Unites States v. Pokerstars, et al

Filing 259

REPLY MEMORANDUM OF LAW in Support re: 203 MOTION to Strike Document No. 62 (Claim of Cardroom International).. Document filed by United States Of America. (Lockard, Michael)

UNITED STATES DISTRICT COURT
SOUTHERN DISTRICT OF NEW YORK
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UNITED STATES OF AMERICA,
:
Plaintiff,

:
11 Civ. 2564 (LBS)

- v. -

:

POKERSTARS, et al.

:

Defendants;

:

ALL RIGHT, TITLE AND INTEREST IN THE
ASSETS OF POKERSTARS, et al.;

:
:

Defendants-in-rem.
:
- - - - - - - - - - - - - - - - - - - x

REPLY MEMORANDUM OF LAW IN FURTHER SUPPORT
OF THE GOVERNMENT’S MOTION TO STRIKE THE CLAIM
OF CARDROOM INTERNATIONAL, LLC

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 -

PRELIMINARY STATEMENT
The Government respectfully submits this reply
memorandum of law in further support of its motion, pursuant to
Rule 12(b) and (c) of the Federal Rules of Civil Procedure and
Rule G(8)(c) of the Supplemental Rules for Admiralty and Maritime
Claims, to strike the claim filed in this in rem forfeiture
action by Cardroom International, LLC (“Cardroom” or “Claimant”).
The Government moved to strike Cardroom’s claim, which sought to
assert an interest in the assets of Full Tilt Poker and
PokerStars based on a pending civil action filed by Cardroom
against those groups of companies seeking monetary damages in the
amount of $30 million.
In its opposition to the motion to strike, Cardroom
does not contest that it lacks standing to assert an interest in
any property of Full Tilt Poker or PokerStars based on its
pending and still-unresolved claims for money damages in
California state court.

Instead, Cardroom now claims an interest

in funds forfeited in this action based on an entirely new theory
and entirely new set of purported facts, and requests permission
to file an amended claim.

Cardroom now claims that the

forfeiture of Full Tilt Poker’s software, among other of the
company’s assets, and transfer of those assets to PokerStars as
part of the settlement between those entities and the United
States caused a breach of a 2003 agreement (an agreement that
Cardroom does not attach to its opposition and claims that it

does not have a copy of) purportedly requiring Cardroom’s consent
to the transfer of certain of Full Tilt’s copyright interests in
software used by Full Tilt Poker in 2003.

Cardroom’s new theory,

however, still fails to establish either a statutory claim under
18 U.S.C. § 983(d) or standing to assert an interest in Full Tilt
Poker’s forfeited assets.

Cardroom has merely asserted a

potential civil claim for breach of contract, not an ownership
interest in Full Tilt’s forfeited assets.
Moreover, Cardroom’s attempt to raise a new theory of
standing based on the 2003 agreement, raised for the first time a
year after Cardroom’s original, deficient claim and after
Cardroom stipulated to the forfeiture and transfer of assets
about which it now seeks to complain, smacks of undue delay, bad
faith, and dilatory motive, and would cause undue prejudice to
the United States.
Accordingly, the Government’s motion to strike the
Cardroom’s claim should be granted and Cardroom’s request for
leave to amend should be denied.
FACTUAL AND PROCEDURAL BACKGROUND
A.

Cardroom’s Claim and Answer
On September 30, 2011, Cardroom filed a claim in this

action (the “Claim”) asserting an interest in $30,000,000 worth
of defendant property relating to PokerStars, Full Tilt Poker,
and the Full Tilt Poker insiders named in the amended complaint.

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(Claim at 2).
Cardroom made its claim to the above-referenced funds:
based on damages suffered as a result of
defendants’ [] violation of, inter alia, the
Racketeer Influenced and Corrupt Organization
Act, which has caused damage to CARDROOM
INTERNATIONAL, LLC, in an amount of no less
than thirty million dollars ($30,000,000). A
lawsuit is being filed today, September 30,
2011, simultaneously herewith in the Santa
Monica Division of the Superior Court of
California, and Claimant desires to satisfy
the inevitable judgment out of the Defendant
Funds.
(Id. at 2-3).

