Full Tilt Poker: $390 million owed, $60 million in the bank, and the email that said player funds were segregated

“Segregated and held separately from our operating accounts”

The sentence that mattered most in the Full Tilt Poker case was written to a customer in May 2008, three years before anyone outside the company knew there was a case. A player had asked whether his money was safe. The reply, quoted in the government’s amended complaint, read in part: “To protect both our players and business from financial problems, all player account funds are segregated and held separately from our operating accounts. Unlike some companies in our industry, we completely understand and accept that your account money belongs to you, not Full Tilt Poker.” The complaint says the company and its representatives gave the same assurance on several occasions in 2008 and 2009, by email and in postings on poker message boards.

On 15 April 2011, a date the poker community named Black Friday, the US Attorney for the Southern District of New York unsealed a criminal indictment against eleven people, including Full Tilt’s chief executive Raymond Bitar, for bank fraud, illegal gambling and money laundering, and filed a civil forfeiture and money-laundering complaint against Full Tilt and two other Internet poker companies. Bank accounts were frozen and the US sites closed. Full Tilt did not repay its players, and over the summer the reason emerged. On 20 September 2011 the same office moved to amend its civil complaint to add the directors Howard Lederer, Christopher Ferguson and Rafael Furst, and to allege that the company had defrauded its players “by misrepresenting that their funds on deposit in online gambling accounts were safe, secure, and available for withdrawal at any time.”

The US Attorney, Preet Bharara, put it in one sentence: “As the proposed Amended Complaint describes in detail, Full Tilt was not a legitimate poker company, but a global Ponzi scheme.” He went on: “Full Tilt insiders lined their own pockets with funds picked from the pockets of their most loyal customers while blithely lying to both players and the public alike about the safety and security of the money deposited with the company.” The release closed with the standard line that the allegations were accusations only, and the civil case was later settled without any admission. But the numbers in it were never seriously contested, and the Alderney regulator’s own hearing, held on the other side of the Atlantic with the company’s own accountants in the room, reached the same shape of conclusion.

Sources: US Attorney SDNY press releases 11-282 (20 September 2011) and 12-232 (31 July 2012); Alderney Gambling Control Commission statement of 29 June 2011 and 2011 Annual Report; Pokerfuse 29 September 2011 and 2014 remission coverage; PokerNews 15 April 2013. The two SDNY releases differ on the US figure ($150 million in 2011, $160 million in 2012); this article uses the 2011 complaint figure and notes the other.

How a $330 million hole forms without anyone touching a card

Nothing in either the federal or the Alderney record alleges that Full Tilt’s poker was crooked. The shuffles were not challenged, the rake was not challenged, the results were the results. The entire case is about what happened to the money between a deposit and a withdrawal, and the complaint describes three mechanisms that together turned a solvent-looking room into a company that could not survive a $5 million run.

The first was the distributions. Between April 2007 and April 2011 the company paid its board members and other owners $443,860,529.89, much of it, the complaint says, moved on to accounts in Switzerland and other overseas locations. A poker site’s income is rake; its deposits are debts. If the owners are paid more than the rake earns, the difference comes from the deposits, and the account balances players see stop corresponding to cash the company holds. By the end of March 2011 the gap was $390 million of balances against $60 million of cash.

The second was the phantom credit. From August 2010 the company’s US payment processors were so disrupted that Full Tilt often could not actually withdraw money from a US player’s bank account when the player made a deposit. The honest response would have been to decline the deposit. Instead, the complaint says, “in order to maintain its false image of financial security,” the company credited the player’s account as if the money had arrived. About $130 million was credited this way and never collected. When those players then lost that money at the tables to other players, the winners held real balances backed by deposits that had never existed, and “a massive shortfall developed.”

The third was continuing after the end. After 15 April 2011 Full Tilt kept accepting deposits from players outside the United States, with liabilities above $300 million and a small fraction of that in the bank. In early June 2011 Lederer told colleagues there was only about $6 million left and no realistic way to repay the new depositors. On 12 June Bitar wrote the sentence that reads like a confession and was filed as evidence: “at this point we can’t even take a five million run.”

