This is a story of two gambling bosses who took on the US justice department through the internet. One of them is now in prison in America, the other a fugitive from the US authorities, while the British investors that ploughed money into online betting companies nervously wait to see whether they have lost their biggest gamble.
Edinburgh-born David Carruthers is a balding, bespectacled 49-year-old who has spent all his working life in the betting industry. He joined Ladbrokes at 19, rapidly became Britain’s youngest betting shop manager and rose to Midlands area manager before parachuting into the lucrative but dangerous waters of internet gambling.
Thick set with slicked-back hair and a taste for sharp suits, Gary Kaplan could hardly be more different. He was hustling as a New York bookie when Carruthers had his eye on a nice detached house in a respectable estate in Bromsgrove.
Kaplan is a dead ringer for Steven Seagal, the 6ft 4in action star, according to his former colleagues, though no photographs are around to prove it. Often surrounded by a phalanx of bodyguards, he sometimes goes by the name Greg Champion, or simply G. He is said to carry a gun at all times and to have once shot up a computer after losing a bet.
“He is a genuinely frightening character,” said one City source who has met him.
So no surprises then that the man seized by the FBI last Sunday in an airport transit lounge and now held in custody on racketeering charges was the inoffensive Carruthers.
His arrest knocked more than £900m off the value of UK gaming stocks on Monday and Tuesday — not through fellow feeling for the unfortunate Carruthers but because it spooked shareholders in the clutch of dotcom gaming firms that have raised billions from listing their shares in London.
They feared that the internet gambling sector was being forced out of its most lucrative market, America.
The arrest is the boldest attempt yet by American lawmakers to crack down on the $12 billion (£6.5 billion) online-gambling industry. Betting via the internet is a huge business in America but still largely illegal there, a reflection of sharply divided attitudes to gaming.
“There is a huge cultural difference between the US and the UK over gambling,” said one senior gambling figure last week. “Sports betting in the US comes out of organised crime, so law enforcers have a bias against it. There is also an element on the right that sees it as immoral and on the left that believes people need to be protected from themselves. Both sides agree that gambling is a bad thing.”
Kaplan and Carruthers joined forces to challenge this mindset — and make lots of money — through the internet, which has opened up the US market to companies that offer legal sports betting in their own countries. Each American state has traditionally set its own rules on gambling, but the net knows no boundaries — or so the online gaming companies argue.
Kaplan is the founder of Betonsports, an online gambling company. He brought in Carruthers as chief executive in 2000 with the goal of getting it listed in London. At Ladbrokes, the Scot had reportedly developed a fervent belief in the future of online gaming and was frustrated at his bosses’ reluctance to take up the challenge.
When the first attempt at Betonsports’ flotation failed in 2002, Kaplan withdrew to the position of consultant — though keeping a 15% stake — and the company was successfully floated on AIM in 2004.
It was no normal float, however. Evolution, the broker handling the issue, did three or four times the due diligence it would normally have undertaken. Its prospectus, as The Sunday Times reported soon afterwards, highlighted the risks in working for or investing in the company. It warned that imprisonment was a possibility for directors, service providers or investors.
Some big firms took the hint. Fidelity, which had been among the biggest shareholders, no longer has an interest in Betonsports — or indeed, in any online-gambling stock, according to a spokesman — and Mishcon de Reya has resigned its role as solicitors to the company.
Nevertheless, Betonsports did well, reaching a market value of £110m before its present troubles. But it antagonised regulators by stridently promoting its US services.
The colourful Kaplan, who was once arrested for bookmaking in New York, was always going to cause the company problems, rivals said last week.
Betonsports adverts clearly promoted sports betting via the net, illegal in the eyes of the Justice Department. The firm even parked coaches with internet access outside sports stadium in New York so customers could sample its service. And it took bets over the phone, a complete no-no under American laws.
“The way they behaved has been a red rag to a bull,” said the boss of one rival firm.
“They were running everything but a dog and pony show to promote that company,” said another US gambling source.
Carruthers — no patsy despite appearances — regularly lectured Americans on television and in newspapers about the absurdities of their “outdated” gambling laws. He argued that online gambling should be legalised, regulated and taxed, bringing in billions of dollars to the US Treasury.
His comeuppance came last Sunday evening when he was sitting with his wife Carol in the transit lounge at Dallas Fort Worth airport in Texas. They were on their way to Costa Rica in Central America, where they have a second home and — like many other online gaming firms — Betonsports has its centre of operations. While the FBI took her husband away, Mrs Carruthers was allowed to continue her journey without knowing when she would see him again.
Kaplan’s brother, Neil, was arrested in Florida and the US authorities revealed an indictment filed in Missouri that names 11 people and four companies facing charges of racketeering, conspiracy and fraud relating to Betonsports.
A warrant was issued for Kaplan’s arrest on 20 charges, but this weekend he was still free and was said to be either in Costa Rica or Israel.