Cardroom contended that it will have an ownership

interest in $30,000,000 in funds based its expectation of an
“inevitable judgment” in its favor in the state court action.
(Id. at 3).
On that same date, Cardroom filed a civil RICO action
in California state court, Cardroom International LLC v. Mark
Scheinberg, et al., No. SC114330 (Super. Ct. Cal. L.A. County,
Sept. 30, 2011) (the “California Complaint”), alleging violations
of the (1) Racketeer-Influenced Corrupt Organizations Act
(“RICO”), 18 U.S.C. § 1964 et seq.; (2) Florida Anti-Trust Act,
Fla. Stat. 542; and (3) Cartwright Act, Cal. Bus. & Prof. Code §
16700 et seq. (the “California Action”).1

In the California

Complaint, Cardroom alleges that:

1

A copy of the California Complaint was attached to
Cardroom’s Answer in this matter. (Docket No. 79). Cardroom
refers to the California Action in its Claim, p. 3.
3

34.

Cardroom owns a mature and proven internet
poker peer-to-peer system. It has sought to
license its technology both for the real
money and play money areas. However, the
efforts of the company to conduct business
were repeatedly stymied by the illegal
conduct of the Defendants, arising from their
illegal and anti-competitive servicing of
United States poker players to play online.

35.

. . . Because the Full Tilt Defendants and
the Pokerstars Defendants successfully
cooperated in finding mechanisms for
illegally transferring money to and from
United States players after the passage of
the UIGEA, they obtained a dominant position
in the world market. . .

(California Complaint, ¶¶ 34-35).
On October 21, 2011, Cardroom filed an answer (the
“Answer”) in which Cardroom conceded that it asserted a
“contingent claim” that was “not at this time enforceable.”
(Answer ¶ 3).

Neither Cardroom’s Claim nor its Answer made any

contention that Cardroom had an ownership interest in any aspects
of Full Tilt’s software.
B.

The Government’s Motion to Strike
On or about July 9, 2012, the Government moved to

strike Cardroom’s claim based on the fact that Cardroom did not
assert an interest in any specific res, but rather, “grounds its
claim on a hypothetical future judgment against Full Tilt Poker
and PokerStars in the California Action.”
set forth in that motion:

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(Gov. Mot. at 11).

As

Even assuming arguendo that Cardroom were to
prevail in the California Action and obtain a
$30,000,000 judgment against Full Tilt Poker
and PokerStars, such a judgment still would
not confer standing in this matter. It is
well established that even holding an in
personam judgment against a party does not
confer an interest sufficient to assert a
claim against that party’s assets in a
forfeiture action.
(Gov. Mot at. 12 (citing United States v. All Assets Held at Bank
Julius Baer & Co., 772 F. Supp. 2d. 191, 199 (D.D.C. 2011)).
C.

Cardroom’s Consent to the Forfeiture of Certain Assets of
Full Tilt Poker and Transfer of Those Assets to PokerStars
On or about July 27, 2012, in anticipation of the

settlement agreements that were eventually entered in this action
between the Government and the Full Tilt Poker entities (“Full
Tilt”) and PokerStars entities (“PokerStars”), the Government and
Cardroom entered into a written stipulation (the “Cardroom
Stipulation” or “Cardroom Stip.”, Exhibit B to the Sanai
Declaration).

The stipulation expressly noted that the

settlements involved “the forfeiture of certain assets of the
Full Tilt Group . . . and the transfer of those assets to the
PokerStars Companies . . .”

(Cardroom Stip. at 3).

Pursuant to

the stipulation, (a) Cardroom consented to the forfeiture of
certain assets of the Full Tilt Group as part of the settlement
reached between the United States and Full Tilt Poker and
PokerStars, and (b) the Government agreed to “to hold $30,000,000
in funds received by the United States in connection with the

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settlement with the Full Tilt Group and the PokerStars Companies
(the ‘Substitute Res’) as substitute res for the Forfeited Full
Tilt Assets subject to Cardroom’s claim.”

(Cardroom Stip. ¶ 2).

During the Government’s communications with Cardroom’s
counsel about the potential settlements with Full Tilt Poker and
PokerStars and about the proposed Cardroom Stipulation,
Cardroom’s counsel never raised any purported ownership interests
claimed by Cardroom in any of Full Tilt Poker’s specific assets,
including any ownership interests in software or copyright
interests in software; and never raised any purported
restrictions on the transfer of any forfeited assets of Full Tilt
Poker, including any software or copyrights.