The Alderney Gambling Control Commission reached its conclusions by a different route. Its regulations require every licensee to meet three prudential ratios on a continuous basis, the first of which is that cash must always exceed player balances. It opened a special investigation on 20 April 2011, five days after the indictment, suspended the four licences of the companies trading as Full Tilt Poker on 29 June “in the public interest,” and began a regulatory hearing on 26 July. The determination of 29 September 2011 found 17 allegations proved and revoked the licences of Vantage, Filco and Oxalic. The grounds reported from the determination notice were insolvency, the inability to return account balances to players, the extension of credit to players, inaccurate financial reporting and the concealment of seizures by the US government: on the company’s own figures presented at the hearing, about $331 million had been seized from Vantage between June 2007 and June 2011 and $15 million frozen in Swiss accounts of Filco, and $128 million had accumulated in uncollected deposits. The Commission’s chairman summarised it in the annual report: the shortfall was “caused by third party theft and by covert seizure of funds by US authorities, both of which had been concealed from us.” The 2011 complaints register shows 410 of the Commission’s 1,626 complaints that year concerned Full Tilt.

Pricing a 15% vault

The useful way to read these numbers is as ratios, because the ratios are what a player could never see. A deposit at Full Tilt in March 2011 was a claim on a pool that covered about 15 cents of every dollar owed. The owners had been paid, over four years, about 1.14 times the entire liability to every player in the world. A third of what the company owed had been created by crediting deposits that never arrived. And when the company itself measured its own resilience in June, the figure it used was a run of $5 million against a liability of $390 million, which is to say it could not withstand 1.3% of its customers asking for their money at once.

All inputs are the figures in the SDNY releases and the 2014 remission coverage; the ratios are this article’s arithmetic. Later remission rounds continued after June 2014 and are not totalled here.

The resolution took the shape the ratios predicted. On 31 July 2012 the government settled with both companies: PokerStars agreed to forfeit $547 million to the United States and to make all balances held in Full Tilt accounts available to non-US players within 90 days, about $184 million, and acquired Full Tilt’s forfeited assets on payment of $225 million within six days. US players were directed to the Department of Justice, which would compensate qualifying victims out of the $547 million. “Today’s settlements demonstrate that if you engage in conduct that violates the laws of the United States,” Bharara said, “then even if you are doing so from across the ocean, you will have to answer for that conduct and turn over your ill-gotten gains.” Neither company admitted wrongdoing. Non-US players, in other words, were made whole by a competitor’s purchase; US players waited for a forfeiture claims process run by the Garden City Group, with a petition deadline of 16 November 2013 and a first wave on 28 February 2014 of about $76 million to more than 27,500 players who had not disputed the balances the government held for them. A second wave of about $5 million followed on 1 April, a third of about $14 million on 12 June, and by mid-June 2014 about $95 million had been returned.

Bitar surrendered in July 2012. On 15 April 2013, the second anniversary of Black Friday, he pleaded guilty before Judge Loretta Preska and was sentenced to time served, seven days, with forfeiture of his assets. “The driving factor in this sentence is Mr. Bitar’s precarious health condition,” the judge said; he was a heart-transplant candidate, and a prison term would have made him ineligible for the transplant. “I regret my actions,” he told the court. “I know they were wrong and illegal.” Lederer, Ferguson and Furst were named in the civil complaint, not the criminal indictment.

The promise a commitment makes, and the one it does not

Put this case next to the others in this series and it is the odd one out. Nikrasch rewrote a chip; the Tran crew held a shoe still; Tipton seeded a random number generator; each of them attacked the result. Full Tilt’s results were fine. A hand of hold’em dealt on its servers in March 2011 was as fair as a hand dealt in March 2008. What had changed was that the chips on the table were no longer backed by money in the bank, and nothing the player could observe at the table, not the deal, not the rake, not the account balance on the screen, carried any information about that. The balance on the screen is exactly what the May 2008 email was about, and the email was false.

This is the limit of what a provably fair engine can do, and it is worth stating plainly because the phrase invites a broader reading than it earns. A commitment scheme proves that the result of each round was fixed before the bet and was computed from inputs the player holds half of. It is a proof about the roll. It proves nothing about whether the operator holds the cash behind the balances, whether the owners have been paid out of deposits, or whether a deposit that shows as credited was ever collected. Alderney’s first prudential ratio, that cash must always exceed player balances, is a custody check, and it is the kind of check a hash cannot make. The Stake hack on this site is the same lesson from the other direction: there the vault was robbed and the roll was never in doubt; here the vault was emptied from inside and the roll was never in doubt.

What a player can do about the part no proof covers is what the Stake piece already says and what the Full Tilt repayment table makes concrete: you cannot audit an operator’s vault from outside, so size your exposure to it. Keep on the site what you intend to play and withdraw the rest, read what the withdrawal window actually checks so that a routine hold is not mistaken for a run, and notice that an email saying funds are “segregated” is a sentence, not a ratio. The 27,500 players who received an average of about $2,760 each in February 2014 had been told, in writing, that their money belonged to them and not to Full Tilt Poker. It did. It took 1,050 days and a federal forfeiture to make the sentence true.