June 26, 2005
At PartyGaming, Everything’s Wild
By KURT EICHENWALD
AS a rule, companies don’t often draw attention to business practices that could land their executives in jail. But for PartyGaming PLC, potential illegalities aren’t just a secret hidden in its business plan – they are the centerpiece of its business plan.
A giant in the online gambling business, PartyGaming is an often-overlooked megasurvivor from the dot-com crash of the late 1990′s. As hundreds of profitless commercial sites disappeared into the digital ether, PartyGaming’s popular gambling sites – like PartyPoker.com – soared, with revenues and profits growing exponentially year after year.
This week, the company will go public in what is expected to be the largest offering in years on the London Stock Exchange, one that will make billionaires out of its ragtag assortment of founders and major stockholders – including a California lawyer who earned her first fortune in online pornography and phone-sex lines. All told, as much as $9 billion is expected to be raised, with all of the cash going to private shareholders selling portions of their stakes.
But there will be no Wall Street investment houses lapping up fees in the giant deal, no victory dances in the offices of American corporate lawyers. That is because PartyGaming, based in Gibraltar, has no assets in the United States, and its officers or directors could risk being served with a civil suit – or an arrest warrant – if they came to the United States on business.
The reason? The Justice Department and numerous state attorneys general maintain that providing the opportunity for online gambling is against the law in the United States – and PartyGaming does it anyway. Indeed, of its $600 million in revenue and $350 million in profit in 2004, almost 90 percent came from the wallets and bank accounts of American gamblers.
To justify this, PartyGaming walks a very thin line. Providing online gambling is not illegal per se in the United States, the company argues – federal prosecutors just say it is. The company has already received an e-mail message from the Louisiana attorney general demanding that it cease providing online gambling in that state; PartyGaming simply ignored the communication and waited for additional action that never came.
The company’s prospectus – a British document that is not available in the United States – at times reads something like a legal brief, citing American case law to support the company’s position that no prosecution would ever take place.
Still, in its offering documents, PartyGaming makes no secret of the fact that even if the company’s view of the law proves wrong, it is banking on its executives’ belief that there is little that law enforcement can do – or will do – to prosecute. “In many countries, including the United States, the group’s activities are considered to be illegal by the relevant authorities,” PartyGaming says in its offering document. “PartyGaming and its directors rely on the apparent unwillingness or inability of regulators generally to bring actions against businesses with no physical presence in the country concerned.”
That type of unusual disclosure is typical of the entire PartyGaming story – a stranger-than-fiction tale laced with an unlikely combination of sex, money, technology and the kind of luck that is fitting only for a gambling company. And there are already signs that before the tale is done, it could well inflame trade disputes between the United States and Britain over America’s arguably inconsistent behavior toward the gambling industry.
Fergus Wheeler, a spokesman for PartyGaming in London, said that the company and its executives could not comment, in part because no offering of shares was being made in the United States.
THE story begins, improbably enough, at a collection of lucrative massage parlors operated in San Francisco. Their owner, Richard Parasol, saw fabulous wealth from the businesses. State property and business records show that Mr. Parasol – at times in deals involving his Swedish wife, Gunna – moved his family into an upscale home in Marin County and bought an array of investment properties while putting money into a leather goods concern and other businesses.
By the early 1990′s, Mr. Parasol had a new business partner in his ventures – one of his three daughters, Ruth, the woman who ultimately would prove to be a driving force behind PartyGaming. After spending years in private school, Ms. Parasol attended college at the University of San Francisco, state records show, before she moved on to Western State University in Fullerton, Calif., where she earned her law degree.
Ms. Parasol, now 38 and a resident of Gibraltar with her husband, J. Russell DeLeon, has universally declined to be interviewed and did not respond to an e-mail message.
But the lawyer’s life of filing briefs and making court appearances was not to be for Ms. Parasol. Instead, her father brought her in as an adviser on a phone sex-chat business he had formed with Ian Eisenberg, a Seattle businessman whose father, Joel Eisenberg, was a pioneer of sex-oriented phone lines in the 1980′s.
Quickly, Ms. Parasol emerged as one of the small clique of prominent executives in the growing world of interactive pornography. In 1994, she split off from her father’s business, forming her own sex-chat phone business with Seth Warshavsky, another young Seattle businessman who had worked with Mr. Eisenberg.
But her business dealings with her father were not over. California state business records show that Ms. Parasol and her father established Starlink Communications, another phone-sex business. They also invested with Mr. Warshavsky’s biggest venture ever, the Internet Entertainment Group.