Betonsports shares fell 16% on Monday and were then suspended. It now faces financial claims running to billions of dollars and has been forced to stop dealing with the US customers who generated the vast majority of its revenues.
The effect on rivals in the online gambling sector was also devastating. Shares in Sportingbet fell 47% over the course of the week while Party Gaming shares dropped 11% and 888 Holdings fell 24%.
RIVALS are keen to dismiss Betonsports’ problems as a company-specific issue because it challenged the American authorities so openly. They argue that gambling is a grey area in most states and that, if left unprovoked, the authorities will not enforce the rules and may eventually ease them.
Is this really the case? Both America’s powerful Christian right and the liberal wing of the Democrat party are pushing for a crackdown through legislation and the prosecution of law breakers.
Online gambling “not only hurts individuals and their families but makes the economy suffer by draining billions of dollars from the United States and serves as a vehicle for money laundering”, says Congressman Bob Goodlatte on his website. “It is time to bring an end to these illegal activities.”
Goodlatte and his fellow Republican Jim Leach are now pushing a bill through Congress that would effectively outlaw internet gambling as it is today within the US and confine it to individual websites operating on a state-by-state basis.
The bill has the backing of the Christian Coalition, but the attack comes from a broad church. Leach himself is one of the most liberal Republicans on Capitol Hill, favouring abortion rights and speaking out against US involvement in Iraq.
Prominent Democrats, including New York’s crusading attorney general Eliot Spitzer, have also attacked online gambling.
Given the ungovernable nature of the internet, gaming executives argue that restrictions are unenforceable and that America will have to embrace the inevitable and find a legal way to allow online gaming. As restrictions on online political dissent in China has shown, however, the internet is more easily controlled than many have believed.
“A week ago I would have said this bill has no chance of passing. Given last week’s news I’d say the odds have changed — and not in our favour,” said one American gambling source.
“You might think it’s hard to contain the internet but that won’t stop them trying,” said another gambling executive. “This is the country of Prohibition.”
Both argued that the bill would force online gambling operators further underground and, as Prohibition did with alcohol in the 1930s, open the way for organised crime to take over.
Leach and Goodlatte’s bill would strengthen the 1961 Wire Act, which originally clamped down on interstate gambling over the phone but has been used to tackle online gambling. The new bill would also place tight restrictions on banks and credit-card companies that do business with online-gaming companies.
There is a fight-back, however. Last week the World Trade Organisation set up a panel to investigate whether US restrictions on internet gambling comply with international trade rules. The powerful American Gaming Association (AGA), which represents gambling giants such as MGM Mirage, has now come out in favour of internet gambling, having opposed it for years.
In the meantime, the legal position remains far from clear for the online companies and for their senior executives. Activities such as online poker and casino games are not explicitly outlawed by the wire act.
Party Gaming, the world’s largest online-poker operator, derives three-quarters of its revenue from America. Mitch Garber, chief executive of Party Gaming, speaking after unveiling strong results on Friday, was relaxed about the firm’s legal position and his ability to fly in and out of the US.
Asked whether he would fly to America if he had a meeting tomorrow, Garber said: “The company would want me to take advice as to whether there was any exposure. Based on our legal position I don’t see there being a meaningful risk. I’m not particularly worried about it.” Other senior industry executives had mixed views about the risks of being the next David Carruthers.
Nigel Payne, the outgoing chief executive of Sportingbet, whose American customers account for about 80% of revenues, keeps a holiday home in Florida and has lobbied hard for changes in the US laws on internet gambling. His boardroom colleague, Mark Blandford, Sportingbet’s founder, travelled through America last week with no problems. But the boss of another gambling company said: “Anyone planning to go to America has to reconsider whether they are going to go or not.”
Perhaps a sign of things to come is the scrapping of an annual gambling industry convention, the Bodog Conference, that was due to get under way tonight at the Wynn casino on the Las Vegas Strip. Last year’s event, rounded off with a star-studded bash, attracted a host of British executives. But this weekend, amid fears of further arrests, the Brits stayed at home. And the odds have lengthened on when they’ll feel like partying again.
Feeling the brunt of the religious right and fears over crime
WHILE Britain has taken an open stance on online gaming, preferring to regulate it and collect the tax revenue rather than ban it, America takes a far dimmer view of online sports betting, which was outlawed by the 1961 Wire Act.
That piece of legislation was originally introduced to clamp down on organised crime’s involvement with match-fixing and gambling in American sports. The country’s hang-up about sports betting stems to a large extent from its squeamishness about the possibility of corruption of its sports leagues. The Wire Act originally covered betting over the telephone between states, but is now interpreted as exerting control over the internet too. It also makes it illegal to exchange information that could be used to assist in the placing of bets on sports.
Another big influence on the attitude of lawmakers towards gaming is the Christian right. The religious lobby is opposed to gambling on moral grounds and has been closely involved with a bill recently approved by Congress to clamp down on internet gambling.
American states vary in their attitudes to online betting. Last week’s arrests were a result of the hardline stance taken by East Missouri district attorney Catherine Hanaway.
