Unites States v. Pokerstars, et al

Filing 257

MEMORANDUM OF LAW in Opposition 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 Avoine-Servico de Consultadoria e Marketing LDA. (Rodes, Leonard)

UNITED STATES DISTRICT COURT
SOUTHERN DISTRICT OF NEW YORK
-----------------------------------------------------x
UNITED STATES OF AMERICA,
:
:
Plaintiff,
:
v.
:
:
POKERSTARS, et al.,
:
:
Defendants;
:
:
ALL RIGHT, TITLE AND INTEREST IN :
THE ASSETS OF POKERSTARS, et al., :
:
Defendants-in-rem. :
-----------------------------------------------------x

11 Civ. 2564 (LBS)

CLAIMANT AVOINE’S MEMORANDUM OF LAW IN OPPOSITION
TO THE GOVERNMENT’S MOTION (D.E.237-238) “FOR
ENTRANCE OF STIPULATED ORDER OF SETTLEMENT AND
ORDER FOR THE INTERLOCUTORY SALE OF PROPERTY”

TRACHTENBERG RODES & FRIEDBERG LLP
Attorneys for Claimant Avoine – Servico
de Consultadoria e Marketing LDA
545 Fifth Avenue
New York, New York 10017
[phone]
(LR3675)

TABLE OF CONTENTS

Page

Table of Authorities

ii

PRELIMINARY STATEMENT

1

ARGUMENT

3

I.

II.

III.

The Government Has Not Demonstrated Grounds
for An Interlocutory Sale Under Rule G(7)

3

Even Assuming There Were A Risk Of “Deterioration,”
The Court Should, In the Exercise Of Its Discretion,
Refrain From Authorizing A Premature Sale

5

Dismissal of the Blanca Entities Should Be Conditional

7

CONCLUSION

11

i

TABLE OF AUTHORITIES

Page
CASES
Beaver Associates v. Cannon, 59 F.R.D. 508 (S.D.N.Y. 1973)

8

Eaddy v. Little, 234 F. Supp. 377 (E.D.S.C. 1964)

9

Gallagher v. Donald, III, 1993 WL 488215 (S.D.N.Y. Nov. 16, 1993)

9

Scandinavian Airlines Sys. v. Reactive Metals, Inc.,
1972 WL 123078, 16 Fed.R.Serv.2d 1058 (E.D.N.Y. Nov. 15, 1972)

8

United States v. $1,133,648.97 seized from Bank of Hawaii,
2008 WL 687337 (D. Hawaii Mar. 11, 2008)

4, 5

United States v. $6,787.00 in U.S. Currency,
2007 WL 496747 (N.D. Ga. Feb. 13, 2007)

4

United States v. Approx. 81,454 Cans of Baby Formula,
560 F.3d 638 (7th Cir.2009)

6

U.S. v. DiCristina, 2012 WL 3573895 (E.D.N.Y. Aug. 21, 2012)

7

United States v. Real Properties Situated at 105 Graff Lane,
Quarry Creek, Charleston, Kanawha County, W. Va.,
2011 WL 5975820 (S.D.W. Va. Nov. 28, 2011)

4

Varnelo v. Eastwind Transp., Ltd., 2003 WL 230741 (S.D.N.Y. Feb. 3, 2003)

9

RULES
Fed.R.Civ.P. 41

7-10

Rule G(7), Supplemental Rules for Admiralty
or Maritime Claims and Asset Forfeiture Actions

passim

ii

Claimant Avoine – Service de Consultadoria e Marketing LDA (“Avoine”) respectfully
submits this memorandum of law in opposition to the Government’s motion (D.E. 237) seeking
(1) approval of a settlement agreement unconditionally dismissing from this case claimant
Blanca Games and its affiliates (the “Blanca Entities”); and (2) an order permitting seizure and
sale of all of the intellectual property owned by Avoine (the “AP Assets”).
PRELIMINARY STATEMENT

