Is Full Tilt Poker Really a "Ponzi Scheme"? If So, Is it Still a Better Bet Than Social Security?

Yesterday, I blogged a federal legal action against Full Tilt Poker, an online poker site. The U.S. Department of Justice is alleging that Full Tilt, including poker stars Chris "Jesus" Ferguson and Howard Lederer, defrauded customers of $300 million. ""Full Tilt was not a legitimate poker company, but a global Ponzi scheme," said Preet Bharara, U.S. Attorney for the Southern District, in a statement…." reported the Wall Street Journal.

Via his FiveThirtyEight Twitter feed, New York Times stats blogger Nate Silver asks some follow-up questions, specifically about the Ponzi scheme allegations:

Not saying FullTIltPoker ran a sound business but calling it a "Ponzi scheme", as DOJ does, is not really accurate.

Full Tilt Poker (apparently) had less cash than deposits. But banks do the same thing. That's not, intrinsically, a problem. (1/2)

Problems: (i) FTP may have misled players about this (ii) risk of "run on the bank" was high. But calling it a Ponzi scheme is spin. (2/2)

Based on news accounts so far, Silver's comments ring true. It's also not clear yet exactly what sorts of problems bettors ran into in terms of getting payouts. This much is certain: Ferguson and others associated with Full Tilt are outspoken advocates of legalizing online poker, which is a touchy subject among law enforcement.

Within an hour or so of my original post, I was contacted by a flack for a group called Fair Play USA, who sent along this press bit from former FBI head Louis Freeh:

"While I have no knowledge of the facts of the case currently being reported on, I do know that ambiguity in current online gambling law and a lack of firm and transparent regulation and licensing is putting American poker players at risk. The current 'Wild West' atmosphere of online gambling, especially online poker, is dominated by shady offshore operators.

"Current laws that attempt to prohibit Internet gambling have failed to stop the illegal Internet gambling market from growing to $6 billion in the United States, exposing minors to Internet gambling sites of all kinds and leaving consumers at risk.

"Changes in the law can better protect consumers and still allow Americans to safely – and legally – play online poker."

Despite common Jersey and Rutgers roots, I'm not fan of Freeh, who presided over all manner of snafus at the FBI. And I don't know anything about Fair Play USA other than what I gleaned during a 30 second glance at its website, which prominently names another less-than-stellar celebrity, former Pennsylvania governor and Department of Homeland Security Secretary Tom Ridge, as its public face. In classic advocacy group mush-mouthedness, the site doesn't simply come out in favor of legalizing online gaming but instead goes through a blah-blah-blah exercise about keeping teh kidz safe and establishing this or that. But to the extent that they are talking about increasing our god-given right to lose our own hard-earned money in the manner of our choosing, more power to Fair Play USA, the least-inspirational name for a firm since George Costanza infiltrated Play Now on Seinfeld.

It is hard to understate how crazy gambling drives cops. Back in 2007, Drew Carey and Reason.tv looked at just how far police are willing to go to shut down unauthorized card games. Even going so far as to raid folks playing for charity at a VFW hall in Texas:

Comments

[Fist of Etiquette]

The current 'Wild West' atmosphere of online gambling, especially online poker, is dominated by shady offshore operators.

That gives me an idea. How about combining onling gambling with multi-player RPG? You're in a virtual saloon and when someone wrongs you (ace of the virtual sleeve or whatnot), you flip over the virtual table and draw. It's virtual genius!

[PIRS]

At least Full Tilt Poker is voluntary.

[o2]

obviously folks too casually & inaccurately toss around ponzi scheme memes

[PIRS]

O2,

Please give us your definition of Ponzi scheme in your own words.

[o2]

criminal fraud

[PIRS]

So your definition would include claiming that sugar pills are aspirin? Claiming that sugar pills are aspirin is unethical and illegal but few would call it a Ponzi scheme. Wanna be a bit more narrow in your definition?

