Unites States v. Pokerstars, et al

Filing 238

MEMORANDUM OF LAW in Support re: 237 MOTION For (1) the Entry of a Proposed Stipulated Order of Settlement Between the United States and Certain Absolute Poker-Affiliated Entities and (2) the Interlocutory Sale of All Assets of Those Entities. MOTION For (1) the Entry of a Proposed Stipulated Order of Settlement Between the United States and Certain Absolute Poker-Affiliated Entities and (2) the Interlocutory Sale of All Assets of Those Entities.. Document filed by United States Of America. (Attachments: # 1 Text of Proposed Order)(Cowley, Jason)

UNITED STATES DISTRICT COURT
SOUTHERN DISTRICT OF NEW YORK
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UNITED STATES OF AMERICA,
:
Plaintiff,
:
- v :
POKERSTARS, et al.
:
Defendants;
:
11 Civ. 2564 (LBS)
ALL RIGHT, TITLE, AND INTEREST IN
THE ASSETS OF POKERSTARS, et al.;

:
:

Defendants-in-rem.
:
:
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MEMORANDUM OF LAW IN SUPPORT OF GOVERNMENT’S MOTION FOR
ENTRANCE OF STIPULATED ORDER OF SETTLEMENT AND ORDER FOR THE
INTERLOCUTORY SALE OF PROPERTY

PREET BHARARA,
United States Attorney for the
Southern District of New York
Sharon Cohen Levin
Jason H. Cowley
Michael D. Lockard
Assistant United States Attorneys
- of counsel -

Table of Contents
PRELIMINARY STATEMENT.. . . . . . . . . . . . . . . . . . . . . 1
BACKGROUND. . . . . . . . . . . . . . . . . . . . . . . . . . . 3
A.

The Criminal Indictment of Isai Scheinberg and
Others for various gambling, fraud, and money
laundering offenses . . . . . . . . . . . . . . . . . 3

B.

The In Rem Forfeiture and Civil Money Laundering
Complaint.. . . . . . . . . . . . . . . . . . . . . . 5

C.

The Claims of Kentucky and Avoine . . . . . . . . . . 7

D.

The Proposed Settlement With Certain Absolute
Entities. . . . . . . . . . . . . . . . . . . . . . . 8

DISCUSSION. . . . . . . . . . . . . . . . . . . . . . . . . . . 9
The Proposed Forfeited Absolute Assets Should be Sold to Avoid
Further Depreciation of the Value of the Property.. . . . . . . 9
A.

Relevant Law. . . . . . . . . . . . . . . . . . . . . 9

B.

Discussion. . . . . . . . . . . . . . . . . . . . .

10

CONCLUSION. . . . . . . . . . . . . . . . . . . . . . . . . .

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PRELIMINARY STATEMENT
The Government respectfully submits this Memorandum of
Law in support of its motion, pursuant to Rule G(7) of the
Supplemental Rules for Admiralty or Maritime Claims and Asset
Forfeiture Actions, for (1) the entrance of the proposed
stipulated order of settlement between the Government and certain
of the Absolute-Poker entities (these Absolute Poker entities
collectively, the “Absolute Poker Settlement Group,” and the
proposed settlement, “Absolute Settlement,” attached to the
Declaration of AUSA Jason H. Cowley as Exhibit A); and (2) an
order permitting the United States Marshals Service (the “USMS”)
to seize and conduct an interlocutory sale of all assets of the
Absolute Poker Settlement Group (the “Proposed Forfeited Absolute
Assets”), with the net proceeds generated by such sale to be held
by the Government as substitute res for ongoing litigation with
the two claimants – Avoine - Servico De Consultadoria E
Marketing, LDA (“Avoine”) and the Commonwealth of Kentucky
(“Kentucky”) – who have asserted an interest in the Proposed
Forfeited Absolute Assets, or such other relief as the Court may
deem to be just and proper.

Kentucky and the Absolute Poker

Settlement Group consents to this motion.

Avoine opposes the

motion.
Since the date of filing of the Amended Complaint, the
Proposed Forfeited Absolute Assets have remained in the custody
of Absolute Poker, with the exception of any funds held in

accounts that were restrained as part of the restraining order
entered in United States v. Scheinberg, et al., S3 10 Cr. 336
(LAK) on or about April 18, 2011.