First, the motion for interlocutory sale should be denied because the Government has
failed to demonstrate that the AP Assets are “at risk of deterioration, decay, or injury by being
detained in custody pending the action,” as Rule G(7) requires. Indeed, nowhere does the
Government suggest (much less prove) that its detention of Avoine’s intellectual property will
cause the property’s “deterioration” or “decay” or “injury.” Instead, it claims only that the AP
Assets may “depreciate” in value – and, even then, only its “value for accounting purposes”
(emphasis added). But the Government cites no case (and we have found none) holding that
“depreciation” (without also “deterioration, decay, or injury” to the property itself) justifies a
Rule G(7) interlocutory sale order. If “depreciation” alone were enough, there would be
interlocutory sales taking place routinely in all forfeiture cases.
Moreover, Avoine respectfully submits that it would be an imprudent exercise of this
Court discretion to order an interlocutory sale. The AP Assets – which by their nature promise a
stream of revenues of indefinite duration – should not be disposed of at a deeply discounted price
by the Government before it proves a prima facie case of entitlement to forfeiture. This is
especially so now, after Judge Weinstein had held – in a thoroughly reasoned and amply
supported decision – that poker is predominantly a game of skill, and not a game of chance. If
that decision portends the conclusion here that internet poker is, likewise, not a game of chance,
but instead predominantly a game of skill, then the Government’s case will fail. Furthermore,
1

the Government is not even in a position to sell the AP Assets, because it has admitted to Avoine
that it does not yet possess the most important of those assets: i.e., the software used in the
operation of the Absolute Poker web based business (the “AP Software”). While the
Government has advised that an unnamed Korean company claims to possess a copy of the AP
Software (wrongful possession, we note), and that the Korean company is willing to turn its copy
over to the Government, no sale of AP Assets should even be contemplated until the Government
is able to represent to the Court, and to potential purchasers: (a) that it has custody of the AP
Software (and that it is, in fact, operational), and (b) that its Korean transferor retains neither a
copy of, nor any rights in, the software. Short of that, fair value in an auction is unachievable.
Finally, to the extent the Government’s motion seeks the dismissal of the Blanca Entities
from this case, it should be granted only on the condition that the Blanca Entities, all of which
are foreign companies beyond this or any U.S. court’s subpoena power, comply with Avoine’s
discovery requests (served several months ago). The Blanca Entities became parties here
voluntarily, filing a verified claim asserting ownership of the AP Assets – a claim in
irreconcilable conflict with Avoine’s claim of ownership. The Government has taken the Blanca
Entities’ side in that conflict; indeed, the Government has filed a motion (D.E.197) to dismiss
Avoine’s claim (D.E.150) precisely because it views the Blanca Entities as the “real” owners of
the AP Assets, and argues that Avoine is merely a “straw owner.” By moving now to dismiss the
Blanca Entities unconditionally from this case, the Government effectively seeks to impede
Avoine’s effort to obtain the very discovery it requires to disprove the Government’s “straw
owner” argument. To prevent such unfairness, the Court should condition the Blanca Entities’
dismissal on their compliance with Avoine’s discovery requests.

2

ARGUMENT
I.

The Government Has Not Demonstrated Grounds
for An Interlocutory Sale Under Rule G(7).
Insofar as is pertinent here, Rule G(7) provides that in a civil forfeiture action, upon

motion by a party “having custody of the [defendant] property,” a Court “may” order an
interlocutory sale of the property if “the property is … at risk of deterioration, decay, or injury by
being detained in custody pending the action; …” Rule G(7)(b)(i)(A). Thus, Rule G(7) confers
discretion to order an interlocutory sale of the AP Assets only if the Government proves (1) that
it is a party “having custody” of the property proposed to be sold; (2) that the “property” itself is
“at risk of deterioration, decay, or injury;” and (3) that the risk exists because of the
Government’s “detention” of the property.
First, the Government has not shown that it is a party “having custody” of the most
important component of the AP Assets: i.e., the operating software for the Absolute Poker
website. In fact, it has admitted to Avoine that it does not have custody of that software. See the
accompanying Declaration of Leonard A. Rodes in opposition to the Government’s motion
(“Rodes Aff.”), at ¶2. While the Government has advised the undersigned counsel that it has
been “in contact” with an unnamed Korean company that claims to possess a copy of the
Absolute Poker operating software, and that the Korean company has represented to the
Government that it would provide the Government with a copy of the software (see Rodes Aff.
¶3), there is no indication in the Government’s moving papers that the software has been
provided to the Government; or that the Government has verified that the software is valid and
operational; or that the Government has obtained the Korean company’s written release of any
arguable interest in the software. Unless and until the Government is in a position to represent to
this Court that it has received the software (and that it is operational and free from any claims of

