Unites States v. Pokerstars, et al
Filing
190
MEMORANDUM OF LAW in Support re: 189 MOTION to Dismiss Verified First Amended Complaint.. Document filed by Howard Lederer. (Peters, Elliot)
UNITED STATES DISTRICT COURT
SOUTHERN DISTRICT OF NEW YORK
UNITED STATES OF AMERICA,
Case No. 1:11 Civ. 02564 (LBS)
Plaintiff,
v.
POKERSTARS; et al.,
Defendants.
ALL RIGHT, TITLE AND INTEREST IN
THE ASSETS OF POKERSTARS; et al.,
Defendants-In-Rem.
MEMORANDUM OF LAW IN SUPPORT OF DEFENDANT AND CLAIMANT
HOWARD LEDERER’S MOTION TO DISMISS VERIFIED FIRST AMENDED
COMPLAINT
______
677182.02
TABLE OF CONTENTS
Page
I.
INTRODUCTION ...............................................................................................................1
II.
BACKGROUND .................................................................................................................2
III.
LEGAL STANDARD..........................................................................................................4
IV.
ARGUMENT .......................................................................................................................7
A.
The government’s claim that Lederer defrauded and conspired to defraud FTP
players is devoid of specific factual allegations and fails to satisfy Rule 9(b). .......8
1.
2.
The government never links Lederer to any of the other allegedly false
statements referenced in the First Amended Complaint. ...........................11
3.
B.
The single statement implicating Lederer in the First Amended Complaint
is insufficient under Rule 9(b) because it fails to identify the speaker,
specify the precise statement at issue, and support an inference of
fraudulent intent. ..........................................................................................9
The Fourth Claim for Relief in rem should be dismissed because the
government’s wire fraud allegations fail to satisfy Rule 9(b)....................12
The government’s IGBA claim is based on an impermissible extraterritorial
application of the law, and fails to allege facts supporting an IGBA violation. ....13
1.
IGBA does not apply extraterritorially to FTP, a company based and
operated outside of the United States.........................................................13
a.
b.
2.
IGBA does not apply extraterritorially. .........................................14
Applying IGBA to FTP would constitute an improper
extraterritorial application of IGBA...............................................15
Even if IGBA applies to FTP’s conduct, the First Amended Complaint
fails to sufficiently allege a violation of IGBA. .........................................17
a.
The First Amended Complaint fails to allege any state law that
FTP violated and thus failed to allege the necessary elements of an
IGBA cause of action. ....................................................................18
b.
The First Amended Complaint fails to allege that FTP is a
“gambling business” under IGBA. ................................................20
(i)
To be a violation of IGBA, a business must be engaged in
“gambling” as defined in § 1955(b)(2). .............................21
i
677182.02
(ii)
(iii)
V.
The First Amended Complaint never alleges that running
an online poker site is “gambling” under § 1955(b)(2). ....22
Running an online poker site is not “gambling” under §
1955(b)(2). .........................................................................23
CONCLUSION ..................................................................................................................25
ii
677182.02
TABLE OF AUTHORITIES
Page(s)
Federal Cases
Alnwick v. European Micro Holdings, Inc.
281 F.Supp.2d 629 (E.D.N.Y. 2003) ...........................................................................................9
Ashcroft v. Iqbal
556 U.S. 662 (2009) ...................................................................................................4, 5, 6, 7, 22
Begay v. United States
553 U.S. 137 (2008) .............................................................................................................22, 24
Bell Atlantic Corp. v. Twombly
550 U.S. 544 (2007) ...............................................................................................6, 7, 19, 20, 22
Cedeno v. Intech Group, Inc.
733 F.Supp.2d 471 (S.D.N.Y. 2010) ...................................................................................16, 17
City of New York v. Beretta U.S.A. Corp.
524 F.3d 384 (2d Cir. 2008) ......................................................................................................22
Conley v. Gibson
355 U.S. 41 (1957) .....................................................................................................................19
County of Suffolk, New York v. First Am. Real Estate Solutions
261 F.3d 179 (2d Cir. 2001) .............................................................................................. passim
DiVittorio v. Equidyne Extractive Indus., Inc.
822 F.2d 1242 (2d Cir. 1987) ......................................................................................................5
EEOC v. Arabian Am. Oil Co.
499 U.S. 244 (1991) ...................................................................................................................15
Hamling v. United States
418 U.S. 87 (1974) .....................................................................................................................20
Jiminez v. Brazil Ethanol, Inc.
No. 11 Civ. 3635(LBS), 2011 WL 5932600 (S.D.N.Y. Nov. 29, 2011) .................................5, 8
Manela v. Gottlieb
784 F. Supp. 84 (S.D.N.Y. 1992) ................................................................................................9
Mills v. Polar Molecular Corp.
12 F.3d 1170 (2d Cir. 1993) ........................................................................................................8
Molloy v. Metropolitan Transp. Auth.
iii
677182.02
94 F.3d 808 (2d Cir. 1996) ..................................................................................................21, 22
Morrison v. National Australia Bank Ltd.
130 S. Ct. 2869 (2010) .............................................................................................13, 14, 15, 16
Norex Petroleum Ltd. v. Access Indus., Inc.
631 F.3d 29 (2d Cir. 2011) ........................................................................................................14
O’Brien v. Nat’l Prop. Analysts Partners
936 F.2d 674 (2d Cir. 1991) ..................................................................................................5, 10
Riverway Co. v. Spivey Marine & Harbor Svc. Co.
598 F. Supp. 909 (S.D. Ill. 1984) .............................................................................................6, 7
S.Q.K.F.C., Inc. v. Bell Atl. TriCon Leasing Corp.
84 F.3d 629 (2d Cir. 1996) ........................................................................................................10
Sanabria v. United States
437 U.S. 54 (1978) .....................................................................................................................16
Shields v. Citytrust Bancorp, Inc.
25 F.3d 1124 (2d Cir. 1994) ......................................................................................................10
United States v. $15,270,885.69 on Deposit in Account No. 8900261137
No. 99 CIV. 10255 (RCC), 2000 WL 1234593 (S.D.N.Y. Aug. 31, 2000) ................................7
United States v. $22,173.00 in U.S. Currency
716 F. Supp. 2d 245 (S.D.N.Y. 2010) .........................................................................................6
United States v. $92,203.00 in U.S. Currency
537 F.3d 504 (5th Cir. 2008) .......................................................................................................6
United States v. All Funds on Deposit in Dime Sav. Bank of Williamsburg Account No. 58400738-1 in the Name of Ishar Abdi & Barbara Abdi
255 F. Supp. 2d 56 (E.D.N.Y. 2003) ...............................................................................7, 13, 15
United States v. Approximately $25,829,681.80 in Funds (Plus Interest) in the Court Registry
Inv. Sys.
No. 98 Civ. 2682 (LMM), 1999 WL 1080370 (S.D.N.Y. Nov. 30, 1999) ..................................7
United States v. Bala
489 F.3d 334 (8th Cir. 2007) .....................................................................................................18
United States v. Daccarett
6 F.3d 37 (2d Cir. 1993) ..............................................................................................................5
United States v. Lettiere
640 F.3d 1271 (9th Cir. 2011) ...................................................................................................24
iv
677182.02
United States v. Menasche
348 U.S. 528 (1955) ...................................................................................................................21
United States v. Miller
774 F.2d 883 (8th Cir. 1985) ...................................................................................13, 18, 19, 20
United States v. Mondragon
313 F.3d 862 (4th Cir. 2002) .......................................................................................................7
United States v. One 1973 Rolls Royce, V.I.N. SRH-16266 By & Through Goodman
43 F.3d 794 (3d Cir. 1994) ........................................................................................................25
United States v. Philip Morris USA, Inc.