(Declaration of

Jason H. Cowley ¶ 6).
On or about July 31, 2012, the Court entered the
stipulated orders of settlement involving Full Tilt and
PokerStars.
D.

(D.E. 240 & 241).

Cardroom’s Opposition to the Motion to Strike and its
Request for Leave to Amend
On or about August 20, 2012, Cardroom filed its

response to the Government’s motion to strike.

In its

opposition, Cardroom does not contest the Government’s motion to
dismiss its Claim and Answer – indeed, Cardroom does not even
address the arguments raised in the motion to strike.
Accordingly, there is no dispute that Cardroom’s Claim is
deficient.
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Instead, Cardroom seeks to assert an entirely new claim
based on entirely different facts than those set forth in its
Claim and Answer and seeks permission to amend its pleadings.
Cardroom argues that, as a result of the settlements with Full
Tilt Poker and PokerStars and the Cardroom Stipulation, Cardroom
now has an ownership claim either in aspects of Full Tilt Poker’s
forfeited software or in the Substitute Res.

In an attorney

declaration, Cardroom claims that in 2003, a predecessor of
Cardroom (BH Development) entered into a settlement agreement
with a group of investors (the “Jesus Coalition”) that later
formed the Full Tilt Group (the “2003 Agreement”).
¶¶ 3-4).

(Sanai Decl.

According to Cardroom’s counsel, the 2003 Agreement

resolved disputes between BH Development and the Jesus Coalition
over BH Development software by, among other things, (1) giving
the Jesus Coalition a joint copyright interest in the software,
excluding certain graphics elements, and (2) providing that
neither BH Development nor the Jesus Coalition could transfer
their copyright interests to unaffiliated persons or entities
without permission from the other side.

(Id. ¶ 5).

Cardroom

purportedly succeeded to BH Development’s interests under the
2003 Agreement as a result of BH Development’s 2006 bankruptcy
and 2007 transfer of its software and other interests to a
corporate affiliate of Cardroom’s.

(Id. ¶¶ 7-9).

not attach the agreement to its opposition.

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Cardroom does

(Id. ¶ 8).

Cardroom’s attorney declaration contains no further
information about the terms of the 2003 Agreement.

Cardroom’s

counsel does not say, for example, whether the 2003 Agreement
creates remedies for any breach of the transfer provisions or
whether the 2003 Agreement governs derivative works or
improvements of BH Development’s 2003 software code.1
In its opposition brief, Cardroom goes further and also
argues that: (1) the 2003 Agreement applies to BH Development’s
2003 software as well as “all derivative works subsequently
created” by Full Tilt Poker (Cardroom Opp. at 1);2 (2) Cardroom
is a joint owner of assets transferred to PokerStars (id. at 2);
and (3) Cardroom did not consent to the transfer of Full Tilt
Poker’s software to PokerStars, and thus Cardroom now is the sole
owner of the Substitute Res.

(Id. at 2, 8, 10).

Cardroom seeks

permission to amend its claim to include the Substitute Res and,
potentially, additional funds forfeited by the United States.
(Id. at 10).

Cardroom does not attach any proposed amended

pleadings to its opposition.

1

Cardroom’s attorney declaration contains additional
allegations about communications with the Government which are
inaccurate but irrelevant to the merits of this motion and to
Cardroom’s request for leave to amend. Accordingly, while the
Government does not concede those allegations, we do not
specifically address them here.
2

Cardroom relies on 17 U.S.C. § 103 for this assertion,
but does not say whether the 2003 Agreement addresses derivative
works or how.
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ARGUMENT
I.

CARDROOM’S CLAIM SHOULD BE STRICKEN
In its response, Cardroom does not even contest the

Government’s motion to strike the Claim as filed by Cardroom in
September 2011.

Cardroom’s claim was explicitly premised on an

“inevitable judgment” for monetary damages in an action Cardroom
filed in California state court on the same day it filed its
claim in this action.