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parties who would not be bound by a forfeiture judgment), it is simply not a party “having
custody” of the software.
Next, the Government neither alleges nor demonstrates that the AP Assets are at risk of
“deterioration” or “decay” or “injury.” Rather, the Government argues only that, while the
Absolute Poker website sits dormant, the value of the AP Assets may “depreciate.”
“Depreciation” is not mentioned in Rule G(7). And, the Government has cited, and our
own research has disclosed, no case in which defendant property that was not at risk of
“deterioration” or “decay” or “injury,” was nonetheless ordered to be sold under Rule
G(7)(b)(i)(A) simply because its value was expected to decline over time. If “depreciation” were
the standard, then forfeiture plaintiffs could always obtain interlocutory sales, as it is the nature
of all property to “depreciate.” In short, “depreciation” by itself is irrelevant. United States v.
Real Properties Situated at 105 Graff Lane, Quarry Creek, Charleston, Kanawha County, W.
Va., 2011 WL 5975820 *2 (S.D.W.Va. Nov. 28, 2011) (“Rule G(7)(A) mentions ‘deterioration,
decay, or injury,’ but it does not cite depreciation as a valid basis for interlocutory sale.”).
Thus, where actual deterioration of the condition of the property itself is not shown, the
motion will be denied. United States v. $6,787.00 in U.S. Currency, 2007 WL 496747 *2 n.1
(N.D.Ga. Feb. 13, 2007) (“The risks that justified interlocutory sales of real property in these
cases are absent here. The Jaguar is not likely to deteriorate, or suffer vandalism or repossession,
in the Government's care.”).
The sole case relied on by the Government (at Govt. Br. p. 10) – i.e., United States v.
$1,133,648.97 seized from Bank of Hawaii, 2008 WL 687337 (D. Hawaii Mar. 11,
2008)(adopting forfeiture order of magistrate judge) – is plainly inapposite.
First, in Bank of Hawaii, the magistrate judge expressly found that the “condition of the

4

Subject Defendant Properties … are [sic] deteriorating.” Id. at *5 (emphasis added). In the
instant case, the Government does not even claim, much less prove, any “deterioration” in the
“condition” of the AP Assets.
Second, the magistrate judge in Bank of Hawaii concluded that forfeiture was proper
under a subparagraph (B) of Rule G(7)(b)(i), based on his express finding that “[t]he cost and
expense of storing and maintaining some of the Subject Defendant Properties, most especially
the Defendant Vehicles, is excessive and disproportionate to their fair market value.” Here, the
Government relies only on subparagraph (A) of Rule G(7)(b)(i). It neither invokes Rule
G(7)(b)(i)(B), nor presents any storage-cost-vs.-market-value analysis.
While the court in Bank of Hawaii does use the word “depreciation” a few times, there is
nothing in the decision to suggest that that usage was anything other than shorthand for the
statutory language. Certainly, the Bank of Hawaii court cites no authority for the proposition
that the risk of “depreciation” alone – without either “deteriorating condition” or excessive
storage expense – would satisfy Rule G(7) preconditions for sale.1
Accordingly, the Government’s motion, having failed to demonstrate the existence of
grounds for interlocutory sale under Rule G(7)(b)(i)(A), should be denied.
II.

Even Assuming There Were A Risk Of “Deterioration,”
The Court Should, In the Exercise Of Its Discretion,
Refrain From Authorizing A Premature Sale
Rule G(7) does not require an interlocutory sale if the Government provides proof of one

of the statutory grounds. Rather, Rule G(7) states only that a court “may” in the exercise of its
1

Even respecting the alleged “depreciation” of the AP Assets, the Government has not
demonstrated that that depreciation is or will be caused “by being detained in custody.” Rather, the
Government claims only that the depreciation is portended by the dormancy of the Absolute Poker
website. Indeed, we understand that the Government has, during the pendency of this case, permitted all
three poker sites implicated in the case to be operated (with conditions and restrictions) – thereby
forestalling “depreciation” notwithstanding that the property was “detained in custody.”