The Government and the

Absolute Poker Settlement Group have entered in a proposed
Stipulation of Settlement (the Absolute Settlement), which
provides for the forfeiture of the Proposed Forfeited Absolute
Assets to the United States.
Kentucky and Avoine, however, have also asserted
ownership interests in the Proposed Forfeited Absolute Assets.
Specifically, Avoine asserts an interest in all assets of
Absolute Poker, while Kentucky asserts an interest in certain
Absolute Poker-related domain names – specifically,
absolutepoker.com and ultimatebet.com (the “Absolute Domains”).
Many of these assets, including, for example the
Absolute Domains, the database of players for Absolute Poker, and
certain other intellectual property will likely continue to
substantially decrease in value if not sold soon.

In order to

address this concern, the Government now moves for the entry of
the Absolute Settlement, forfeiting the Absolute Poker Settlement
Group’s interest in the Absolute Assets, and for an Interlocutory
Order of Sale permitting the sale of the Proposed Forfeited
Absolute Assets.

Any and all net proceeds realized from the sale

of the Proposed Forfeited Absolute Assets would, pursuant to Rule
G(7)(b)(iv) of the Supplemental Rules for Admiralty or Maritime

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Claims and Asset Forfeiture Actions, be held in “an interestbearing account maintained by the United States pending the
conclusion of the forfeiture action” as it relates to Kentucky
and Avoine.
BACKGROUND
A.

The Criminal Indictment of Isai Scheinberg and Others for
Various Gambling, Fraud, and Money Laundering Offenses
On or about March 10, 2011, a superseding indictment,

S3 10 Cr. 336 (LAK) (the “Indictment”) was filed under seal in
the Southern District of New York, charging Isai Scheinberg,
Raymond Bitar, Scott Tom, Brent Beckley, Nelson Burtnick, Paul
Tate, Ryan Lang, Bradley Franzen, Ira Rubin, Chad Elie, and John
Campos with conspiring to violate the Unlawful Internet Gambling
Enforcement Act (“UIGEA”), 31 U.S.C. § 5363, in violation of
Title 18, United States Code, 371; violating the UIGEA; operating
illegal gambling businesses, in violation of Title 18, United
States Code, Sections 1955 and 2; conspiring to commit wire fraud
and bank fraud, in violation of Title 18, United States Code,
Section 1349; and conspiring to launder money, in violation of
Title 18, United States Code, Section 1956(h).
As set forth in the Indictment, from at least in or
about November 2006, the three leading internet poker companies
doing business in the United States were PokerStars, Full Tilt
Poker, and Absolute Poker/Ultimate Bet (collectively, “the Poker
Companies”).

(Ind. ¶ 1).

PokerStars, headquartered in the Isle
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of Man, provided real-money gambling through its website,
pokerstars.com, to United States customers.

PokerStars did

business through several privately held corporations and other
entities.

(Ind. ¶ 4).

Full Tilt Poker, headquartered in

Ireland, provides real-money gambling through its website,
fulltiltpoker.com, to United States customers.

Full Tilt Poker

did business through several privately held corporations and
other entities.

(Ind. ¶ 5).

Absolute Poker, headquartered in

Costa Rica, provided real-money gambling through its websites,
absolutepoker.com and ultimatebet.com, to United States
customers.

Absolute Poker did business through several privately

held corporations and other entities.

(Ind. ¶ 6).

As described in the Indictment, because internet
gambling businesses such as those operated by the Poker Companies
were illegal under United States law, internet gambling
companies, including the Poker Companies, were not permitted by
United States banks to open bank accounts in the United States to
receive proceeds from United States gamblers.

Instead, the

principals of the Poker Companies operated through various
deceptive means designed to trick United States banks and
financial institutions into processing gambling transactions on
the Poker Companies’ behalf.

(Ind. ¶ 16).

For example, as described more fully in the Indictment,
the defendants, and others, worked with and directed others to

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deceive credit card issuers and to disguise poker payments made
using credit cards so that the issuing banks would process the
payments.

(Ind. ¶¶ 17-18).

These deceptive and fraudulent

practices included, for example, creating phony non-gambling
companies that the Poker Companies used to initiate the credit
card charges (Ind. ¶ 19), and creating pre-paid cards designed
for United States gamblers to use to transfer funds to the Poker
Companies and other gambling companies, with the purpose of the
cards disguised by fake internet web sites and phony consumer
“reviews” of the cards making it appear that the cards had some
other, legitimate, purpose.