Cardroom does not dispute that this is

utterly insufficient to confer standing for a claim for any of
the defendant property in this action.
Thus, Cardroom’s claim should be stricken.

And, for

the reasons discussed below, Cardroom’s request for permission to
amend its claim should be denied.
II.

LEAVE TO AMEND SHOULD BE DENIED BASED ON FUTILITY, UNDUE
DELAY, AND UNDUE PREJUDICE
A.

Relevant Law
Though courts generally grant a party leave to amend

its claim, it may also deny a motion to amend a pleading “where
there is ‘undue delay, bad faith, dilatory motives or undue
prejudice to the opposing party,’ or where such amendment would
be futile.”

Orthocraft, Inc. v. Sprint Spectrum L.P., 98 CV 5007

(SJ), 2002 WL 31640477, at *1 (E.D.N.Y. Nov. 16, 2002) (citing
Fed. R. Civ. P. 15(a)); see also In re Tamoxifen Citrate
Antitrust Litig., 466 F.3d 187, 220 (2d Cir. 2006) (“[W]here
amendment would be futile, denial of leave to amend is proper”).
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“Granting leave to amend is futile if it appears that plaintiff
cannot address the deficiencies identified by the court and
allege facts sufficient to support the claim.”

Panther Partners

Inc. v. Ikanos Comms., Inc., 347 F. App’x 617, 622 (2d Cir.
2009).

“In considering whether to grant a motion for leave to

amend, the court may properly take into account the futility
associated with the newly-added claims or defenses.”

Clarke v.

Max Advisors, LLC, 235 F. Supp. 2d 130, 151 (N.D.N.Y. 2002)
(citations omitted) (denying leave to amend to assert certain
affirmative defenses) (citations omitted).
B.

Discussion
Cardroom’s attempt to assert an entirely new claim in

this matter based on an entirely new theory of standing should be
roundly rejected by the Court.

Even assuming the accuracy of the

facts alleged in Cardroom’s attorney declaration, those facts do
not show a meritorious claim or standing to assert an interest in
any assets forfeited from Full Tilt Poker.
amendment Cardroom requests would be futile.

Accordingly, the
Furthermore,

Cardroom could have asserted its purported joint interest in
software and copyrights owned by Full Tilt Poker nearly a year
ago when Cardroom filed its original, deficient claim.
Accordingly, Cardroom’s proposed amendment should be denied on
the grounds of undue delay and prejudice.

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1.

Undue Delay, Prejudice, and Bad Faith
Though Cardroom attempts to argue that it could not

have asserted its purported interests under the 2003 Agreement
prior to the Cardroom Stipulation and the settlement stipulations
with Full Tilt Poker and PokerStars, the joint rights Cardroom
seeks to assert were, under Cardroom’s own allegations, created
in 2003 and acquired by Cardroom in approximately 2007.

See

Cardroom Opp. at 1 (the 2003 Agreement resulted in the Jesus
Coalition receiving “an undivided joint ownership interest
alongside BH Development” and discussing “BH Development’s joint
ownership in the copyright and other associated rights in the
software”); id. at 1-2 (“BH Development and the Full Tilt Poker
group used the jointly-owned software”); id. at 5 (describing the
transfer of “the joint copyrights in the software” from the BH
Development bankruptcy estate to an affiliate of Cardroom); id.
at 8 (discussing Cardroom’s “joint ownership of the software”
prior to the Full Tilt Poker and PokerStars settlements); id. at
10 (asserting that “Cardroom co-owned a substantial portion” of
assets transferred to PokerStars).
Thus, Cardroom’s purported interests in Full Tilt
Poker’s software and copyrights could have been asserted in
Cardroom’s original claim.

Cardroom’s late effort to assert

those interests in an effort to rescue its facially deficient
claim and answer is the result of undue and unjustifiable delay.

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Rule G(5)(a) of the Supplemental Rules for Certain Admiralty and
Maritime Claims establishes the deadlines for filing claims in a
forfeiture action.

“A claim is an important safeguard against

the filing of false or frivolous claims because the Government
has an opportunity to know the nature of the interest in the
property at the outset of the forfeiture action” so that it can
seek standing discovery.

United States v. $25,790 in U.S.

Currency, 2010 WL 2671754, at *3 (D. Md. July 2, 2010) (emphasis
added).