[o2]

yes, there are many types of criminal fraud & a [PONZI] scheme qualifies.

[PIRS]

"yes, there are many types of criminal fraud & a [PONZI] scheme qualifies."

What I asked you was how you define a Ponzi Scheme, specifically, what makes a POnzi scheme a Ponzi scheme and not some other type of criminal fraud.

[Episiarch]

Why are you responding to the mongoloid troll?

[PIRS]

"Why are you responding to the mongoloid troll?"

Because he is not the only one who has taken this line of attack against those who point out that S.S. is a Ponzi scheme.

[o2]

social security is NOT criminal fraud any moar than an annuity which also uses fungable monies

[PIRS]

"social security is NOT criminal fraud any moar than an annuity which also uses fungable monies"

This is not an answer to my question. What I asked you was how you define a Ponzi Scheme, specifically, what makes a POnzi scheme a Ponzi scheme and not some other type of criminal fraud.

[o2]

ones hopez ur TRYING to be funny anyway

[PIRS]

"ones hopez ur TRYING to be funny anyway"

I am just trying to get an actual answer to a question I asked and not evasions. Perhaps it was too much to hope for that o2 would not try to evade a question.

[o2]

i chose not to be drawn into ur arbitrary comparison

[PIRS]

"i chose not to be drawn into ur arbitrary comparison"

Arbitrary? It either is or is not a good comparison. It is a topic that is now being discussed in the political world. What I asked you was how you define a Ponzi Scheme, specifically, what makes a Ponzi scheme a Ponzi scheme and not some other type of criminal fraud.

[o2]

no, its a topic amongst the wingnutz, which is a considerably smaller subset than "the political world".

[o2]

[PONZI] !

[spencer]

It's such a sham. This, combined with the closing of gitmo for a political ace up the sleeve is disgusting.
"Ponzi scheme, huh Perry? We'll take your term and show you how easily it's corrupted so no one knows what it means anymore! Also, we'll win back our base by doing something we should have done years ago- they'll love us for that."

[Mainer]

Sort of like the way "market failure" has come to mean "a result I don't like".

[AZ]

And "externalities" have become "fuck you, that's why"

[o2]

i wonnder how mnay [JOBZ] full tillt pocker creatde wihth thoes bush taxes cuts

[Smart Aleck]

Obviously not enough new jobs in teaching grammar and spelling.

[o2]

i m a cambat vetern so dont teel me a bout spelin n grammer

[PIRS]

What is a cambet?

[PIRS]

Sorry, I was tripped up by a Turing test ready imitation o2

[Smart Aleck]

I thought that a cambet vetern was a species of waterfowl.

[o2]

^spoofarrhea v

[mark Yglesias]

Poker is not a Ponzi scheme, it's an investment just like your 401(k). You put money in, and you may win money back or lose it. See! Just like a 401(k)!

[R C Dean]

I dunno, I think of a Ponzi scheme as one in which:

(a) investors/contributors/whoever are misled about what is actually being done with their cash;

(b) the only way to pay out investors/etc. is to take the money of new investors/etc. and use that; so that

(c) the scheme depends crucially on evermore new investors/etc. coming in so there is always a source of new cash to cover up the misappropriation.

Sounds like Full Tilt to me. And SocSec.

[Episiarch]

Sounds like an attempt to completely dilute and distort the meaning of "Ponzi scheme" so that its use regarding SS becomes meaningless.

[o2]

not reallyu since teh [PONZI] retains its [AGIPROP] emotional appeal for the know-nothing wingnutz

[PIRS]

o2, do you read posts before replying to them?

[o2]

yep, in this case teh [PONZI] is an emotional appeal like death panels, FEMA camps, & gun confiscation so it is agiprop

[PIRS]

Are you implying that there is no such thing as a Ponzi scheme? That they do not exist at all? So I should not be able to find a specific definition in a dictionary right?

