Caught in a Web: Future of online casinos debated

Friday, March 7, 2003 | 5:35 a.m.

WEEKEND EDITION: March 9, 2003

Jay Cohen was peddling stock options on a San Francisco trading floor when a fellow trader who was "selling contracts" on the potential outcome of the O.J. Simpson trial gave him the idea to do the same thing with sporting events.

Cohen's idea, which he developed with partner Steven Schillinger, was to establish an offshore sports betting parlor on the Internet at a time when such websites were just beginning to take off. A unique wrinkle was to allow bettors to gamble on games in progress by buying and selling contracts, much the same way stocks are traded.

Cohen consulted with attorneys and attended a gaming conference in Las Vegas, coming away assured -- or so he thought -- that what he was about to do would be perfectly legal. He and Schillinger contacted foreign embassies and ultimately selected the tiny Caribbean island of Antigua for their new venture, World Sports Exchange.

But Cohen drew the attention of federal prosecutors, who made him the first person ever convicted under the Wire Wager Act for operating an offshore gambling website that took bets from Americans. That he is now confined to the minimum-security Nellis Federal Prison Camp, a stone's throw from the Las Vegas Strip, is an irony not lost on him.

"I came back to the United States because I wanted to clear my name and felt this was wrong," Cohen, 35, said of the federal charges in a recent interview at the prison. "Here I sit in the shadow of the Strip while billion-dollar corporations engage in the same activity every day for which I am serving a 21-month sentence. And for what? For running a legal business in another country."

If it were up to some members of Congress, Cohen and fellow online gaming entrepreneurs would not be the only targets of federal scrutiny. So would financial institutions that issue credit cards. Later this month, the House Committee on Financial Services is expected to begin hearings on the proposed Unlawful Internet Gambling Funding Prohibition Act sponsored by Rep. James Leach, R-Iowa.

The bill, which passed the House last year with Bush administration support but died in the Senate, would make it illegal for financial institutions to grant permission to customers to use credit cards or bank account wire transfers to pay for gambling over the Internet.

"He believes Internet gambling ruins people's lives and creates possibilities for money laundering," Leach spokeswoman Meghan McCabe said of the congressman. "He believes Internet gambling is illegal but this bill would help enforce laws that are already on the books. What the congressman wanted to do was to stop banking institutions from processing illegal transactions."

Gaming lobbyist Frank Fahrenkopf, president of the American Gaming Association, which does not oppose the bill, said the legislation already has encouraged many issuers of MasterCard and Visa credit cards to refuse customer charges for Internet bets. This is significant, he said, because 95 percent of all online wagering is done with charge cards.

He said this has caused Internet gaming companies to scramble for other ways to collect money from bettors.

"The threat of the Leach bill has had a deleterious effect on the websites," Fahrenkopf said. "When you cannot use a credit card you'd have to be pretty hard up to bet on the Internet."

But Internet gambling supporters say the Leach bill may actually have little effect on the spread of Web casinos. They say the bill won't enable this country to prosecute operations outside the United States.

That could be significant given the fact Internet gambling websites have become big business since they emerged in the 1990s. Bear, Stearns & Co. has estimated that there are 1,800 gaming websites, all based outside this country. These companies take in about $4 billion annually, at least 60 percent of which comes from the United States, Bear Stearns found.

MGM MIRAGE got into the act last fall by launching a gaming website restricted to European players. And just Friday, a company owned by Venetian resort owner Sheldon Adelson said it was awarded an Internet gambling license from regulators in Alderney, one of the British Channel Islands.

Not all congressmen support the Leach bill. Rep. John Conyers, D-Mich., who instead backs legislation to study regulation of Internet gaming, has said that the Leach bill would only drive Internet gambling further underground, making it easier for unsavory individuals to launder money outside U.S. control.

"Just as outlawing alcohol did not work in the 1920s, current attempts to prohibit online gaming will not work, either," Conyers said in a recent column written for the Sun.

"To the contrary, a regime where there is strict oversight by the states and transparent record-keeping is more likely to give law enforcement the tools to prosecute criminals."

While Congress ponders the future of Internet wagering, Cohen said in the visiting room at the Nellis prison that lawmakers should instead focus on ways to regulate online gaming.

