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Online gambling world watches U.S. case

When prosecutor Marty Woelfle went before a federal judge this week to lay out her case against an online gambling firm, she faced a daunting legal challenge from the company she was prosecuting: No one bothered to show up.
/ Source: The Associated Press

When prosecutor Marty Woelfle went before a federal judge this week to lay out her case against an online gambling firm, she faced a daunting legal challenge from the company she was prosecuting: No one bothered to show up.

There would seem to be good reason for BetOnSports PLC to hire attorneys. The firm is facing a 22-count indictment on fraud and racketeering charges filed in the U.S. District Court in St. Louis. The chief executive officer is in jail, and the company faces a restraining order barring it from operating in the United States.

But with headquarters in Costa Rica and other offices on the island of Antigua, BetOnSports was advised it didn't have to respond to charges filed in a U.S. court, Woelfle told U.S. District Judge Carol Jackson.

Just because BetOnSports was a no-show doesn't mean no one is paying attention to the case. Industry executives and legal experts are closely watching the prosecution in St. Louis as a key test case in the U.S. government's ongoing effort to crackdown on Internet gambling, which collects roughly $6 billion domestically every year.

"This may very well signal that the Justice Department is going to allow the U.S. attorneys to take this issue much more seriously than they have in the past," said William Eadington, director of the Institute for the Study of Gambling and Commercial Gaming at the University of Nevada, Reno.

If the BetOnSports prosecution is successful, it could change the industry landscape, he said.

"You basically have a very chilling effect on the entire U.S. segment of the market," Eadington said.

There's an enormous jackpot to be won or lost for Internet gambling firms. Online betting in the United States accounts for about half the global market of $10 to $12 billion annually, Eadington said.

U.S. Attorney Catherine Hanaway said that's one big reason why she is pursuing the case against BetOnSports and other companies associated with online gambling.

All those billions of dollars flowing out of United States escape excise taxes, she said. Not only does that rob the U.S. Treasury, she said, but it could foster other illegal activity.

"Because the industry is illegal and unregulated and very large amounts of cash are transferred, it has the potential to create other problems," Hanaway said.

The flow of online gambling cash has been growing with relatively little fanfare over the last few years, Eadington said. But in June, the U.S. House of Representatives passed a bill that would ban credit card companies from processing online gambling transactions. The bill awaits Senate approval.

In light of the House bill, the St. Louis indictment is akin to the other shoe dropping. Eadington said it shows just how hard U.S. law enforcement authorities are willing to crackdown on Internet gambling companies.

David Carruthers, CEO of BetOnSports, was arrested during a layover in Texas as he flew from London to Costa Rica. He appeared at a hearing Monday in St. Louis, handcuffed and in shackles. He remains in custody awaiting terms of his bail.

Besides Carruthers' arrest, online gambling executives around the world are paying particular attention to the temporary restraining order the U.S. Justice Department won against BetOnSports, said Sue Schneider, president of the River City Group, which publishes an online gambling trade magazine.

The restraining order bars BetOnSports from taking U.S.-based bets, and the company appears to be complying, according to Schneider and others.

"This is the first time that I have every seen that," Schneider said.

She has received calls from Internet gambling executives as far away as Germany, England and Asia, all looking for an update on the BetOnSports case. They worry about more restraining orders and are not likely to make any layovers on U.S. soil, Schneider said.

But this week's events in St. Louis also highlight some obstacles in tackling online gambling.

Woelfle, of the Justice Department's organized crime and racketeering section, told Judge Jackson on Monday that the government wants to make its restraining order against BetOnSports permanent. But Jackson suggested that couldn't happen until the company received proper "service," meaning it received legal filings in a fashion that satisfies U.S. requirements.

Woelfle sounded frustrated. She said BetOnSports fired Carruthers immediately after he was arrested, clouding the issue of whether it was properly served. She said the government would try and serve BetOnSports in its London office, a process that involves complicated international treaties.

Jackson extended the temporary restraining order until Aug. 14.

Hanaway acknowledged it isn't easy to control a business that shuttles money from private computers to offshore bank accounts. But she pointed out the government has a long history of tracking down international drug networks and catching international fugitives.

"What has made it difficult is that these businesses have been structured to avoid prosecution," she said.