783 F.Supp.2d 23 (D.D.C. 2011) ...............................................................................................15
United States v. Sacco
491 F.2d 995 (9th Cir. 1974) ...............................................................................................16, 17
United States v. Santos
553 U.S. 507 (2008) ...................................................................................................................25
Williams v. Taylor
529 U.S. 362 (2000) ...................................................................................................................21
State Cases
In re Allen
59 Cal.2d 5 (1962) .....................................................................................................................23
People v. Li Ai Hua
24 Misc.3d 1142 (Crim. Ct. Queens Cty. 2009) ........................................................................20
Federal Statutes
15 U.S.C. § 78j(b) ..........................................................................................................................15
18 U.S.C. § 981(a)(1)(c) ..................................................................................................................4
18 U.S.C. § 1343 ..............................................................................................................................4
18 U.S.C. § 1344 ..........................................................................................................................3, 4
18 U.S.C. § 1349 ..............................................................................................................................4
18 U.S.C. § 1955 .................................................................................................................... passim
18 U.S.C. § 1955(a) .......................................................................................................................21
18 U.S.C. § 1955(b)(1) ......................................................................................................16, 18, 21
v
677182.02
18 U.S.C. § 1955(b)(1)(i)...............................................................................................................18
18 U.S.C. § 1955(b)(1)(i)-(iii) .................................................................................................21, 22
18 U.S.C. § 1955(b)(2) .......................................................................................................... passim
18 U.S.C. § 1955(d) .........................................................................................................................4
18 U.S.C. § 1956(h) .....................................................................................................................3, 4
31 U.S.C. § 5361(4) .......................................................................................................................15
Pub. L. 91-452, Title VIII, § 803(a), 84 Stat. 922, 937 (1970) ......................................................17
State Statutes
N.Y. Penal Law § 225.00 ...............................................................................................................19
Federal Rules
Fed. R. Civ. P. Supp. R. G(2)(f) ..................................................................................................5, 6
Fed. R. Civ. P. 8(a) ....................................................................................................................4, 18
Fed. R. Civ. P. Supp. R. (E)(2) ........................................................................................................7
Fed. R. Civ. P. Supp. R. A(1)(B) .....................................................................................................5
Fed. R. Civ. P. Supp. R. A(2) ..........................................................................................................6
Fed. R. Civ. P. 9(b) ................................................................................................................ passim
Fed. R. Civ. P. 12(b)(6)............................................................................................................1, 3, 4
Fed. R. Civ. P. Supp. R. E(2)(A) .....................................................................................................5
Fed. R. Civ. P. Supp. R. G(2)(f) ......................................................................................................6
vi
677182.02
I.
INTRODUCTION
Buried in the government’s 90-page First Amended Complaint (“FAC”), which targets
twenty-eight separate defendants and 136 defendants-in-rem, are precisely two allegations
implicating Defendant Howard Lederer (“Lederer”), co-founder of Full Tilt Poker (“FTP”): (1)
that Lederer helped FTP defraud its own customers by allowing them to play internet poker with
deposited funds before FTP had securely processed their money; and (2) that FTP—an internet
poker company located entirely offshore—was an illegal gambling business under the Illegal
Gambling Business Act (“IGBA”), 18 U.S.C. § 1955, rendering illegal any proceeds Lederer
derived from it. According to the government, these allegations support $42 million in personam
civil money laundering penalties against Lederer, as well as the forfeiture of two of his bank
accounts in rem. The government’s in personam claim must be dismissed for two reasons.
First, the government’s fraud allegations fail to state a claim under Rules 9(b) and
12(b)(6) of the Federal Rules of Civil Procedure (“FRCP”). Although the government alleges
that Lederer participated in a scheme to defraud FTP’s customers, specific factual allegations
against him are nowhere to be found. How, exactly, did he mislead players regarding their
deposits and accounts? What did he say to them, and when did he say it? Was any information
Lederer allegedly provided false when given, and if so, did Lederer know it? The government
doesn’t say. The only specific factual allegations against Lederer are that he co-founded FTP
and helped build it into a successful business, and that he received distributions as part-owner of
the company. These allegations fail to state a fraud claim—or any claim—against Lederer.
Second, FTP is not an illegal gambling business under IGBA, a statute that has never
been successfully applied solely to poker clubs, let alone internet poker companies headquartered
and operated entirely abroad. Based on the statute’s plain language, IGBA neither applies
extraterritorially nor criminalizes poker, a skills-based sport covered on ESPN alongside golf and
1
677182.02
football. Poker is also legal under New York’s gambling laws—but because the government has
failed even to identify which state law forms the predicate of the IGBA claims, Lederer is left to
guess at which statute or statutes the government has in mind. That failure alone justifies
dismissal of the IGBA claims.
These two arguments apply with equal force to the government’s IGBA and wire fraudbased in rem claims against Lederer’s bank accounts. Accordingly, the Court should dismiss the
$42 million in personam claim against Lederer for money laundering, along with the First and
Fourth Claims for Relief in rem.
II.
BACKGROUND
The government’s 161-paragraph FAC alleges multiple in personam allegations against
three online poker companies, twenty-one other entities, four individual defendants, and in rem
allegations against a multitude of bank accounts. The complaint focuses largely on a series of
misdeeds allegedly committed by the poker companies, focusing mainly on their alleged
attempts to defraud banks and their players.
Despite its prolixity, the FAC contains scarcely a word about Lederer’s role in any
alleged wrongdoing by FTP. The sum total of the government’s allegations about Lederer is that
he was (1) among FTP’s founders, owning roughly 8.6% of the company (FAC ¶ 23); (2) on
FTP’s board of directors from April 2007 until April 2011, during which times he received
distributions totaling $42 million (Id. ¶¶ 8, 108); and (3) a managing member of Tiltware LLC,
and, “[a]t certain times relevant to the Amended Complaint,” FTP’s president (Id. ¶ 23). Of the
complaint’s161 paragraphs, only 10 involve Lederer’s alleged actions.
The government further alleges that FTP defrauded its customers by “misrepresenting to
players that funds credited to their online player accounts were secure and segregated from
operating funds” when, allegedly, they were not. Id. ¶ 99. According to the FAC, FTP received
2
677182.02
customer inquiries about the security of player funds. Id. ¶ 100. “In response to these inquiries,”
the government alleges, “in or about March of 2008, [FTP CEO Ray] Bitar and Lederer advised
a Full Tilt Poker employee that Full Tilt Poker could represent to players that Full Tilt Poker
kept all of its player funds in segregated accounts and that fund would be available for
withdrawal by players at all times.” Id. “[B]ased in part on this information,” an unnamed FTP
employee allegedly drafted “several form e-mail templates” for use in responding to player
inquiries about their funds. Id. That is the only allegation relating to Lederer’s participation in
or knowledge of the alleged fraud against FTP’s customers. According to the complaint, after
the government had seized FTP’s website and assets on April 15, 2011, Lederer reported to other
FTP employees in early June 2011 that FTP had approximately $6 million in its bank accounts,
with more than $300 million owed to players worldwide. Id. ¶ 116.
In addition to the IGBA and wire fraud allegations included in the complaint, the
government also contends that FTP committed bank fraud in violation of 18 U.S.C. § 1344 by
allegedly arranging for the funds received from U.S. players to be disguised as payments to nonexistent entities or non-gambling businesses. See Id. ¶¶ 2-4, 35-50. Notably, however, the
complaint nowhere alleges that Lederer knew about or had anything to do with this supposed
miscoding of transactions by FTP. See id. ¶¶ 142 (listing individuals who allegedly conspired to
commit bank fraud, but leaving out Lederer).