He said he believes that Internet wagering companies would be willing to cooperate with federal regulators by helping to combat money laundering, suspected game-fixing, underage gambling and attempts by individuals to avoid paying taxes on winnings.

"I would respect Congress more if they said all gaming is bad and that they want to ban all gaming," Cohen said. "I wouldn't agree with it but I would respect it. But their real motivation is nothing more than anti-competition. It's protectionism. They're just trying to protect their home-grown industries."

The native of Woodmere, N.Y., is not your typical bookmaker, not when one considers that he holds a bachelor's degree in nuclear engineering from the University of California at Berkeley or that he was a trader on the Pacific Stock Exchange.

Prison officials have put his grasp of numbers to good use. He now teaches mathematics to fellow inmates who are looking to complete their GED requirements. In just four months of confinement, Cohen said he has also shed 40 pounds, getting his 5-foot, 9-inch frame down to 215 pounds.

"The worst part is not the confinement but when I sit down and think about how stupid it is that I'm here in the first place," Cohen said.

Clad in a khaki-colored prison uniform and heavy work boots, Cohen was an accommodating host as he grabbed two chairs and placed them around a small table at one end of the visiting area, which looks like a recreation room complete with vending machines.

During the 75-minute interview Cohen was articulate both about his case and current events, with a tendency to answer questions with lengthy responses. He also displayed an us-against-them attitude, as in Internet gaming versus land-based casinos. He was also critical of congressmen such as Leach who are trying to crack down on gaming websites.

"It's hypocritical to say that our kind of gaming is bad but their kind of gaming is good," Cohen said. "On our website, we have a reference to Gamblers Anonymous on every page and we don't extend credit the way Vegas does. We're what you call 100 percent post-up, meaning you've got to have the money in your account or you can't wager it.

"I'll tell you something else we don't do that Vegas does. Not only do they serve you alcohol, they serve it for free. It distorts your judgment. They put you in this room with no clocks and no windows. We don't give you free booze. We don't put you in a windowless room unless you choose to be in a windowless room."

As for cracking down on money laundering and income tax cheats, Cohen said Internet gaming websites have an advantage over land-based casinos in that they keep detailed computerized records of every bet placed by a gambler. And he said many Internet gaming companies, including World Sports Exchange, would gladly share their records with federal regulators in this country.

"Land-based casinos take cash," he said. "Internet casinos don't take any cash. Which is more susceptible to money laundering?"

Members of Congress are leery that online wagering companies can be regulated, however. Senate Minority Whip Harry Reid, D-Nev., counts himself among those who favor an outright ban on Internet wagering. Reid spokeswoman Tessa Hafen said the senator has not committed himself to supporting specific bills but believes that there is "no way to regulate it on the Internet."

"Sen. Reid would support an effective law that says Internet gaming is illegal," Hafen said.

The American Gaming Association also believes no way exists to properly regulate Internet gambling to protect the integrity of online gaming and the security of financial transactions. The association also believes there is no way to guard against underage and pathological wagering over the Internet.

"State regulators do not believe technology exists today to properly regulate Internet gaming with proper law enforcement oversight," Fahrenkopf said.

Open to debate

Part of the problem with current enforcement efforts, said Fahrenkopf and Nevada Gaming Control Board Chairman Dennis Neilander, is that the intent of the wire act used to convict Cohen remains open to debate. Both Neilander and Fahrenkopf said that some legal experts believe the act applies only to sports wagering.

But in a letter last August to Neilander, Assistant U.S. Attorney General Michael Chertoff wrote: "As set forth in prior congressional testimony, the Department of Justice believes that federal law prohibits gambling over the Internet, including casino-style gambling."

"Additionally, it is the department's view that the gambling activity occurs both in the jurisdiction where the bettor is located and the state or foreign country where the gambling business is located," Chertoff wrote.

A federal ruling in Louisiana upheld last year by the 5th U.S. Circuit Court of Appeals came to a different conclusion, however. The courts ruled against two Internet gamblers who sued credit card companies and banks after accumulating gambling debts from casino-style gaming websites.

The gamblers argued that the credit card companies and banks, working in conjunction with the websites, created a worldwide gambling enterprise that facilitated illegal gaming, making their debts unenforceable. But as part of their dismissal of the lawsuit, both courts ruled that the wire act applies only to bets on sporting events or contests.

