becoming a reality in California

In legislative proceedings, the most important words in a debate often are the ones left unmentioned. At a hearing held by a California state assembly committee last month about legalizing online poker, the unspoken term was PokerStars.

No hearing witnesses wanted to say outright that they were talking about PokerStars. It's the largest online poker company in the world, which wants in on the riches to be had if California legalizes Internet card play, but it also has faced federal charges of money laundering and fraud. So the April 23 discussion before the Governmental Organization Committee was filled with talk about California's "tremendously competent regulators," and how to keep unspecified "bad actors" out of California gaming, and how legislators should avoid "picking winners and losers."

These were code words for the most explosive issue still dividing California's Indian tribes — whether PokerStars should be allowed to participate. Since legalization depends almost entirely on what the tribes want, it's not a trivial matter.

The state's poker interests basically have coalesced into two groups. The one group is made up of the Pechanga Band of Luiseño Indians, which owns California's largest casino; the San Manuel Band of Mission Indians; and the Agua Caliente, Pala and other tribes. The second group comprises the Morongo Band of Mission Indians, whose huge casino is located just northwest of Palm Springs; and the Bicycle, Commerce and Hawaiian Gardens card clubs. They've made a deal with PokerStars to run their online game.

The Morongo group complains that the two bills to legalize Internet poker in California introduced by Sen. Lou Correa (D-Santa Ana) and Assemblyman Reggie Jones-Sawyer (D-Los Angeles), include language drafted specifically to keep PokerStars out of the state.

Because PokerStars, given its size and experience, arguably would be better at running an online poker game in California than anyone else, it's unsurprising that Morongo's chairman, Robert Martin, called the bills "just a smoke screen ... to give a competitive advantage to others." Nor is there any secret about who those "others" are — the Pechangas, San Manuels and other competing tribes. At the April hearing, Lynn Valbuena, San Manuel's chairwoman, demanded that "only those with a proven record of compliance with applicable laws should be in the [online] marketplace." She didn't mention PokerStars, but she didn't have to.

The PokerStars dispute comes as online poker is close to becoming a reality in California.

That's largely because the gaming tribes have ironed out a host of long-standing differences. The tribes seem resigned to letting non-tribal card clubs have a piece of the action. And for the most part they no longer fear that online poker would cannibalize their brick-and-mortar casinos; they now believe the online game will expand the market, if modestly, and that they need to participate to fend off competition.

There are still doubts that Internet gambling is a key to fresh riches. "We do not suffer from the irrational exuberance that says Internet Poker will generate hundreds of millions of dollars," Pechanga Chairman Mark Macarro told the Assembly committee, but "we believe it's preferable to drive the bus rather than getting run over by it."

Some outside experts agree that the market potential has been overestimated. Gaming analyst Chris Krafcik cautioned that in New Jersey, which started running online poker games in November, the market grew through January, then "stagnated, and has since decelerated."

Krafcik projected that total revenues in California would reach $317 million in the first year of legalization, rising to $597 million in year four. If the state were to claim a 5% tax (the Jones-Sawyer bill) or 10% (Correa), that's less than $60 million a year. The sum is not nothing, but it is only six hundredths of a percent of the state's roughly $100-billion budget.

But there are other issues state legislators want ironed out before legalization. One is a role for the state's racetracks, which have taken a devastating hit in business since Indian gaming was made legal in 2000. They fear they'll be annihilated if online poker is legalized without their participation. Many tribes, however, regard extending card games to the tracks, on- or off-line, as an infringement of their nearly exclusive right to offer games of chance in California.

Then there's PokerStars.

Isle of Man-based PokerStars, like some other online gaming companies, operated in the U.S. for several years when the legality of Internet poker was murky. Congress had passed the Unlawful Internet Gambling Enforcement Act, or UIGEA, in 2006, but some poker firms argued that because poker is a game of skill, not chance, UIGEA didn't apply to them. Those doubts were extinguished on April 15, 2011 — gaming's "Black Friday" — when federal prosecutors unsealed indictments on charges of bank fraud, money laundering and violations of UIGEA. Isai Scheinberg, the founder of PokerStars, was among the 11 defendants indicted. He wasn't arrested because he wasn't in the U.S., and he hasn't crossed the border since. The company itself was charged with money laundering.

Only five months later, the Obama administration reinterpreted the law, holding that only sports betting was barred; pretty much everything else, including poker, was legal on an intrastate basis. Since then, online games have been legalized in Nevada, Delaware and New Jersey.

In July 2012, PokerStars settled the U.S. charges for $731 million. The company didn't admit wrongdoing. But Scheinberg remains under indictment.

Flash forward to 2014. The Correa and Jones-Sawyer bills, which would allow Internet licenses to be granted to gaming Indian tribes and card clubs, both include a "bad actor" provision.

Correa's bill bars any company that engaged in Internet gaming, including poker, after Dec. 31, 2006, a few weeks after UIGEA was signed into law. The current version of the Jones-Sawyer measure has similar language.

"We seem to be the only company that meets that standard," Eric Hollreiser, a spokesman for PokerStars, says wryly. The irony, he says, is that PokerStars is clean. He maintains that it didn't break the law, because it wasn't operating a game of chance, and points out that the U.S. government since has come around to its viewpoint.

As it happens, there's no guarantee that PokerStars could get licensed in California even without the bad actor provision. In New Jersey, where such judgments are left to regulators, the state Division of Gaming Enforcement isn't any happier about the company's background. The division last December suspended PokerStars' license application for two years, citing "the unresolved federal indictment against Isai Scheinberg" and "the involvement of certain PokerStars executives with Internet gaming operations in the United States following the enactment of UIGEA."

The difference between leaving the issue to regulators, and writing a ban into the law, is that gambling regulators' concerns can be assuaged by corporate action. The New Jersey regulators even offered PokerStars a road map: make Scheinberg deal with the indictment, and cleanse the company of any connections with those in charge during the UIGEA controversy. That probably means cutting ties with Scheinberg and his son, Mark, who is chairman and CEO of the company.

Once a bad actor provision is written into law, however, it's forever. Nothing PokerStars could do would eradicate its history of taking bets from Californians after Dec. 31, 2006.

The expectations in Indian Country appear to be that an Internet poker bill will pass this session. If you're inclined to bet — and if you're interested in online poker you just might be — the odds are that the bad actor provision will be dropped, and PokerStars will start putting distance between itself and the Scheinbergs.

But in politics, as in poker, you often don't know how things will turn out until the last hand is dealt. That hasn't happened yet.

Michael Hiltzik's column appears Sundays and Wednesdays. Read his blog, the Economy Hub, at latimes.com/business/hiltzik, reach him at mhiltzik@latimes.com, check out facebook.com/hiltzik and follow @hiltzikm on Twitter.

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