Based on these threadbare allegations against Lederer, the government seeks a civil
monetary judgment of “not less than $41,856,010.92” pursuant to 18 U.S.C. § 1956(h), which
represents the total amount of ownership distributions and “profit sharing” payments he allegedly
received as part-owner of FTP. FAC ¶ 108. The government also seeks forfeiture of two of
Lederer’s bank accounts, alleging that at least some portion of the $42 million was deposited into
3
677182.02
them. See id.; Schedule C ¶¶ 2-3. The FAC alleges that these accounts are forfeitable pursuant
to sections 981(a)(1)(A), 981(a)(1)(C), and 1955(d) as
•
property used in and proceeds of an illegal gambling business in violation of 18
U.S.C. § 1955 (First Claim for Relief);
•
proceeds of a conspiracy to commit bank and wire fraud in violation of 18 U.S.C. §§
1343, 1344, and 1349 (Second Claim for Relief);
•
property involved in a conspiracy to commit money laundering (Third Claim for
Relief);
•
proceeds of a conspiracy to commit wire fraud in violation of 18 U.S.C. § 1343 and
1349 (Fourth Claim for Relief).
For the reasons stated below, the allegations against Lederer are insufficient to support
the $42 million in personam claim, as well as the First and Fourth Claims for Relief in rem.1
III.
LEGAL STANDARD
The FAC asserts both an in personam claim against Lederer as well as in rem claims
against his bank accounts. For the in personam claim, Rules 8(a) and 12(b)(6) of the Federal
Rules of Civil Procedure apply. Accordingly, in evaluating the sufficiency of factual allegations
underpinning the in personam claim, the Court should follow the two-step process established in
Ashcroft v. Iqbal, 556 U.S. 662 (2009). First, the Court should identify and eliminate allegations
“that, because they are no more than conclusions, are not entitled to the assumption of truth.” Id.
at 679. Second, the trial court should evaluate the remaining, non-conclusory allegations “to
determine if they plausibly suggest an entitlement to relief.” Id. at 681. This “plausibility
standard” requires “more than a sheer possibility that a defendant has acted unlawfully. Where a
1 Lederer does not presently challenge the Second Claim for Relief, which is a forfeiture claim predicated on alleged
bank fraud by certain individuals other than him. Even though the First Amended Complaint does not allege—and
no evidence will support—that Lederer knew about or committed bank fraud, the First Amended Complaint has
alleged sufficient facts to permit that in rem claim to proceed against the defendant bank accounts under 18 U.S.C. §
981(a)(1)(c). Because the Third Claim for Relief, which alleges money laundering, may be derivative of the bank
fraud allegations, Lederer elects not to challenge it here as well.
4
677182.02
complaint pleads facts that are merely consistent with a defendant’s liability, it stops short of the
line between possibility and plausibility of entitlement to relief.” Id. at 678 (citation and internal
quotation marks omitted).
Rule 9(b)’s exacting pleading standard applies to all fraud claims alleged against Lederer.
Rule 9(b) requires that when alleging fraud, “a party must state with particularity the
circumstances constituting fraud or mistake.” Fed. R. Civ. P. 9(b). Thus, for a fraud claim to
survive a motion to dismiss, the plaintiff must, at a minimum, “(1) specify the statements that the
plaintiff contends were fraudulent, (2) identify the speaker, (3) state where and when the
statements were made, and (4) explain why the statements were fraudulent.” Jiminez v. Brazil
Ethanol, Inc., No. 11 Civ. 3635(LBS), 2011 WL 5932600, *2 (S.D.N.Y. Nov. 29, 2011) (citation
and quotation marks omitted). Conclusory allegations of fraud are insufficient; rather, “[a]n
ample factual basis must be supplied to support the charges.” O’Brien v. Nat’l Prop. Analysts
Partners, 936 F.2d 674, 676 (2d Cir. 1991). Further, when multiple defendants are involved,
“the complaint should inform each defendant of the nature of his alleged participation in the
fraud.” DiVittorio v. Equidyne Extractive Indus., Inc., 822 F.2d 1242, 1247 (2d Cir. 1987).
As for the in rem claims, the government’s pleading burden is a heavy one due to the
“drastic nature of the civil forfeiture remedy.” United States v. Daccarett, 6 F.3d 37, 47 (2d Cir.
1993). The FRCP’s Supplemental Rules set the pleading standard for in rem civil forfeiture
complaints. See Fed. R. Civ. P. Supp. R. A(1)(B). Supplemental Rule E(2)(A) directs the
government to set forth its claims “with such particularity that the defendant…will be able,
without moving for a more definite statement, to commence an investigation of the facts and to
frame a responsive pleading.” Supplemental Rule G(2)(f) further commands that the
government “state sufficiently detailed facts to support a reasonable belief that the government
5
677182.02
will be able to meet its burden of proof at trial.” Fed. R. Civ. P. Supp. R. G(2)(f).2 Thus, “the
Government’s complaint must assert specific facts supporting an inference that the property is
subject to forfeiture.” United States v. $22,173.00 in U.S. Currency, 716 F. Supp. 2d 245, 248
(S.D.N.Y. 2010) (internal citation and quotation marks omitted).
The Supplemental Rules do not supplant the FRCP. Rather, the latter “apply to Civil
Forfeiture actions so long as they are not ‘inconsistent with’ the Supplemental Rules.” Id. at 249
(quoting Fed. R. Civ. P. Supp. R. A(2)). This has two important implications.
First, the Supreme Court’s pronouncements in Bell Atlantic Corp. v. Twombly, 550 U.S.
544 (2007), and Ashcroft v. Iqbal inform the legal standard for the government’s in rem claims.
See $22,173.00 in U.S. Currency, 716 F. Supp. 2d at 249 (noting that Iqbal and Twombly “may
help to clarify when a civil forfeiture complaint survives the motion to dismiss phase”).
Second, Rule 9(b)’s heightened pleading standard applies to all fraud claims supporting
the government’s forfeiture allegations. Nothing in Rule 9(b) is “inconsistent with” the pleading
standard set forth in the Supplemental Rules. Fed. R. Civ. P. Supp. R. A(2). By its terms, Rule
9(b) applies to any party “alleging fraud or mistake.” Fed. R. Civ. P. 9(b). As a civil plaintiff,
the government is a party like any other, and it can simultaneously abide by Supplemental Rule
G(2)(f)’s command to “state sufficiently detailed facts to support a reasonable belief that” it will
prevail at trial, and Rule 9(b)’s directive to “state with particularity the circumstances
constituting fraud.” See Riverway Co. v. Spivey Marine & Harbor Svc. Co., 598 F. Supp. 909,
912 (S.D. Ill. 1984) (“The construction placed upon Rule 9(b) of the Federal Rules of Civil
Procedure requiring the circumstances of an action for fraud be stated with particularity, is
2 Although the government’s burden of proof was once a mere showing of probable cause, Congress elevated the
government’s burden to a preponderance of the evidence when it passed the Civil Action Forfeiture Reform Act
(“CAFRA”) in 2000. See United States v. $92,203.00 in U.S. Currency, 537 F.3d 504, 509 (5th Cir. 2008) (noting
the “increase in the Government’s burden—from probable cause to preponderance of the evidence”).
6
677182.02
helpful in determining the meaning of Supplemental Rule E(2)(a).”); United States v.
Mondragon, 313 F.3d 862, 864 (4th Cir. 2002) (citing Riverway as “[t]he leading case on the
subject” of the Supplemental Rules’ particularity requirement for in rem forfeiture actions).3
In sum, both the government’s in personam and in rem allegations against Lederer must
rise to the level of plausibility required by Iqbal and Twombly. The government must allege
particularized and specific facts demonstrating that Lederer’s funds are subject to forfeiture.
And, most importantly, any fraud allegations must satisfy Rule 9(b). Because the government
has failed to meet this burden for the in personam claim against Lederer and two of the in rem
Claims for Relief, those claims must be dismissed.
IV.