Cash was coming in by the fistful for everyone. While online pet stores and cosmetics companies were struggling, Internet pornography was a gold mine. The phone lines almost printed money, and, through I.E.G., Mr. Warshavsky became the most prominent businessman in online pornography, with hundreds of thousands of paying members. Time magazine called him the Larry Flynt of the Internet.
But soon, everything began crashing down in a storm of unpaid debts and lawsuits. Mr. Warshavsky, for example, moved overseas, leaving behind a huge collection of unpaid bills. Mr. Eisenberg, meanwhile, had a falling out with Mr. Parasol and his daughter and the dispute ended up in court. Mr. Warshavsky and Ms. Parasol were co-defendants in lawsuits contending improper business practices. The Federal Trade Commission sued Mr. Eisenberg, accusing him of engaging in deceptive trade practices by tricking customers into authorizing billings to their telephone lines for Internet access.
The pornography business was beginning to look dicey. But Ruth Parasol had another idea.
While many of her former associates found themselves in legal trouble, she emerged relatively unscathed. According to people who have spoken with her, she and her father sold their interests in electronic pornography, just as the litigation was heating up.
Instead, Ms. Parasol pursued a new venture: online gambling. It was the new buzz of the Internet world, and Ms. Parasol decided to apply the knowledge she acquired from her pornography ventures into the more reputable gambling business.
Using her profits from the pornography business as seed capital, she and a handful of partners opened a Web site called Starluck Casino in 1997. According to company records, Starluck maintained all of its operations – including servers and offices – in the Caribbean, beyond the reach of American authorities. But the business was nothing special; the software that drove the site was simply licensed from a third party.
Then, the next year, Ms. Parasol struck up the relationship that would transform her company into the giant it is today. She spoke with Anurag Dikshit (pronounced DIX-sit), then a 25-year-old computer-engineering specialist who had recently graduated from the Indian Institute of Technology in New Delhi, asking him to write a proprietary program for casino games. Within a year, as Mr. Dikshit’s skills were recognized as crucial to her company’s future, he became an investor.
By 2000, the new team of executives began exploring the idea that would bring them billions: developing a platform to let gamblers from around the world play against one another online, either at individual virtual tables, or in larger tournaments. PartyGaming is then paid a commission, known as a rake, for its role in hosting the games.
The timing could not have been more fortuitous.
At that point, a poker craze was about to sweep across the United States, pushed by the advent of televised poker events like the World Poker Tour and the World Series of Poker. These programs helped to transform poker, once a penny-ante game played out on kitchen tables by neighbors and friends, into a glamorous event with celebrity matches and color commentators.
HELPING to push the growth was the use of cameras under tables during the competitions. That allowed viewers to see the players’ cards and gain an insider’s view of the unfolding game.
Once Mr. Dikshit’s software was improved to allow for hosting as many as 70,000 players at once, Ms. Parasol’s company further fueled the game’s popularity. Now, players could join a game anytime, from anywhere, without having to wait for their buddies or to restock on beer and potato chips.
Players responded in droves, making poker by far the fastest-growing segment of the online gambling market. Total revenue for online poker among all companies was already a healthy $92 million in 2002, but it then exploded, surpassing $1 billion just two years later, according to Christiansen Capital Advisors L.L.C., a consulting firm in New Gloucester, Me., that specializes in advising gambling companies.
Ms. Parasol’s company, by then known as PartyGaming, did its part to fuel the mania. To help introduce its poker Web site, it hired a well-known poker player named Mike Sexton as a marketing consultant, and with his help it developed the “PartyPoker.com Million” tournament – a live contest played on a luxury cruise ship with a guaranteed first prize of $1 million. With cable channels hungry for more poker programming, the PartyPoker.com contest was soon on television – featuring none other than Mr. Sexton as a commentator.
The company’s base of players – and the cash they generated – exploded. In 2002, the casino business at PartyCasino.com, which included slot machines, blackjack games and roulette wheels, was still the big piece of PartyGaming, with 535 registered players compared with 105 registered poker players. By the end of 2004, the number of registered casino players had jumped to 1,296 while the number of poker players had soared to 5,225.
But that is only part of the story. After a blitz of television advertising in the United States, the poker games attracted an escalating number of casual players. At the end of 2002, the average number of daily active players was 1,297. Two years later, that had risen to 77,094 – and by the end of March had reached 121,570.