(Ind. ¶ 20).

In addition, as described more fully in the Indictment,
the defendants, and others, worked with and directed others to
develop another method of deceiving United States banks and
financial institutions into processing their respective Poker
Companies’ internet gambling transactions through fraudulent echeck processing.

(Ind. ¶ 21).

The Poker Companies used poker

processors to establish payment processing accounts at various
United States banks and disguised from the banks the fact that
the accounts would be used to process payments for internet poker
transactions by making the transactions appear to relate to phony
internet merchants.

(Ind. ¶¶ 22-26).

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B.

The In Rem Forfeiture and Civil Money Laundering Complaint
On or about April 14, 2011, the United States commenced

the instant action against the Defendant Property by filing,
under seal, a Verified Complaint, 11 Civ. 2564 (LBS) in the
United States District Court for the Southern District of New
York, seeking the forfeiture of certain properties, including all
assets of Absolute Poker (the “Absolute Poker Assets”), pursuant
to Title 18, United States Code, Sections 1955(d), 981(a)(1)(A),
and 981(a)(1)(C), and seeking civil money laundering penalties
pursuant to Title 18, United States Code, Section 1956 against,
inter alia, Absolute Poker, Ultimate Bet, SGS Systems Inc., Trust
Services Ltd., Fiducia Exchange Ltd., Blue Water Services Ltd.,
Absolute Entertainment, S.A. and Blanca Games, Inc. of Antigua
(collectively, “Absolute Poker”).

Subsequently, on or about

September 22, 2011, a verified amended complaint in this action
(the “Amended Complaint”) was filed seeking the forfeiture of,
inter alia, all assets of Absolute Poker, and seeking civil money
laundering penalties pursuant to Title 18, United States Code,
Section 1956 against Absolute Poker.
On or about October 31, 2011, Blanca Games, Inc., on
behalf of itself and Absolute Poker, SGS Systems Inc., Trust
Services Ltd., Fiducia Exchange, Ltd., Blue Water Services Ltd.,
and Absolute Entertainment, S.A., filed a claim asserting an
interest in the Absolute Poker Assets.

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C.

The Claims of Kentucky and Avoine
On or about September 30, 2011, Kentucky filed a claim

(the “Kentucky Claim”) with respect to, inter alia,
absolutepoker.com and ultimatebet.com (the Absolute Domains).
(Docket Entry 59).1

The Kentucky Claim asserts that Kentucky is

“the true and bona fide sole owner of the [Absolute Domains] . .
. and entitled to possession, and that no other person is the
owner of or entitled to possession of the” Absolute Domains.
Kentucky Claim at 1 (emphasis added).

The Claim further stated

that Kentucky “is the owner of the domain names by virtue of its
prior seizure of said domain names, in that certain in rem civil
forfeiture action, styled Commonwealth of Kentucky, ex rel. J.
Michael Brown, Secretary Justice and Public Safety Cabinet v. 141
Internet Domain Names, 08-CI-1409.”

Claim at 1-2.

On or about

October 21, 2011, Kentucky filed an answer to the Complaint.
(Docket Number 78).
On or about January 5, 2012, Avoine filed a claim (the
“Avoine Claim”) for what appears to be the Absolute Poker Assets
in their entirety.

(Docket Number 150).

The Avoine Claim is

premised on the assertion that the assets of an entity named SGS
(BVI) Inc. were assigned to Avoine in or about 2007.

1

Avoine

Kentucky has not asserted an interest in the domain name
ub.com, which is also named as defendant res in the Complaint.
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Claim at 1.

On or about March 9, 2012, Avoine filed its answer.

(Docket Number 168).
On or about July 9, 2012, the Government filed a motion
to strike the Avoine Claim (D.E. 197).
D.

The Proposed Settlement with Certain Absolute Entities
The Government and certain entities affiliated with

Absolute Poker have entered into a proposed settlement regarding
this action (the Absolute Settlement).

The following entities

affiliated with Absolute Poker are parties to the Absolute
Settlement:
1.

Absolute Poker

2.

Ultimate Bet

3.

Absolute Entertainment, S.A.

4.

Blanca Games, Inc.

5.

Hoop & Javelin Holdings Limited

6.

Lacrosse Holdings Limited

7.