ARGUMENT
Only two allegations in the complaint implicate Lederer in his personal capacity such that
they would justify the civil money laundering penalties alleged in Section VIII of the FAC (¶¶
158-161): (1) his alleged role in helping FTP defraud poker players by allowing them to play
with deposited funds before FTP had securely processed their money, and (2) his status as coowner of FTP, which the government—in a novel and extraterritorial application of a decades-
3 A few cases have cast some doubt on whether Rule 9(b) applies to civil forfeiture actions. See United States v. All
Funds on Deposit in Dime Sav. Bank of Williamsburg Account No. 58-400738-1 in the Name of Ishar Abdi &
Barbara Abdi, 255 F. Supp. 2d 56, 69 n.18 (E.D.N.Y. 2003); United States v. $15,270,885.69 on Deposit in Account
No. 8900261137, No. 99 CIV. 10255 (RCC), 2000 WL 1234593 (S.D.N.Y. Aug. 31, 2000) (unreported); United
States v. Approximately $25,829,681.80 in Funds (Plus Interest) in the Court Registry Inv. Sys., No. 98 Civ. 2682
(LMM) 1999 WL 1080370 (S.D.N.Y. Nov. 30, 1999) (unreported). None of these cases is persuasive. The two
unreported cases cited above were decided before CAFRA raised the government’s burden of proof from probable
cause to preponderance of the evidence, and all three cases were decided before the Supplemental Rules were
amended to include Rule G in 2006. See $15,270,885.69, 2000 WL 1234593 at *6 (“Rule 9(b) [is] inapplicable to
civil in rem actions because the particularity requirements applicable in this context are guided by Rule (E)(2) in
combination with the comparatively low, probable cause standard.”). Ishar Abdi simply relies on one of the
previous unreported cases without further analysis. Ishar Abdi, 255 F. Supp. 2d at 69 n.18. Moreover, the seminal
treatise on civil forfeiture actions has directly questioned the correctness of these holdings, observing that “two
unpublished district court opinions” have declined to require the government to allege “purported fraudulent
statements with particularity, although it is hard to see why.” 1 David B. Smith, Prosecution and Defense of
Forfeiture Cases ¶ 9.02[1] at 9-44 (2010).
7
677182.02
old statute never before applied to internet poker—characterizes as an “illegal gambling
business” in violation of IGBA.4 Because neither allegation withstands scrutiny, the in
personam money laundering claims against Lederer must be dismissed. Similarly, the
government’s First and Fourth Claims for Relief in rem against Lederer’s bank accounts, which
relate to the wire fraud and IGBA allegations respectively, must also be dismissed.
A.
The government’s claim that Lederer defrauded and conspired to defraud FTP
players is devoid of specific factual allegations and fails to satisfy Rule 9(b).
As noted above, for both its in personam and in rem claims, the government’s fraud
allegations must “meet the heightened pleading standard of Rule 9(b), which requires that the
plaintiff ‘state with particularity the circumstances constituting fraud.’” Jiminez, 2011 WL
5932600, at *2 (quoting Fed. R. Civ. P. 9(b)). The government’s in personam fraud allegations
against Lederer fall far short of this standard. What, if anything, did Lederer say, and to whom
did he say it? Were the alleged statements fraudulent when made? And where are the allegations
that “give rise to a strong inference [of] fraudulent intent”? Mills v. Polar Molecular Corp., 12
F.3d 1170, 1176 (2d Cir. 1993). These necessary allegations for an in personam claim against
Lederer are absent in the FAC. Further, because the complaint never specifically alleges the
name of the speaker, why the statements or false, or any evidence of scienter for any FTP
employee, the Fourth Claim for Relief in rem must also be dismissed.
4 In its Second Claim for Relief, FAC ¶¶ 136-143, the government alleges conspiracy to commit bank and wire
fraud against a specified list of Defendants. Howard Lederer is not included in that list. Id. ¶ 142. Thus, although if
proved this claim may support the forfeiture of Lederer’s bank accounts in rem as proceeds of the alleged conspiracy
to commit fraud, they cannot support the in personam money laundering claim against Lederer. Counsel for the
United States has confirmed this understanding of the First Amended Complaint with Lederer’s attorneys. Lederer
does not currently move to dismiss the in rem claims predicated on the Second Claim for Relief.
8
677182.02
1.
The single statement implicating Lederer in the First Amended Complaint is
insufficient under Rule 9(b) because it fails to identify the speaker, specify
the precise statement at issue, and support an inference of fraudulent intent.
The government’s wire fraud allegations against FTP appear in FAC paragraphs 99
through 104, but only one sentence implicates Lederer directly. The gravamen of the allegations
is that FTP told players “that funds credited to their online player accounts were secure and
segregated from operating funds” when, allegedly, they were not. FAC ¶ 99. According to the
complaint, “[o]n numerous occasions,” FTP’s customers asked the company whether their funds
were secure, and whether FTP held them “in separate bank accounts” where they were not used
for other purposes, such as operating expenses. Id. ¶ 100. The key passage follows:
In response to these inquiries, in or about March of 2008, [FTP CEO Ray] Bitar
and Lederer advised a Full Tilt Poker employee that Full Tilt Poker could
represent to players that Full Tilt Poker kept all of its player funds in segregated
accounts and that funds would be available for withdrawal by players at all
times. Subsequently, and based in part on this information, Full Tilt Poker
created several form e-mail templates to be used by Full Tilt Poker to respond to
player inquiries about the security of their funds.
Id. (emphasis added). This is the only factual allegation specifically implicating Lederer in any
alleged wire fraud scheme against FTP’s customers. It fails Rule 9(b) for three reasons.
First, it is unclear who allegedly made the statement at issue, and to whom it was
directed. Where, as here, the plaintiff brings a fraud claim against multiple defendants, Rule 9(b)
requires the plaintiff “to identify which defendant caused each allegedly fraudulent statement to
be spoken, written, wired or mailed” as well as “to whom the communication was made.”
Alnwick v. European Micro Holdings, Inc., 281 F.Supp.2d 629, 639 (E.D.N.Y. 2003); see also
Manela v. Gottlieb, 784 F. Supp. 84, 87 (S.D.N.Y. 1992) (holding that Rule 9(b) requires
plaintiffs to “plead with particularity by setting forth separately the acts complained of by each
defendant”). Was it Bitar or Lederer? Did Bitar and Lederer speak in tandem? The
government’s attempt to lump Lederer and Bitar together into an undifferentiated hybrid-
9
677182.02
defendant, who “advised” an unidentified “Full Tilt Poker employee,” FAC ¶ 100, fails Rule
9(b)’s particularity requirement.
Second, the FAC fails to “specify the statements that the plaintiff contends were
fraudulent.” Shields v. Citytrust Bancorp, Inc., 25 F.3d 1124, 1128 (2d Cir. 1994). The
government never alleges how Lederer or Bitar communicated the allegedly false directives to
the unnamed Full Tilt Poker employee, or what, exactly, was said. Lederer is left to guess at
whether the alleged direction was given orally (and if so, to whom), or in writing (and if so, in
what form). Rule 9(b) is designed to preclude such guesswork. See O’Brien, 936 F.2d at 676.
Third, even if the Court were to conclude that the bare statement in paragraph 100 meets
Rule 9(b)’s particularity requirement, it must still dismiss the fraud claim based on the
government’s failure to allege “facts that give rise to a strong inference of fraudulent intent” on
Lederer’s part. S.Q.K.F.C., Inc. v. Bell Atl. TriCon Leasing Corp., 84 F.3d 629, 634 (2d Cir.
1996). Indeed, nothing in the complaint supports the inference that Lederer knew any of the
alleged statements—whatever they were—were false, if indeed they were. The complaint
merely states in conclusory fashion that “Full Tilt Poker provided no protection whatsoever to
deposits it received from players in the United States and other countries,” and instead used the
funds for business expenses and owner distribution payments. FAC ¶ 105. This allegation is
silent as to time. It is unclear whether the government contends that the statement—“that Full
Tilt Poker kept all of its player funds in segregated accounts and that funds would be available
for withdrawal by players at all times”—was false when made. Id. ¶ 100. Indeed, the complaint
later asserts that FTP’s difficulties securing player funds began only “around August 2010,” two
years after Lederer or Bitar made the allegedly fraudulent statements at issue. Id. ¶ 113.