The case was initially hailed as a victory for Internet gambling supporters because it chips away at the Justice Department's interpretation of the wire law. But at a gaming conference in January, Internet gambling analyst Sebastian Sinclair said "prohibition could become a reality" unless casinos can agree on whether or not to support online gaming.

Having a single voice will be a key in preventing an all-out Internet gambling ban that appears more likely after the court decision against the online gamblers, he said.

Cohen, who just "takes it day by day here," said he feels singled out because the United States has not prosecuted foreign-owned gaming companies.

"I think they're legal but I thought my company was legal," he said. "The only thing I can see is that I was a U.S. citizen licensed by a country of lesser economic and world status."

Transmissions

The federal wire law was intended to address transmissions of bets via wire communications such as telephone lines, making them unlawful except in cases where such wagering is legal at both the point where the bet is made and where it is received. But Fahrenkopf said the federal court rulings mean that casino-style Internet gaming may be deemed legal unless states have specific prohibitions against such wagering.

A 1997 Nevada law makes it a misdemeanor to place a bet "through a medium of communication" from Nevada to another person inside or outside the state. Neilander said the law covers Internet wagering because that involves a method of communication. But he said that because gaming is legal in Nevada and because "so far, this has not been a big problem," he could not recall that that statute has ever been enforced.

Gov. Kenny Guinn signed into law another bill in 2001 that directed state regulators to develop ways to license and regulate Internet gaming companies as long as they operated in compliance with federal laws. But those regulations have not been developed because of the Justice Department's position that all Internet gaming is illegal, Neilander said.

"The state law requires us to make a finding that it can be done applicable to federal laws," he said. "As long as the Department of Justice takes the position that it can't be done, we won't override that."

'Gray area'

But Neilander said there is "gray area" in the federal wire law, such as in the case of an Internet transmission that begins in Nevada, goes through a web server outside the state and rebounds to yet another location back in Nevada.

"It's kind of a gray area right now because you're transmitting across state lines, so the federal law comes into play, and the federal law is unclear," he said.

The state Gaming Control Board, though, continues to explore the possibility of allowing Nevadans to gamble on the Internet within the state. Online gaming supporters are pushing for Nevada to adopt those regulations so that they could conduct transactions with other states that may legalize Internet wagering.

Still, the board has indicated it wouldn't consider potential legalization of intrastate Internet gaming until the Nevada Legislature offers its input.

Cohen, for one, never gave a thought to basing his company in the United States. But he said he received legal advice in the United States that his offshore venture would be legal.

"I was a big advocate of not having any U.S. employees," he said. "We had no bank accounts in the U.S."

Cohen said that he and Schillinger selected Antigua because gambling is legal there and because that country adopted stringent regulations for Internet wagering companies that choose to locate there.

"We didn't just show up and hand them money and say, 'We'd just like a license,' " he said.

The fact that Antigua also has high-quality fiber-optic cable for wire transmissions also didn't hurt, Cohen said.

"I was in my office seven days a week from about 8 in the morning to 11 at night," Cohen said. "We were always the kings of high transaction speed."

Jurisdictions

One way the United States could regulate online gaming would be to recognize licensed jurisdictions such as Antigua, he said.

"Antigua is definitely one country that is worthy of recognition as doing a good job," Cohen said. "If you have a problem with an Antigua operation, there is someone to call there as opposed to Costa Rica, which is just like the wild West. The Costa Rica gaming operations claim in their ads that they're licensed but that's just the same license you buy to become a hot dog vendor there.

"In Antigua they do background checks on all the people who have over 5 percent equity in the company and they do background checks on all people in management positions."

Cohen and Schillinger, who opened their website at www.wsex.com in January 1997, had attracted more than 100 gaming clients by the time they received a favorable write-up in the Wall Street Journal that April. But the publicity upset the National Football League, National Basketball Association and National Hockey League.

In May 1997, attorney Bruce Keller of the New York City law firm Debevoise & Plimpton, which represents the professional sports leagues, demanded that Cohen and Schillinger stop transmitting sports gambling information to the United States. Keller alleged that the pair had violated the leagues' trademark rights as well as federal wire and racketeering laws.

"Internet gambling is illegal and Cohen was offering people an illegal way to bet on professional sports teams," Keller said. "It is pretty well known that professional sports leagues have always been concerned about betting on their games."