5

discretion order a sale. See United States v. Approx. 81,454 Cans of Baby Formula, 560 F.3d
638, 641 (7th Cir.2009) (district court’s discretion under Rule G(7) is “considerable”). Here,
even assuming that the Government had presented in its moving papers proof of “deterioration,
decay or injury by being detained in custody” (which it has not), this Court should nonetheless
decline to exercise its discretion to order a sale of the AP Assets.
Avoine’s research indicates that no federal court has ever granted a motion for a Rule
G(7) interlocutory sale of intellectual property. Respectfully, this Court should not be the first to
do so.
Intellectual property, unlike the cars at issue in the Bank of Hawaii case relied on by the
Government, produces revenue indefinitely. In the case of the AP Assets, Avoine can expect –
once it quiets its title to those assets in this case and finds a suitable and strong licensee run by
competent management – to restart a stream of revenue that will last for many years. And, that
revenue will be formidable, if the experience of Avoine’s precedessor in interest, SGS (BVI),
Ltd. (“SGS”), is any indication. For example, in 2005, based in part on the quality of its
intellectual property (including trademarks, domain names, and the AP Software), SGS
generated revenue in excess of $25 million. More importantly, it was experiencing phenomenal
growth, having quintupled its revenues in just one year.
Here, if the Court permits the Government to sell the AP Assets, Avoine’s property will
be lost, and even if it should successfully defend the remainder of the case, it will never get back
its rights to an increasing revenue stream of indefinite duration. Instead, it will receive the net
proceeds of a fire sale administered by third parties whose objectives do not even recognize the
interests of Avoine’s shareholders and creditors. In short, an interlocutory sale of the AP Assets
will with certainty cause irreparable injury to Avoine, while the risks of “depreciation” in the

6

event no interlocutory sale takes place are uncertain (and certainly not quantified, or even
explained, in the Government’s moving papers).
While the specter of irreparable harm as a result of court order should always be reason
for pause, this Court should be all the more reticent to permit such harm here – where the
Government’s case has been cast in serious doubt by the recent decision of District Judge
Weinstein in the case of U.S. v. DiCristina, 2012 WL 3573895 (E.D.N.Y. Aug. 21, 2012).
The Government’s forfeiture claim rests substantially on allegations of “illegal gambling”
under 18 U.S.C. § 1955 (“IGBA”). See the Government’s Verified First Amended Complaint
(D.E. 53), passim. But in DiCristina, the Court held that poker is a game of skill, and not a game
of chance, and therefore that poker does not constitute “illegal gambling” within the meaning of
IGBA. Assuming that this Court were to agree with DiCristina (or that DiCristina were to be
affirmed by the Second Circuit), the Government’s case against the AP Assets would likely fail.
It would seem imprudent to order a premature sale of Avoine’s income producing intellectual
property in such circumstances.
Finally, as already noted above, the Government is not even in a position to maximize
value from the AP Assets – because it has not obtained custody of the most important component
of those assets: the AP Software. Without the software, the bidders for the other AP Assets will
be fewer, and will pay less, than would be the case if the Government were in custody of, and in
a position to sell, all of the AP Assets as a package.
III.

Dismissal of the Blanca Entities Should Be Conditional
Nowhere in the Government’s moving papers will the Court find any reference to

Fed.R.Civ.P. 41 (“Dismissal of Action”). Yet, the “settlement” that is the subject of the
Government’s so-called motion “for entry of proposed order of stipulated settlement between the

7

Government and Absolute Poker-affiliates entities” (see D.E. 237, “Notice of Motion”) does
contemplate the dismissal of the Blanca Entities from this case, and is therefore a dismissal
subject to the requirements of Rule 41.
Dismissal “by court order” is governed specifically by Rule 41(a)(2), which states in
pertinent part: “an action may be dismissed at the plaintiff's request only by court order, on
terms that the court considers proper.” (Emphasis added).
It is well-settled that the court must consider the interests of all parties remaining in the
case and mitigate the prejudice which may be caused by such dismissal prior to allowing the
voluntary dismissal of a party. See, e.g., Beaver Associates v. Cannon, 59 F.R.D. 508, 510
(S.D.N.Y. 1973) (Fed.R.Civ.P. 41(a)(2) “calls for the exercise of judicial discretion to avoid an
unfair effect on anyone else incident upon such a termination of the suit. The fact that the suit
will be dismissed with prejudice to the plaintiff is not the only consideration before the Court;
the possible effect on others must be considered.”) (citations omitted); Scandinavian Airlines
Sys. v. Reactive Metals, Inc., 1972 WL 123078 *2, 16 Fed. R. Serv. 2d 1058 (E.D.N.Y. Nov. 15,
1972) (“The thrust of the rule is primarily to prevent voluntary dismissals which unfairly affect
the defendants, and to permit the imposition of curative conditions. There is no absolute right to
a voluntary dismissal even if plaintiff agrees to the imposition of conditions. The prime
consideration for the court in the exercise of its discretion is to insure substantial justice to all
parties. Decision is to be made in accordance with what would be fairest and cause the least
hardship to the parties.”).
In order to mitigate the prejudice that may be caused by a dismissal, courts may and often
do impose conditions on the parties seeking the voluntary dismissal. Scandinavian Airlines Sys.
v. Reactive Metals, Inc., supra, *2 (Voluntary dismissal “rests in the discretion of the court,