10
677182.02
In short, the FAC’s single, vague, unattributed allegation against Lederer in paragraph
100 fails to satisfy Rule 9(b)’s exacting requirements. It cannot support the government’s $42
million in personam claim against Lederer.
2.
The government never links Lederer to any of the other allegedly false
statements referenced in the First Amended Complaint.
The complaint includes a few additional allegedly fraudulent statements purportedly
made by FTP employees, but none of them implicates Lederer. For example, the government
alleges that, “[o]n or about May 6, 2008,” an unnamed person at FTP “created a form e-mail
which its staff then e-mailed to players.” Id. ¶ 100(a). The email stated that FTP kept player
funds “in several deposit accounts throughout the world, all of which are separate and distinct
from our operating accounts.” Id. Lederer is nowhere alleged to have authored, edited, or sent
this email. It cannot support a wire fraud claim against him.
The complaint further alleges that another (or possibly the same) unnamed FTP employee
authored a second email “[o]n or about May 23, 2008,” which stated that “all player account
funds are segregated and held separately from our operating accounts.” Id. ¶ 100(b). Again, the
government nowhere alleges that Lederer had anything to do with this allegedly misleading
email. It, too, cannot support a wire fraud claim against him.
The same goes for Web-forum posts attributed to an FTP employee identifying himself as
“FTPDoug” on July 18, 2008. Id. ¶ 101(c-d). What “FTPDoug” wrote on an internet poker
forum cannot form the basis of a fraud claim against Lederer. Indeed, it is nowhere alleged that
Lederer authored this statement, or even knew it was made.
The government’s final fraud allegation concerns a statement allegedly issued by FTP
“[i]n response to” the events of April 15, 2011, i.e. after the government unsealed its indictment
against FTP and seized FTP’s website. The statement supposedly told FTP customers:
11
677182.02
In light of recent events involving the freezing of certain accounts, Full Tilt Poker
would like to assure all players that their funds remain safe and secure.
Processing of both deposit and withdrawal requests is proceeding as normal and is
still available to all of our players . . . . We assure all players on Full Tilt Poker
that your online playing experience will not change and that you will be able to
deposit and withdraw funds as needed. Your money remains safe, secure and
accessible at all times.
Id. ¶ 104. As a cursory amount of Internet research would have revealed had the government
cared to check, this statement was posted on FTP’s website sometime in mid-2009, nearly two
years before the events of April 15, 2011. See Full Tilt Poker, Statement from Full Tilt Poker
Regarding Recent Check Withdrawal Issues (June 30, 2009, 2:28 AM), http://web.archive.org/
web/20090630022812/http://www.fulltiltpoker.com/official-statement-online-poker-withdrawals
(accessed by entering http://www.fulltiltpoker.com/official-statement-online-poker-withdrawals
into the Internet Archive). Indeed, the statement’s plain terms reveal that it was not made in
response to the events of April 15, 2011; it would have been nonsensical to assure players that
“[p]rocessing of both deposit and withdrawal requests is proceeding as normal and is still
available to all of our players” or that their “online playing experience will not change” when the
government had seized FTP’s website, replacing the company’s logo with a giant Department of
Justice seal. This lackadaisical approach to alleging fraudulent statements permeates the
complaint and demonstrates that the government’s fraud claim cannot withstand scrutiny.
3.
The Fourth Claim for Relief in rem should be dismissed because the
government’s wire fraud allegations fail to satisfy Rule 9(b).
To adequately allege its wire-fraud based in rem forfeiture claim (the Fourth Claim for
Relief), the government must show that the seized proceeds came from the alleged wire fraud,
not that Lederer was personally involved. But the complaint fails even to accomplish this. The
FAC never names the speaker for any of the allegedly false statements (other than the
pseudonym “FTPDoug”), it never explains what about the statements is false, and it never
12
677182.02
alleges any evidence of scienter. The complaint therefore fails to satisfy Rule 9(b) for anyone at
FTP, and the in rem Fourth Claim for Relief should be dismissed.
B.
The government’s IGBA claim is based on an impermissible extraterritorial
application of the law, and fails to allege facts supporting an IGBA violation.
Apart from the inadequate wire fraud allegations, only one other claim implicates
Lederer: the allegation that FTP violated IGBA, making all FTP proceeds illegal.5 This novel
application of a decades-old statute far exceeds the statute’s text and intended scope. First,
under the Supreme Court’s decision in Morrison v. National Australia Bank Ltd., 130 S. Ct. 2869
(2010), IGBA does not apply extraterritorially to a business operated abroad whose only contact
with the United States is that some of its poker players are based here. Second, even if IGBA
could apply to FTP, the FAC alleges no IGBA violation. The complaint never alleges that FTP
violated any state law, “an essential and substantive element” of an IGBA charge, United States
v. Miller, 774 F.2d 883, 885 (8th Cir. 1985), nor does it allege any facts that, taken as true,
demonstrate that poker constitutes “gambling” under § 1955(b)(2). Accordingly, the
government’s IGBA charges support neither the in personam claims against Lederer, nor the
First Claim for Relief in rem. Both must be dismissed.
1.
IGBA does not apply extraterritorially to FTP, a company based and
operated outside of the United States.
The Supreme Court’s recent decision in Morrison demonstrates that IGBA does not apply
extraterritorially. Further, based on Morrison and cases interpreting it, applying IGBA to FTP’s
conduct in this case would constitute an impermissible extraterritorial application of the statute.
5 The government apparently takes the position that all proceeds of FTP are tainted, despite the fact that a
significant part of FTP’s business catered to players living outside of the United States. Lederer reserves the right to
argue that proceeds derived from international operations do not constitute proceeds from any IGBA, wire-fraud, or
bank-fraud violation.
13
677182.02
a.
IGBA does not apply extraterritorially.
In Morrison, the Supreme Court considered whether § 10(b) of the Securities Exchange
Act creates a cause of action for foreign plaintiffs suing foreign and American defendants for
misconduct involving foreign securities, where much of the misconduct took place in the United
States. In answering that question, the Court reiterated the “longstanding principle of American
law that legislation of Congress, unless a contrary intent appears, is meant to apply only within
the territorial jurisdiction of the United States.” Morrison, 130 S. Ct. at 2877 (citation and
internal quotation marks omitted). Thus, “[w]hen a statute gives no clear indication of an
extraterritorial application, it has none.” Id. at 2878; see also Norex Petroleum Ltd. v. Access
Indus., Inc., 631 F.3d 29, 32 (2d Cir. 2011) (“Morrison wholeheartedly embraces application of
the presumption against extraterritoriality.”). Applying that presumption, the Court concluded
that § 10(b) does not apply extraterritorially. The Court first noted that “[o]n its face, § 10(b)
contains nothing to suggest it applies abroad.” Morrison, 130 S. Ct. at 2881. It then rejected all
of petitioners’ arguments as to why the statute applied abroad. Most notably, the Court rejected
the argument that because the prices of foreign securities are disseminated throughout the United
States, and therefore affect markets in the United States, section 10(b) should apply.
Applying Morrison’s analysis to IGBA, it is clear that IGBA does not apply
extraterritorially. On its face, IGBA contains no language suggesting extraterritorial application.
Further, IGBA was passed together with the Racketeer Influence and Corrupt Organizations
(RICO) Act as part of the Organized Crime Control Act of 1970. Applying Morrison, the
Second Circuit recently held that RICO does not apply extraterritorially. Norex, 631 F.3d 29. In
addition, one of Congress’s findings in passing the Unlawful Internet Gambling Enforcement
Act (“UIGEA”) was that “traditional law enforcement mechanisms are often inadequate for
14
677182.02
enforcing gambling prohibitions or regulations on the Internet, especially where such gambling
crosses State or national borders.” 31 U.S.C. § 5361(4) (emphasis added). Congress’s
recognition that “traditional” mechanisms, including IGBA, were inadequate to enforce crossnational activity strongly suggests that IGBA does not apply extraterritorially.
b.