Profits rode right along with that growth. The company had revenue of just $9 million from its poker business in 2002; by the end of 2004, revenue had climbed to more than a half-billion dollars.
As the business grew, PartyGaming brought in more professional managers. It hired Richard Segal, the head of Odeon Limited, Britain’s leading operator of movie theaters, as chief executive in 2004, and hired Michael Jackson, the chairman of the Sage Group, a big British software company, as non-executive chairman. Ms. Parasol and her husband, Mr. DeLeon, now serve as consultants to the company and, after the offering, will retain the right to name one director to the board.
At the same time, PartyGaming adopted a long-term strategy for managing its growth, which is likely to continue to be robust. According to the Christiansen Capital analysis, poker players should continue to migrate to online games over the next five years, even as new players are attracted to the game. In the process, the firm estimates, the total online poker market will mushroom to $6 billion in 2009 from $1 billion in 2004.
But there is a problem with these estimates. Players in the United States make up three-quarters of the market, and even with all that growth they are expected to continue to be at least half of the overall business. At PartyGaming, American players currently make up just under 90 percent of the company’s business. And American law enforcement argues that providing online poker is simply illegal.
It is called the Interstate Wireline Act – known colloquially as the wire act. Passed in 1961 and aimed primarily at mobsters, the law prohibits anyone involved in the gambling business from using wire communication to transmit bets on “sporting events or contests.”
The question becomes this: Is poker a contest? The Justice Department has historically maintained that it is and, as a result, has argued that operators of online poker, including PartyGaming, are acting in violation of the law.
But it is hardly that simple. In an astonishing bit of luck, in 2001 – just as PartyGaming was preparing to start its poker business – Federal Judge Stanwood Duval in New Orleans ruled in a case pertaining to MasterCard International that the wire act “does not prohibit Internet gambling on a game of chance.” That position has since been upheld by the Fifth Circuit Court of Appeals.
Still, the Justice Department has maintained that such gambling is illegal, and numerous states have argued that it violates their laws as well. Some authorities have tried flanking maneuvers to frustrate online casinos. Eliot Spitzer, New York’s attorney general, for example, opened an investigation into how PayPal, the online payment firm owned by eBay, helps online bettors pay gambling companies. PayPal agreed to suspend all such payments, as did the Citibank division of Citigroup, one of the country’s largest issuers of credit cards.
And there have been rumblings in Congress about toughening up federal laws to curb the business. For several years, Senator Jon Kyl, an Arizona Republican, has pushed for a federal law to prohibit the use of credit cards or other payment systems for online gambling. But each of those attempts has collapsed, as various sectors of the American gambling industry – including horse racing and Indian casinos – have sought to insert exemptions into the law for their businesses.
In an odd way, the questionable legality of online gambling in the United States ultimately proved to be a huge boost for PartyGaming. Even as hundreds of millions of dollars started rolling in from American players, gambling giants – notably the operators of Las Vegas casinos – stood on the sidelines. With valuable assets and all of their executives in the United States, none of them were willing take a chance on where the law would finally settle. That paved the way for independent virtual casinos like PartyGaming to succeed.
The company got a gambling license from Gibraltar, where it established its headquarters. It carefully made sure that none of its assets were in the United States, making it impossible for law enforcement to seize anything. Even the computer servers used to handle the poker games were located in Canada, and will be moved to Gibraltar by the end of this year.
Now, as the largest company pushing into the United States market, PartyGaming is best positioned to benefit if the question of online gambling is decided in its favor. Already, the World Trade Organization and foreign governments are siding with companies like PartyGaming and against the United States.
LATE last year, for example, the W.T.O. agreed with the Caribbean island nation of Antigua that United States legislation criminalizing online betting based in other countries violated global laws. An appellate body at the trade organization upheld the principal conclusions in that ruling in April.
Indeed, among international bodies and foreign governments, the American position on Internet gambling is becoming an object of derision. A 2003 report by the Department for Culture, Media and Sport in Britain, for example, found that there was a “growing global market for online gambling where national boundaries” no longer had any meaning.
“Nowhere is this better illustrated than in the U.S.A., where despite the apparent illegality of cross-border gambling more of its citizens gamble online than anywhere else in the world,” the report says. “To deny this appears in many ways to fly in the face of the reality of international banking and the inherently international nature of 21st-century telecommunications.”
With America’s strongest allies throwing in the towel, PartyGaming may well have been successful with its risky roll of the dice on Internet gambling. And now this week, its owners can cash in their billions of dollars in winnings.
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