8

which may impose conditions”). The rule expressly states that the court will only issue a
dismissal order “on terms that the court considers proper.” Fed.R.Civ.P. 41(a)(2).
In fact, this Court and others often condition dismissal of a party on its compliance with
discovery demands, as a way to mitigate prejudice to the other parties to the case. Varnelo v.
Eastwind Transp., Ltd., 2003 WL 230741 *23 (S.D.N.Y. Feb. 3, 2003) adhered to sub nom.
Varnelo ex rel. Estate of Varnelo v. Eastwind Transp., Ltd., 2004 WL 103428 (S.D.N.Y. Jan. 23,
2004) (“Nevertheless, to alleviate any difficulty in obtaining such discovery, this Court will
condition any dismissal order on defendants' agreement to make any relevant Greek witnesses
they control, such as Captain Lekkos, available in the Russian forum”); Gallagher v. Donald, III,
1993 WL 488215 *1 (S.D.N.Y. Nov. 16, 1993) (“production of documents may be required as a
precondition to dismissal without prejudice in such instances. Hudson Engineering Co. v.
Bingham Pump Co., 298 F.Supp. 387 (SDNY1969)”); Eaddy v. Little, 234 F. Supp. 377, 380
(E.D.S.C. 1964) (“Defendant argues that dismissal would prejudice its rights heretofore noticed
as to the production of certain documents pursuant to Rule 34 of the Federal Rules of Civil
Procedure. The Court therefore finds it proper, for protection of defendant that the production of
such documents be a prerequisite to a voluntary dismissal without prejudice; under such
circumstances defendant can lose no substantial right by the dismissal.”).
Avoine respectfully submits that the Government’s Rule 41(a)(2) motion for an order,
inter alia, dismissing the Blanca Entities from this case should be conditioned on the Blanca
Entities’ compliance with discovery requests of remaining parties with an interest in the AP
Assets.
None of the Blanca Entities is an involuntary participant in this case; none is a defendant.
To the contrary, the Blanca Entities elected to participate here as claimants, pursuant to a verified

9

claim filed October 31, 2011 (D.E.85). Pursuant to that claim (the “Blanca Claim”), the Blanca
Entities have, under oath, asserted an ownership interest in the AP Assets.
The Blanca Claim irreconcilably conflicts with Avoine’s verified claim to the AP Assets,
filed on January 5, 2012 (D.E.150). Avoine filed its verified answer on March 9, 2012
(D.E.168), and soon thereafter served interrogatories and document requests (“Avoine’s
Discovery Requests”) on Blanca Entities’ counsel of record, Blank Rome. Rodes Aff., Exhs. AB. In part, those discovery requests sought information relevant to the conflicting ownership
claims of the parties. To date, Blanca Games has not objected to, or otherwise responded to,
Avoine’s Discovery Requests.
Not only have the Blanca Entities flouted Avoine’s Discovery Requests, the Government
has taken action that, intentionally or not, would assist them in that evasiveness. Thus, the
Government has both moved to dismiss Avoine’s claim (D.E.197) based on the argument that it
is a mere “straw owner” of the AP Assets (and that the Blanca Entities are the true owner), and
moved for an order dismissing the Blanca Entities from this action.
In other words, while the Government argues that the Blanca Entities’ rights trump
Avoine’s rights, it simultaneously seeks an unconditional dismissal that would excuse the Blanca
Entities from producing proof of its rights or their superiority to Avoine’s rights.
An unconditional dismissal of the Blanca Entities from this case would unduly and
unfairly prejudice Avoine as it tries to prepare its defense to the Government’s claim that it is
merely a “straw owner” of the AP Assets.
Finally, it is no answer to say that Avoine may subpoena the same information from the
Blanca Entities. All of the Blanca Entities are foreign entities beyond the subpoena power of this

10