Applying IGBA to FTP would constitute an improper extraterritorial
application of IGBA.
Because IGBA lacks extraterritorial application, the government must show that FTP’s
activities inside the United States bring the company within the statute’s reach. The government
cannot make that showing. Under Morrison, to determine whether U.S. conduct—the “territorial
event”—is sufficient to make conduct non-extraterritorial, courts must ask whether that
“territorial event” was the “‘focus’ of congressional concern.” 130 S. Ct. at 2884 (quoting
EEOC v. Arabian Am. Oil Co., 499 U.S. 244, 255 (1991) (“Aramco”)). Morrison is again
instructive. There, the Court noted that section 10(b) punishes “only deceptive conduct ‘in
connection with the purchase or sale of any security registered on a national securities exchange
or any security not so registered.’” Id. (quoting 15 U.S.C. § 78j(b)). On that basis, the Court
held that the “focus of the Exchange Act is not upon the place where the deception originated,
but upon purchases and sales of securities in the United States.” Id. The Court also rejected the
argument that a statute could be applied extraterritorially if effects of the deception were felt
inside the United States. In so holding, the Court observed that “it is a rare case of prohibited
extraterritorial application that lacks all contact with the territory of the United States. But the
presumption against extraterritorial application would be a craven watchdog indeed if it retreated
to its kennel whenever some domestic activity is involved in the case.” 130 S. Ct. at 2884.6
6 Following Morrison, courts have found impermissible extraterritorial application of statutes despite effects on or
activity in the United States. See, e.g., United States v. Philip Morris USA, Inc., 783 F.Supp.2d 23 (D.D.C. 2011);
15
677182.02
Here, FTP is an Irish corporation, governed by Irish law. Its business was legal under
Irish law. Its staff and management lived and worked in Ireland. It was operating under a
license from the Alderney Gambling Control Commission. FTP’s bank accounts were all outside
of the United States. The only “territorial events” relating to FTP are the playing of poker hands
on FTP’s site (and the associated payments for those hands) by players in the United States. See
Decl. of Rosemary Karaka in Support of Post-Indictment Restraining Order, S.D.N.Y. Case No.
1:10cr00336 LAK, Dkt. # 76, at ¶ 7 (“internet gambling companies keep their computer servers,
management and support staff offshore”). Yet the “focus” of § 1955 is not on playing or betting,
but on those who “conduct[], finance[], supervise[], direct[], or own[]” an “illegal gambling
business.” Thus, IGBA focuses on the gambling business’s operations, not the nature of its
customers. See 18 U.S.C. § 1955(b)(1). Indeed, the Supreme Court has noted that IGBA
“proscribes any degree of participation in an illegal gambling business, except participation as a
mere bettor.” Sanabria v. United States, 437 U.S. 54, 71 n.26 (1978) (emphasis added). Yet all
activities other than those of “mere bettors” were not territorial events. Just as the “focus of the
Exchange Act is not upon the place where the deception originated, but upon purchases and sales
of securities in the United States,” Morrison, 130 S. Ct. at 2884, IGBA’s focus is not where the
poker-playing took place, but where the gambling business is located and operated. For FTP,
that is not the United States.
IGBA’s history further demonstrates the statute’s “focus” on the gambling business,
rather than the customers. IGBA “was enacted as [part] of the Organized Crime Control Act of
1970. The legislation was aimed at curtailing syndicated gambling, the lifeline of organized
crime, which provides billions of dollars each year to oil its diversified machinery.” United
Cedeno v. Intech Group, Inc., 733 F.Supp.2d 471 (S.D.N.Y. 2010).
16
677182.02
States v. Sacco, 491 F.2d 995, 998 (9th Cir. 1974) (internal citations omitted). It was based on
Congress’s findings that “organized crime derives a major portion of its power through money
obtained from such illegal endeavors as syndicated gambling, loan sharking,” and several other
activities, Pub. L. 91-452, Title VIII, § 803(a), 84 Stat. 922, 937 (1970), and that organized
crime’s interstate nature, and propensity for bribing state and local officials, made it difficult for
local authorities to combat, Sacco, 491 F.2d at 999-1001 (citing S. Rep. No. 91-617, 91st Cong.,
1st Sess. 16 (1969)). IGBA’s origin in the fight against organized crime makes clear that the
“focus” of the legislation was on the gambling organizations, not the bettors.
This case mirrors Judge Rakoff’s recent decision in Cedeno, in which he concluded that
RICO does not apply to a predicate money laundering scheme that used American banks to
launder money when the RICO enterprise was located abroad. “So far as RICO is concerned, it
is plain on the face of the statute that the statute is focused on how a pattern of racketeering
affects an enterprise. . . . But nowhere does the statute evidence any concern with foreign
enterprises.” 733 F. Supp. 2d at 473 (emphasis added). Just as RICO concerns enterprises, and
thus does not apply to foreign enterprises even if the predicate acts took place in the United
States, IGBA concerns gambling businesses, and thus does not apply to a foreign business even
if some customers happen to be located in the United States. Thus, applying IGBA to FTP’s
activities in this case would constitute an impermissible extraterritorial application of the statute.
2.
Even if IGBA applies to FTP’s conduct, the First Amended Complaint fails
to sufficiently allege a violation of IGBA.
Even if IGBA could be applied to a foreign business based abroad, the complaint
nonetheless fails sufficiently to allege an IGBA violation. First, the complaint never alleges that
FTP violated any state law, one of the key elements of an IGBA claim. Second, the complaint
never alleges any facts that “plausibly” suggest that poker constitutes “gambling” under §
17
677182.02
1955(b)(2). In fact, maintaining a poker website that charges a fee to allow customers to play
poker against each other does not constitute “gambling” under § 1955(b)(2).
a.
The First Amended Complaint fails to allege any state law that FTP
violated and thus failed to allege the necessary elements of an IGBA
cause of action.
For FTP to constitute an “illegal gambling business,” it must be a business which “is a
violation of the law of a State or political subdivision in which it is conducted.” 18 U.S.C. §
1955(b)(1)(i). This requirement is arguably the most important of the three requirements for a
“gambling business” to be an “illegal gambling business” under § 1955(b)(1). See Miller, 774
F.2d at 885 (“[T]he elements of a Section 1955 violation are actually contained in the underlying
state law alleged to have been transgressed.”). As explained by the Eighth Circuit: “The statute
defines an ‘illegal gambling business’ as one which ‘is a violation’ of state law. 18 U.S.C. §
1955(b)(1)(i). The word ‘is’ strongly suggests that the Government must prove more than a
violation of some state law by a gambling business. The gambling business itself must be
illegal.” United States v. Bala, 489 F.3d 334, 340 (8th Cir. 2007) (emphasis in original).
Here, the government has nowhere alleged that the alleged gambling business conducted
by FTP is illegal in the place where that business is conducted. Nor could it: FTP was legally
operating under a duly issued license from the Alderney Gambling Control Commission.
Accordingly, FTP lies outside IGBA’s ambit.
To the extent the government believes that FTP violated some U.S. state law, the FAC
again falls short. The complaint not only fails to allege a specific state statute that FTP’s conduct
violated, but it also neglects to allege which state’s laws were allegedly offended. There is
simply no mention in the FAC of any state law whatsoever.