Similarly, a claimant’s claim informs the Government’s

decisions about resolving claims and filing motions.

Cardroom’s

untimely request to file a claim asserting a new interest in
property and premised on a new theory of standing undermines
these policy considerations.
Moreover, Cardroom seeks to use its facially deficient
claim -- a claim that Cardroom does not even attempt to defend in
its opposition -- to bootstrap an interest in the Substitute Res
based on a previously un-asserted interest.

Had Cardroom never

filed its original, deficient claim, it never would have been in
a position to obtain the United States’ agreement to maintain any
forfeited assets as a substitute res.

Indeed, the Cardroom

Stipulation explicitly sets forth the assets for which Cardroom
asserts a claim and states that the Substitute Funds will serve
as “substitute res for the Forfeited Full Tilt Assets subject to
Cardroom’s claim.”

(Cardroom Stip. ¶ 4 (emphasis added)).

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The

Stipulation does not provide that the Substitute Funds can be
treated as a substitute res for new and different claims that
Cardroom never asserted at the time the stipulation was executed.
Thus, Cardroom’s late request to amend smacks of gamesmanship by
Cardroom and would prejudice the Government.
2.

Futility
In addition to Cardroom’s undue delay in seeking to

raise a claim based on the 2003 Agreement, such a claim would be
futile.

Though Cardroom repeatedly asserts that it can claim an

ownership interest in the Substitute Res, Cardroom’s allegations
about the 2003 Agreement would support, at most, potential civil
claims against Full Tilt Poker and/or PokerStars.
Cardroom claims a joint interest in software and
copyrights also jointly owned by Full Tilt Poker, but only Full
Tilt Poker’s assets were forfeited and transferred.

See, e.g., 1

Melvin B. and David Nimmer, NIMMER ON COPYRIGHT §§ 6.10 & 6.11
(2012) (unless otherwise agreed, a joint owner of copyright
interests may exploit, license, or transfer its interests without
the consent of other joint owners); cf. Thomson v. Larson, 147
F.3d 195, 205 (2d Cir. 1998) (co-authors’ “rights in a joint work
are non-exclusive”).

Cardroom’s interests, whatever they are,

were not forfeited or transferred.
Thus, even under the most generous reading of
Cardroom’s opposition, the forfeiture and transfer of Full Tilt

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Poker’s software and copyright interests would have resulted, at
most, in a breach of the 2003 Agreement’s terms concerning the
transfer of the relevant interests.

Cardroom’s remedy for any

such breach would be a civil claim for breach of contract against
the breaching party, or possibly a civil infringement suit
against any unauthorized users of the relevant copyrights.
Indeed, Cardroom at times characterizes the Substitute Res as a
pool of funds to compensate Cardroom for monetary damages
Cardroom purportedly has suffered as a result of Full Tilt
Poker’s and PokerStars’ actions.

See Cardroom Opp. at 2 (the

Substitute Res “completely satisfies Cardroom’s claim” in the
California action); 10 (discussing Cardroom’s intent to
potentially assert a claim for additional forfeited assets on the
theory that the Full Tilt Poker and PokerStars settlements
“exacerbate[ ] the very anti-competitive advantages obtained by
the PokerStars Group” alleged in the California action).
Thus, even under Cardroom’s allegations, Cardroom’s and
Full Tilt Poker’s interests in software and related copyrights
were joint but non-exclusive, and Cardroom did not have and
cannot assert a direct interest in Full Tilt’s joint but separate
interests that were forfeited and transferred.

Cardroom can only

assert, at most, a complaint about the manner in which Full
Tilt’s interests were forfeited and transferred.

Accordingly,

Cardroom’s contentions about the 2003 Agreement do nothing to

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remedy its failure to demonstrate standing or its failure to
demonstrate a meritorious claim under 18 U.S.C. § 983(d).
Amendment would be futile and Cardroom’s request should be
denied.
CONCLUSION
For the foregoing reasons, the Government respectfully
requests that the Court enter an order striking the claim of
Cardroom International for lack of standing, without leave to
amend.
Dated:

New York, New York
September 4, 2012
Respectfully submitted,
PREET BHARARA
United States Attorney for the
Southern District of New York
By: :

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

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