metoo105 (98.96)

Online Gaming and the UIGEA

May 23, 2008 – Comments (3) | RELATED TICKERS: OPMR , PYGMF.PK , WYNN

The top 10 reasons why the UIGEA is not long for this world: (FYI – the UIGEA is the law which went after online gambling.)

1. It doesn't work. Plenty of gamblers still gamble online despite the law. For instance, if you want to gamble online, an easy way to do it is to get yourself a prepaid credit card. Other ways would include transferring money directly from your bank, via a wire transfer, to one of the casinos that still accepts US players. Do note that not all casinos do accept money from US players -- for instance PartyPoker does not. But most of them still do since they are overseas and out of reach.

2. The UIGEA was snuck into another law under suspicious circumstances and its chief sponsors are a now backtracking religious right and the holier than thou brick and mortar casinos.  These b-a-m casinos still have plenty of dough to throw at this thing, but now there is resistance.  Not only have the online casinos united to throw money at Congress, but . . . .

3. The financial institutions are upset about this law since it makes them liable for transferring money to casinos. As you may or may not know, the UIGEA does NOT make gambling online illegal. What it does prohibit are the money transfers. As I've already described, the DOJ does not want to enforce this law against the banks, which is the major reason that this law is still around: they haven't. This is also the chief loophole and the reason that folks who want to play poker online still can. As it stands, there has been discriminatory treatment among the financial institutions.

4. If the DOJ decides that they want to get rough and say they try to bring an action against VISA for allowing prepaid cards to go to casinos. VISA can very simply push back by claiming that the UIGEA is an unfunded mandate in that it requires VISA to determine the use and user of the card (an expense) but that the government provides no money to pay for the requirement. Congress has made unfunded mandates illegal, which creates a contradicatory law with this one and hence a legal challenge.

5. The UIGEA has already been determined by a WTO dispute and appeal to be in violation of International Trade law. Although the US really, really wishes that the WTO decisions did not have the weight of law in the US, unfortunately they do by dint of that pesky treaty that the US signed on to.  

6. But none of that matters much since it is really all about the money. And the concessions are now rolling and will continue to do so until the US repeals the UIGEA. The trade concession figures bandied about are in the billions. (Note trade argument is that there is discrimination whereby native US business - the b-a-m casinos are treated more favorably than the overseas ones - the online casinos. It's a pretty clear cut violation unless you can show some kind of special harm from online gambling, which they couldn't do.)

7. That other kind of money that makes D.C. turn is also in play for since the finance companies are now eager to see the UIGEA go. It's not an accident that Barney Frank, sponsor of the IGREA, is on the House finance committee. There is now plenty of money on the other side of the lobbying for this issue sloshing around D.C. from both the online casinos and the finance companies that don't want ever to be penalized by its effects. In fact, the only reason that this law was able to pass in the first place was because it caught a new industry (and an old one) pretty much completely unawares.

8.  Barney Frank's bill, the IGREA, is now before Congress.  He has recently been gathering supporters for the bill. Each day it seems he adds a new gaggle of backers. Frank's bill also does a smart thing which is that it not only seeks to regulate it (keep out the kids), it seeks to tax it as well.

9. During the Bush siege of the past 8 years, the UIGEA stands out as yet another piece of that larger tapestry of his administration’s mistake making. For one thing, the prohibition against online gambling has never had any support among the US populace. For another, the UIGEA was stuffed as a rider into the "Safe Ports" Act, which since it was literally an Act to make our ports safer, got a nearly unanimous round of yeas. I mean who doesn't want our ports safe from terrorism and foreign influence? Not your Congressperson, I hope. Continuing the pattern, it took what ought to have been a money making enterprise for the government (from taxes) and turned it into a clear money loser (billions in trade concessions).  Similar to all things that have been done during the Bush administration, it will be undone quickly after his fall (and inevitable prison term) if it's not undone before then. My belief is that if Congress were to present Bush with the IGREA, he would have little choice but to sign it into law.  (Let him use another signing statement!)

10. As a final, but totally gratuitous tenth, I will add that the UIGEA is obviously illegal under the US Constitution. For reasons that will probably be obscure except to those other fellow lawyers out there, the UIGEA is not a law for Congress to make. Think about it. Does it fit within the commerce clause? While it would be fine for the states to prohibit online gambling under their general police power, it is not the same for Congress. That is, protecting morals is up to the states, which is why Nevada was able to make the exception.This is not to mention the affirmative rights the Constitution grants to citizens that the law probably also and quite independently offends.

Some possible stocks that might benefit from repeal.

1- It is unclear which companies make the best investments. OPMR, currently hobbled maker of Firepay, is the easiest investment in this space. I mentioned this stock in yesterday's blog. I should add that they've got some $40 million tied up in the DOJ's investigation of their prior practices.

2- Other investments are NLR.L or Neteller, which does the same and had a much larger user base than Firepay. The downside with Neteller is that you must buy an unregistered ADR or be able to purchase shares in London, which not all of us can do.

3- But if you can buy shares in London, Party Gaming (PRTY.L, PYGMF.PK) is probably an even better bet anyway, since they've been crushing earnings even without the US market and they seem to have kept a fairly large user base of US players and so are ready to rejoin "the party" when and if the time comes.

4- In the total micro cap/speculation space, there's BNGOF.OB, owner of the domain bingo.com and a steady loser of money that's been unsuccessfully trying to transition to the UK market.  (Someone forgot to let them know that bingo is not called bingo in the UK, but rather it goes by "housie.")  But a favorable ruling might be good for a huge short term trade in this stock, and for the time being, bingo.com seems bankruptcy-resistant if only because of its major investor’s (Praetorian’s) willingness to throw good money after bad.