The government’s failure to allege any state law violation warrants the FAC’s dismissal
under Fed. R. Civ. P. 8(a). Rule 8(a) requires that a complaint “give the defendant fair notice of
18
677182.02
what [plaintiff’s] claim is.” Twombly, 550 U.S. at 555 (citing Conley v. Gibson, 355 U.S. 41, 47
(1957)). Without any knowledge of the “essential and substantive element” of the government’s
§ 1955 claim, Miller, 774 F.2d at 885, Lederer lacks fair notice of the basis of the government’s
claim such that he can mount a defense.
The government could be basing its IGBA claim on a violation of any of the myriad
gambling laws of any of the fifty states, all of which penalize slightly different behavior.
Lederer cannot be expected to respond to any such allegation. New York law alone contains at
least five different laws prohibiting different forms of gambling, each of which would require
Lederer to prepare different legal and factual defenses. See N.Y. Penal Law §§ 225.00 et seq.7
The FAC’s utter silence on the matter dooms the IGBA claims.
Indeed, the Eighth Circuit recognized the importance of pleading a particular state statute
in Miller. There, the government’s indictment “failed to cite the state statute alleged to have
been violated.” 774 F.2d at 883. The Eighth Circuit concluded that
the particular state statute alleged to have been violated is an essential and
substantive element of a violation of 18 U.S.C. section 1955. Other than the
requirements of five persons and of 30 days or $2,000, the elements of a Section
1955 violation are actually contained in the underlying state law alleged to have
been transgressed. Thus, the indictment’s reference to Section 1955 did not
inform Miller of the crime with which he was charged. An allegation that some
state statute has been violated does not “fully, directly, and expressly, without any
uncertainty or ambiguity, set forth all the elements necessary to constitute the
offense intended to be punished.”
7 Lederer maintains that FTP’s conduct as alleged in the FAC violates none of these New York laws because the
outcome of poker does not “depend[] in a material degree upon an element of chance.” N.Y. Penal Law §
225.00(1). Rigorous academic research on this point could hardly be clearer. See, e.g., Steven D. Levitt & Thomas
J. Miles, The Role of Skill Versus Luck in Poker: Evidence from the World Series of Poker, National Bureau of
Economic Research Working Paper 17023 (April 2011), available at http://pricetheory.uchicago.edu/levitt/
Papers/WSOP2011.pdf (concluding that differences between return on investment for skilled versus unskilled poker
players “are highly statistically significant and far larger in magnitude than those observed in financial markets”);
Rachel Croson, Peter Fishman & Devin G. Pople, Poker Superstars: Skill or Luck?, 21 Chance No. 4, 25 (2008).
Should this case proceed, and should the predicate offense be a state law premising liability on poker’s status as a
game of chance, Lederer intends to prove that skill, not chance, dominates the outcome of poker.
19
677182.02
Id. at 885 (quoting Hamling v. United States, 418 U.S. 87, 117 (1974)) (emphases added).
Although Miller involved an indictment rather than a civil forfeiture complaint, Miller’s
conclusion that citation to a specific state statute is necessary to fully inform a defendant of the
crime with which he is charged is equally applicable here. Without fully informing Lederer of
the state offense that FTP is alleged to have committed, the FAC fails to “give [Lederer] fair
notice of what [the government’s] claim is.” Twombly, 550 U.S. at 555.
The complaint’s allegations cast no light on the basis of the IGBA charge. The complaint
merely alleges that FTP “provided real-money gambling on internet poker games to United
States customers.” FAC ¶ 22. But there are numerous versions of poker, all with different rules.
As the complaint acknowledges, FTP offered at least four different types of poker. Id. ¶ 65
(Texas Hold ‘em, Omaha, Stud, and Razz). The complaint never discusses these games’ rules,
nor explains why these games violate state law, let alone which state law they violate. To the
extent the FAC is predicated on a violation of New York law, a failure to allege facts showing
that these games are games of chance may on its own be sufficient to dismiss the complaint. See
People v. Li Ai Hua, 24 Misc.3d 1142 (Crim. Ct. Queens Cty. 2009) (dismissing information for
“play[ing] ‘Mahjong’ which is a game of chance” because the information included “no support .
. . for the claim that mah jong is a game of chance”). Because the FAC fails to allege anything
about the predicate state law offense, the IGBA charges must be dismissed.
b.
The First Amended Complaint fails to allege that FTP is a “gambling
business” under IGBA.
To violate IGBA, a business must be engaged in “gambling” as defined in 18 U.S.C. §
1955(b)(2). Section 1955(b)(2) defines “gambling” by providing a non-exhaustive list of nine
activities that constitute gambling. No form of poker appears on this list. But to qualify as a
“gambling,” running an online poker website must be “similar to the specific items in the list.”
20
677182.02
Molloy v. Metropolitan Transp. Auth., 94 F.3d 808, 812 (2d Cir. 1996). The complaint alleges
no facts that, accepted as true, plausibly suggest that poker is similar to the specific activities
listed in § 1955(b)(2). In fact, poker is not similar to those activities.
(i)
To be a violation of IGBA, a business must be engaged in
“gambling” as defined in § 1955(b)(2).
IGBA criminalizes the conduct, finance, management, supervision, direction, or
ownership of an “illegal gambling business.” 18 U.S.C. § 1955(a). An “‘illegal gambling
business’ means a gambling business which” violates state law, involves five or more persons,
and satisfies certain operation or revenue requirements. Id. § 1955(b)(1). Thus in order to be an
“illegal gambling business,” a business must be a “gambling business,” or a business that
engages in gambling. “Gambling” is defined as “includ[ing] but . . . not limited to pool-selling,
bookmaking, maintaining slot machines, roulette wheels or dice tables, and conducting lotteries,
policy, bolita or numbers games, or selling chances therein.” Id. § 1955(b)(2).
The government has argued in the past that an “illegal gambling business” under IGBA
does not have to engage in “gambling” under § 1955(b)(2), but only has to satisfy the
requirements in § 1955(b)(1)(i)-(iii). In two key ways, this would violate the “cardinal principle
of statutory construction that [courts] must give effect, if possible, to every clause and word of a
statute.” Williams v. Taylor, 529 U.S. 362, 404 (2000) (internal quotation marks omitted) (citing
United States v. Menasche, 348 U.S. 528, 538-39 (1955)). First, the only time the word
“gambling” is used in IGBA outside of the phrase “illegal gambling business” is when IGBA
defines an “illegal gambling business” as “a gambling business which” satisfies the §
1955(b)(1)(i)-(iii) requirements. See 18 U.S.C. § 1955. Thus reading the definition of “illegal
gambling business” to not be limited to businesses that engage in “gambling” under § 1955(b)(2)
would make the § 1955(b)(2) definition of gambling entirely superfluous. Second, § 1955(b)(1)
21
677182.02
defines “illegal gambling business” as “a gambling business which” satisfies the § 1955(b)(1)(i)(iii) requirements. If Congress did not intend the word “gambling” to limit the type of
businesses that violate the statute, it would have simply left that modifier out. The only logical
interpretation of Congress’s decision to include it is to read IGBA as limiting “illegal gambling
businesses” to businesses engaged in “gambling” under § 1955(b)(2).
(ii)
The First Amended Complaint never alleges that running an
online poker site is “gambling” under § 1955(b)(2).
IGBA does not define the term “gambling.” Instead, it provides a list of illustrative
activities, stating, “gambling’ includes, but is not limited to pool-selling, bookmaking,
maintaining slot machines, roulette wheels or dice tables, and conducting lotteries, policy, bolita
or numbers games, or selling chances therein.” 18 U.S.C. § 1955(b)(2). When interpreting a
“general provision in light of a list of specific illustrative provisions,” courts “construe the
general term . . . to include only things similar to the specific items in the list.” Molloy, 94 F.3d
at 812; see also Begay v. United States, 553 U.S. 137, 141-42 (2008) (holding that drunk driving
was not a “violent felony” for purposes of the Armed Career Criminal Act because it was “too
unlike the provision’s listed examples” of other violent crimes); City of New York v. Beretta
U.S.A. Corp., 524 F.3d 384, 401 (2d Cir. 2008) (“[W]here general words are accompanied by a
specific enumeration of persons or things, the general words should be limited to persons or
things similar to those specifically enumerated.” (internal citation and quotation marks omitted)).