Hoop Payment Solution Services Ltd.

8.

Morning Bliss Overseas Ltd.

(Collectively, the “Absolute Poker Settlement Group”).

The

Absolute Settlement provides for the forfeiture of all assets of
the Absolute Poker Settlement Group (the “Proposed Forfeited
Absolute Assets”).
The Proposed Forfeited Absolute Assets include the
following:

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1.

The following domain names:
“Absolutepoker.com;”
“Ultimatebet.com;” and
“Ub.com;”

2.

Funds on deposit at various
financial institutions held in the
name of the Absolute Poker
Settlement Group;

3.

Receivables owed by various
entities to the Absolute Poker
Settlement Group;

4.

Various hardware assets owned by
the Absolute Poker Settlement
Group; and

5.

Various registered patents, other
intellectual property, trademarks,
and trade names of the Absolute
Poker Settlement Group.
DISCUSSION

The Proposed Forfeited Absolute Assets Should Be Sold
To Avoid Further Depreciation of the Value of the Property
A.

Relevant Law
The interlocutory sale of defendant rem is permitted by

Rule G(7) of the Supplemental Rules for Admiralty or Maritime
Claims and Asset Forfeiture Actions, Federal Rules of Civil
Procedure (“Rule G(7)”), which provides in part that “on motion
by a party or a person having custody of the property, the court
may order all or part of the property sold if . . . the property
is perishable or at risk of deterioration, decay, or injury by
being detained in custody pending the action . ..”
G(7)(b)(i)(A).

Rule

The proceeds of the sale “are a substitute res
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subject to forfeiture in place of the property that was sold.”
Rule G(7)(b)(iv).

“The proceeds must be held in an interest

bearing account maintained by the United States pending the
conclusion of the forfeiture action.”

Id.

“The purpose of an

interlocutory sale of property in a civil forfeiture action is to
preserve the monetary value of the seized property.”

United

States v. $1,133,648.97 seized from Bank of Hawaii, 2008 WL
687337, at *3 (D. Hawai‘i March 11, 2008).

“The interlocutory

sale does not require a showing of a likelihood of success on the
merits.”
B.

Id., citing Rule G(7)(b).

Discussion
An interlocutory sale of the Proposed Forfeited

Absolute Assets in essential to avoid their depreciation.

In

relation to this matter, the Government has retained Duff &
Phelps LLC (“Duff & Phelps”), a leading provider of, among other
things, corporate asset valuation.

Jaime d’Almeida, a Director

at Duff & Phelps, has provided a declaration relating to the
Proposed Forfeited Absolute Assets (the “d’Almeida Declaration,”
attached as Exhibit B to the Declaration of AUSA Jason H.
Cowley).

As explained in the d’Almeida Declaration, the value of

the intangible assets of the Absolute Poker Settlement Group will
continue to decline in value the longer that the Absolute Pokerbranded business does not operate.
As d’Almeida explains:

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d’Almeida Declaration ¶ 11.

It is well understood that the value of intangible
assets deteriorates over time. Absolute Poker and
Ultimate Bet’s intangible assets are precisely the
types of assets that would be valued for accounting
purposes in the context of a Purchase Price Allocation
and amortized over time, recognizing that the value of
these assets deteriorates over time.
Id.

As d’Almeida explains, this includes specifically the player

list for Absolute Poker and software technology affiliated with
Absolute Poker.

Id. at ¶ 12-13.

On the other side of the ledger, the interlocutory sale
of the Proposed Forfeited Absolute Assets does not prejudice
Avoine.

On the contrary, by selling the Proposed Forfeited

Absolute Assets before further deterioration of their value
during the pendency of this litigation, the liquidation will
result in more money being held as substitute res for their
claims.

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CONCLUSION
For the reasons set forth above, the Government
respectfully requests that the Court (1) enter the Absolute
Settlement; and (2) enter an order authorizing the United States
Marshals Service to take custody of the Absolute Assets and
conduct an interlocutory sale of those assets.

A proposed order

is attached hereto.
Dated:

New York, New York
July 31, 2012
Respectfully submitted,
PREET BHARARA
United States Attorney for the
Southern District of New York
Attorney for the Plaintiff
United States of America

By:

/s/
Sharon Cohen Levin
Michael D. Lockard
Jason H. Cowley
Assistant United States Attorney
[phone]/2193/2479

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