Keller said the leagues aim to make sure that "the games and outcomes are above reproach," something that is jeopardized by the ability to bet on those games, he said.

"There is also a concern associated with Internet gambling, the fact that you can gamble from the comfort of your home and that minors can gamble," Keller said.

Cohen said he shares the concerns about access of minors to online wagering. He recalled two cases where World Sports Exchange made full refunds of wagers that were made by minors.

"It's not that easy for a kid because he would need a credit card," Cohen said. "If they use a credit card that is not theirs, all the parent has to say is, 'unauthorized transaction.' The credit card companies could help by offering pin codes like they have with bank cards. That way you know that whoever is using it is authorized."

World Sports Exchange only partially complied with Keller's letter by removing team names from its website. So instead of an NFL contest between the Oakland Raiders and San Diego Chargers, it would be listed as Oakland versus San Diego.

But Cohen, who claims his case is loaded with hypocrisy from the federal government and the sports leagues, said one example is that Las Vegas sports books continue to list team names for all professional sports.

Cohen said no one has a greater interest in the integrity of sporting events than bookmakers because "we're the ones putting money on the line."

"If the NFL is opposed to gambling, why do they put out injury reports and fine teams for not doing it?" he said. "Why did the NFL push the late game back 15 minutes on Sundays? Well, if you're a bettor and you didn't have time to get your bet down because you didn't know if you won or lost the early game, then that makes a difference whether or not you watch the late game.

"The sports leagues have a public position against gambling but quietly are happy it's there because it's good for their business."

Federal prosecutors in New York, alerted by Keller's law firm, charged Cohen and Schillinger in March 1998 with violation of the federal wire act. Twenty other Americans connected with offshore Internet wagering were also charged at that time, of whom 13 pleaded guilty to felonies or misdemeanors, according to the Justice Department.

Schillinger chose to remain a fugitive in Antigua, where he continues to run the website. But Cohen decided to return to the United States to fight the federal government. By the time of his trial in February 2000, he said his company had amassed more than 10,000 customers.

Cohen argued that he had not violated the wire act because his company was legally based in Antigua and the bets were processed by Internet web servers located there.

"We're consistent with off-track betting in the United States, that the bet takes place where the off-track site is located," Cohen said. "We said that there was no federal law against placing sports bets and no New York state law against placing sports bets. So if it's legal to place a sports bet in New York and legal to receive a sports bet in Antigua, we should fall under the exemption in the wire act."

Government wins

But the government argued successfully in a federal court in New York and on appeal that it was illegal to place sports bets in that state. Prosecutors alleged that from June 14, 1997, through Sept. 3, 1998, World Sports Exchange received 8,856 wire transfers from Americans that totalled $4.88 million. More than $298,000 of that came from New Yorkers, it was alleged.

"On cross examination, Cohen admitted that he had been specifically informed by lawyers for the National Football League that his conduct violated Section 1084 (the wire act) and that, in spite of this advice, Cohen never sought counsel from any other lawyer," prosecutors argued in their appellate brief. "In addition, Cohen acknowledged that he knew that operating a sports book was legal only in one state -- Nevada -- and that, even there, it was not permissible to take bets from persons outside Nevada."

Cohen lost his gamble when he was convicted of conspiracy to violate the wire act, along with seven violations of the act connected with his operation of World Sports Exchange. Having resigned as president of the company, he was sentenced to 21 months in prison, which began in October, but he is expected to be released about three months early, in April 2004, with good time served.

"Any good lawyer would have told Cohen not to come back from Antigua, that he was making a mistake," Fahrenkopf said. "You don't take a chance on that."

Though familiar with Cohen's case, Fahrenkopf said he had no idea that Cohen was imprisoned in Las Vegas.

Cruel punishment

"That's cruel and unusual punishment to put him that close to gambling," Fahrenkopf said.

Cohen said he doesn't have any long-range plans when he leaves prison. He is expected to go through two years of supervised parole upon his release and said it will be up to authorities whether he is allowed to go back to Antigua. He hinted that he may go back to stock trading.

But he said he doesn't think it would be wise for his former partner, Schillinger, to return to this country any time soon.

"Why should he go through the same silliness that I've had to go through?" Cohen said. "I said that I would come back to fight this. He said that he was staying there in Antigua. I said one of us is making the right decision."

Sun reporter Liz Benston contributed to this story.

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