To allege an IGBA violation, the government must therefore allege “sufficient factual
matter, accepted as true,” Iqbal, 556 U.S. at 678, that FTP’s activities in running an online poker
site are similar to the activities listed in § 1955(b)(2). A complaint does not “suffice if it tenders
‘naked assertion[s]’ devoid of ‘further factual enhancement.’” Id. (quoting Twombly, 550 U.S. at
557) (alterations in original). Yet the FAC nowhere suggests that FTP’s activities are remotely
22
677182.02
similar to the activities listed in § 1955(b)(2). There are no facts in the complaint about the rules
of the various poker games played on FTP, or FTP’s role in charging for and administering those
games. This alone is reason to dismiss the government’s IGBA-based claims.
(iii)
Running an online poker site is not “gambling” under §
1955(b)(2).
The government’s failure to plead facts sufficient to establish that poker is “roughly
similar” to the activities listed in § 1955(b)(2) is not surprising: running an internet poker site
like FTP falls outside IGBA’s definition of “gambling.” Nearly all the activities listed in §
1955(b)(2) involve games where the business—the “house”—is betting directly against the
customers. In bookmaking, slot machines, roulette, dice tables, lotteries, policy, bolita, or
numbers games, the house directly bets against its customers such that when the customer/bettor
loses, the house wins. This makes sense given that the phrase for these companies in IGBA is a
“gambling business,” suggesting that the business itself is gambling. There are numerous
reasons Congress may have wanted to penalize these games. In these games the businesses have
an incentive to cheat, and it is likely difficult for customers to monitor them. These games were
also tended to fund organized crime, a problem that animated IGBA’s passage.
The only activity listed in § 1955(b)(2) that does not involve a business betting against its
customers is pool-making. Pool-making, however, is hardly a game at all but is rather simply a
forum to allow people to place bets on external events over which the customers/bettors have no
control. None of the activities listed in § 1955(b)(2) involves a business that charges a hosting
fee for players to engage in a game like bridge, scrabble, or poker, where betting is part of a
larger game whose outcome predominantly depends on the players’ skill. See In re Allen, 59
Cal.2d 5, 7 (1962) (holding that bridge is a game of skill in part because “it is obvious that,
although there is of course an element of chance resulting from the deal of the cards, there is
23
677182.02
continually recurring necessity in the bidding and play of the hand to make decisions which,
considered together, will ordinarily be determinative of the outcome of the game”).
This is true even if, as the government has argued in the corresponding criminal case, a
common understanding of the word gambling would include poker. “Only in the absence of a
statutory definition does this court normally look to the ordinary meaning or dictionary
definitions of a term.” United States v. Lettiere, 640 F.3d 1271, 1274 (9th Cir. 2011). Indeed in
Begay, even where drunk driving satisfied the statute’s definition of violent felony (i.e. a crime
that “presents a serious potential risk of physical injury to another”), the Court found that the
illustrative list of examples limited the statutory definition to crimes “roughly similar” to that
illustrative list. 553 U.S. at 137. Thus, the illustrative list in this case must limit a non-statutory
understanding of what “gambling” means to activities similar to those listed in § 1955(b)(2). In
short, the government’s “Willie Nelson” argument, while glib, is irrelevant.8
Congress’s decision to include the specific games listed in § 1955(b)(2) was hardly
random. IGBA was enacted as part of the Organized Crime Control Act of 1970. 84 Stat. at
937. That Act was based on Congress’s findings that organized crime harmed American security
and economic stability, and that “organized crime derives a major portion of its power through
money obtained from such illegal endeavors as syndicated gambling, loan sharking,” and several
other activities. Id. at 922-23. It is thus unsurprising that Congress focused IGBA on the types
of games organized crime used. This explains why Congress’s list includes such esoteric games
as bolita. It also explains why Congress did not include in the list of activities charging a fee to
host skill-based games that include betting as one element of the game, like bridge or poker.
8 The government told Judge Kaplan that “poker, with all apologies, of course, to Willie Nelson, is understood to be
a quintessential form of gambling.” Hr’g Tr., United States v. Elie, at 23 (Dec. 1, 2011). The government
apologized to the wrong country singer; “The Gambler”—the song to which the government was likely referring—
was sung by Kenny Rogers.
24
677182.02
At the very least, the list of activities constituting IGBA’s definition of “gambling” is
sufficiently ambiguous that an average person would not be certain whether a company hosting a
poker site falls within it. Under the rule of lenity, such ambiguity should be interpreted in favor
of the defendant.9 The rule of lenity “not only vindicates the fundamental principle that no
citizen should be held accountable for a violation of a statute whose commands are uncertain, or
subjected to punishment that is not clearly prescribed. It also places the weight of inertia upon
the party that can best induce Congress to speak more clearly and keeps courts from making
criminal law in Congress’s stead.” United States v. Santos, 553 U.S. 507, 514 (2008) (plurality
opinion). Both of these concerns apply in this case. IGBA’s definition of “gambling” is at best
an uncertain command as to the legality of charging a fee for players to play a skill-based game
that includes betting as one aspect of the game. And given that Congress’s goal in passing IGBA
was to fight organized crime, not to generally criminalize all card games involving money, many
of which were likely played by the very Congress-people who passed IGBA, the burden should
be on Congress to speak clearly if it does in fact want to criminalize a company like FTP.
V.
CONCLUSION
The government’s in personam claim for civil money laundering penalties against
Howard Lederer is premised on allegations that (1) Lederer participated in FTP’s fraud against
its players; and (2) FTP operated in violation of IGBA. The government has failed to
sufficiently plead either of these allegations, and the in personam claims against Lederer must be
dismissed. The government has similarly failed to plead its First and Fourth in rem claims for
relief against Lederer’s bank accounts, and those claims too must be dismissed.
9 The rule of lenity applies in civil forfeiture cases when the statute is “punitive and quasi-criminal in nature.”
United States v. One 1973 Rolls Royce, V.I.N. SRH-16266 By & Through Goodman, 43 F.3d 794, 819 (3d Cir.
1994); see also County of Suffolk, New York v. First Am. Real Estate Solutions, 261 F.3d 179, 195 (2d Cir. 2001).
25
677182.02
Dated: July 9, 2012
Respectfully submitted,
/s/ Elliot R. Peters
Elliot R. Peters
Cody S. Harris
KEKER & VAN NEST LLP
633 Battery Street
San Francisco, CA 94111-1809
415 391 5400 (Telephone)
415 397 7188 (Facsimile)
Email: epeters@kvn.com
Email: charris@kvn.com
Attorneys for Defendant and Claimant
HOWARD LEDERER
26
677182.02
CERTIFICATE OF SERVICE
I hereby certify under penalty of perjury that on July 9, 2012, I caused a true copy of the
foregoing Memorandum of Points and Authorities in Support of Defendant and Claimant
Howard Lederer's Motion to Dismiss Verified First Amended Complaint pursuant to Rule G of
the Supplemental Rules for Admiralty and Maritime Claims to be served by the Court’s ECF
system upon:
Jason H. Cowley
Michael D. Lockard
United States Attorneys Office
One Saint Andrew’s Plaza
New York, NY 10007
Tel: (212) 637-1060
Fax: (212) 637-0421
Jason.Cowley@usdoj.gov
Michael.Lockard@usdoj.gov
/s/Elliot R. Peters
Elliot R. Peters
27
677182.02
Disclaimer: Justia Dockets & Filings provides public litigation records from the federal appellate and district courts. These filings and docket sheets should not be considered findings of fact or liability, nor do they necessarily reflect the view of Justia.
Why Is My Information Online?