EBay’s PayPal Is Accused Over Gambling Transfers

A federal prosecutor has accused EBay Inc.’s PayPal subsidiary of violating the law when it facilitated online gambling payments last year, according to EBay documents filed Monday with the Securities and Exchange Commission.

In a letter sent to the San Jose online auction firm Friday, U.S. Atty. Ray Gruender of St. Louis argued that PayPal violated a 17-month-old federal anti-terrorism law when it handled payments for online casinos.

Gruender, whose office declined to comment Monday, has not filed charges against EBay. Instead, his letter proposed a settlement in which EBay would forfeit an amount equal to PayPal’s casino-related earnings from Oct. 26, 2001, when the law went into effect, to July 31, 2002, when EBay agreed to buy the electronic-payments company for $1.5 billion.

EBay spokesman Kevin Pursglove said the company’s attorneys were reviewing the letter. EBay shares slipped $3.98 to $85.31 on Nasdaq on Monday.

In its SEC filing, EBay said PayPal earned less from online gambling than Gruender contended, but did not disclose the amounts.

Either way, Pursglove said, “There will not be a material impact on cash flow or earnings.”

As part of its sale to EBay, PayPal ceased processing online gambling payments, a business that accounted for 6% of its 2002 revenue.

In August, PayPal settled a suit filed by New York Atty. Gen. Eliot Spitzer, who argued that facilitating online gambling was illegal in that state. The company paid a $200,000 fine and vowed to exit online gambling, a lightly regulated industry with murky legal status in the U.S.

The U.S. attorney’s letter represents a new federal application of a law designed to help terrorism investigators. Passed six weeks after the Sept. 11 attacks, the USA Patriot Act gave federal authorities broader powers to track money laundering and monitor online activities, among other things.