[o2]

ponzi schemes certainly exist & you've been drawn into one if you sent ur political donation to perry on this single issue

[Dylan]

"to cover up the misappropriation." The crucial difference here is that a bank or Full Tilt (supposedly) INVEST the money while Bernie Madoff and Social Security SPEND the money.

[Goober]

Social Security is a government program. It's paying out money so old people can get medical insurance and have a small pension to live on. It does this through taxes.

Sorry, not a ponzi scheme. Not even close.

[Mango Punch]

I came close to investing in buying up FT deposites at a discount after the initial freeze lifts at Stars and Party... Happy I didn't...

[Mango Punch]

It's also not clear yet exactly what sorts of problems bettors ran into in terms of getting payouts.

The innitial issue was a freeze of all accounts by the DOJ when the gambling sites were first shut down. Within a week and a half Party Poker and Poker Stars had reached agreements, blocked US play for $ and allowed withdrawls. Full Tilt which is I think Aruba based (might be wrong on this) didn't reach a speedy settlement. When eventually accounts were unfrozen (mid summer) a lot of people still couldn't get their money out (the deposits never came).

Full Tilt Poker (apparently) had less cash than deposits. But banks do the same thing. That's not, intrinsically, a problem. (1/2)

The issue was bigger - it's not just that they didn't have enough fungible assets, but may not have had enough assets at all. Lots of cash was used to payout investors (hence the ponzi scheme analogy). As you accurately note, players were missled that accounts were held seperately (as was the case at PP and PS).

[libarbarian]

Its clear you have an emotional investment in this and really don't want the charges to be true.

This wasn't caused by the legality/illegality of Online Poker (although, for the record, I used to play and want it to be legal again).

This was just another case of people looting a company for personal profit.

[Mainer]

Look, you can't just have people using their own money to engage in an activity they find enjoyable.

[bosty]

just you wait until the FBI catches wind of the Federal Reserve..

[PIRS]

+2000

[Russ Wishtart]

I'm not sure if I'd call it a Ponzi scheme but this much is true: I have been unable to get the funds that I deposited in FTP since the FBI raid.

Yes, the FBI raid was horrible from every perspective, but if FTP really cared about it's customers, they would make good and pay the people who have requested withdrawals. I want to withdraw the money I have in FTP, and they will not give it to me. In my book, they're guilty of something for that.

[Goober]

Considering that FTP is broke, but the people who were running it, like Ferguson and Lederer, took tens of millions out of it, I'd say you're right.

[Robert Fellner]

I touch on this in my blog today. FTP is definitely a criminal enterprise, but the crime is much more similar to fractional reserve banking than it is a ponzi scheme. They should and hopefully will be found guilty of this crime of not keeping depositors funds safe as promised, because they do not have the political privilege and protection that comes from being a bank.

[Goober]

I think you could make the case that its a ponzi scheme, actually. They were taking the money players deposited for themselves, and to pay off people who made withdrawals. It might have collapsed on its own at some point, even without the government investigating. If deposits ever reached a point when they weren't enough to cover what was being withdrawn, they wouldn't have been able to pay, since the players money is actually gone. The illusion that the money was still there would be gone. It wouldn't have taken a big run to do it, really. Pretty similar to a ponzi scheme, if it isn't one.

[Goober]

Hmm. Should have proof read that post, but I think you get the idea. They were using money from players accounts to pay out "winnings", and taking a lot of it for themselves. Not unlike how people running a ponzie scheme will take money invested and use it to pay out profits, creating the illusion that its a successful investment.

[Tim Cavanaugh]

Dead thread P.S.: I did a very nice piece of flackwork representing the whistleblower in a Ponzi scheme, and I submit to you that pyramid-payup schemes like these can evolve from legitimate businesses. In that case it was a private equity company with a good but moderate-yield asset. When that asset failed to produce returns as high as projected, the CEO went back to his original pool of investors and started bringing in new ones, using that new money to provide the expected returns (in those heady days, seven was considered a lucky number) to the existing investors.