Online betting sites prepare for squeeze

Updated: September 9, 2006, 12:24 PM ET
By John Barr | Special to ESPN.com

ST. JOHN'S, Antigua -- From the outside, the building looks like any strip mall in any American suburb. The satellite dishes out back serve as the only hint of what lies inside. There are no company logos plastered on doorways. Inside, not one sign indicates a suite number for our final destination.

Up the stairs from a collection of shops selling children's toys, clothing and the works of local artists, drawn light-blue blinds mask the operations within. Behind the blinds, one of the most profitable and resilient betting operations on the Internet continues to flourish, despite the best efforts of the U.S. Department of Justice to shut it down.

"We don't exactly advertise our presence," says World Sports Exchange co-founder Haden Ware with a slight smile as he welcomes us to a tastefully decorated collection of offices.

You could hardly blame Ware for his discretion. In recent weeks, U.S. authorities have arrested executives from two of the largest online sports books in the world. On Wednesday, Peter Dicks, chairman of Sportingbet PLC, was arrested at Kennedy International Airport in New York. Sportingbet runs the hugely popular Sportsbook.com. Dicks was arrested just weeks after BetonSports CEO David Carruthers was taken into custody while changing planes in Dallas.

Getty Images for World Poker ExchangeHaden Ware, with FHM women at a party in London, helped build World Sports Exchange into a flourishing online gambling operation.
Ware dropped out of college nearly 10 years ago to form World Sports Exchange with partners Jay Cohen and Steve Schillinger. He met Cohen and Schillinger while working as a runner on the Pacific Exchange in San Francisco. His most pressing job those days was fetching lunch for the two seasoned options traders.

In 1996, Schillinger, a gregarious trader whose workplace betting operation remains the stuff of legend on the Pacific Exchange, and Cohen, a stocky New Yorker with a nose for business and the potential of the Internet, approached Ware with an offer he couldn't refuse.

The plan was to open an online gambling company on the Caribbean island of Antigua. A cyber sports book where bettors could find action on any game with a few clicks of the mouse.

Cohen and Schillinger had sought legal advice and were convinced they would remain protected as long as they took bets and kept all of their assets offshore. When asked if he wanted in, Ware, who by his admission was floundering at Berkeley at the time, didn't hesitate.

Today the runner who used to fetch lunch is largely credited with leading one of the first Web-based sports books ever to remarkable new heights.

World Sports Exchange opened for business in November 1996. In its first few years the company had just four employees, one tiny Internet server and about 800 customers. To chart its growth is to chart the growth of the online gaming industry.

"We have a hundred employees worldwide, we have 80 down here in our offices in Antigua and our client base is upwards of 250,000," Ware says of his company today.

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Ware's office is adorned with memorabilia from his beloved New York Yankees. One of his most prized possessions remains a signed black-and-white image of Don Larsen's perfect game in the 1956 World Series. Within that blown-up image you can clearly make out a sign hanging in the outfield bleachers: "No Betting Allowed." Just down the hall is a room full of Antiguan women sitting behind computer screens and answering calls from gamblers in the United States looking for action on the day's major league games.

"OK, that's Arizona with Gonzalez plus 176. … You got the bet. You're welcome," one of the operators says to the caller on the other end of the line. Each time a bet is placed at World Sports Exchange the computers ping with an audible beep. The workers became so immune to the chorus of beeps throughout the day that the settings were changed to allow the beeps to sound only when an out-of-the-ordinary bet was placed, a bet that could impact the betting line. On this day, for our benefit, the settings have been changed to generate beeps for every bet. And the beeps keep coming.

Nobody knows for certain how much money is wagered over the Internet each year. Study the issue long enough and you'll hear all kinds of estimates -- $12 billion each year, more than half of it from Americans, some experts say. The numbers sound impressive but the fact is no one really knows. While some online gaming sites have gone public, opening themselves up to the scrutiny of regulators and shareholders, most, like World Sports Exchange, remain private and reluctant to open their books. And that makes lawmakers and prosecutors in the United State nervous.

'THE BIG SPLASH'

While there's no federal law against making a bet online, taking a sports bet over the Internet remains illegal in the United States. The best weapon federal prosecutors have to go after the operators of online gaming sites is a 45-year-old law called the Wire Act. Originally designed as part of Robert F. Kennedy's war against organized crime to keep bookies from using telephone and telegraph lines to take bets, the Wire Act is now applied to a high-tech industry full of cyber-bookies living in tax-friendly outposts like Antigua, Costa Rica and Gibraltar.

Roughly half of the states have laws that make it a crime to place a bet. It was an investigation by Louisiana State Police that led to the arrest of Dicks from Sportingbet PLC. Dicks was arrested on an outstanding warrant from the Louisiana State Police Gaming Enforcement Division. He's charged with gambling by computer, which is punishable by up to five years in prison.

A Louisiana State Police spokesman said there are outstanding warrants for several other Sportingbet officials.

But the fact that billions of dollars continue to flow offshore, untaxed, also has the attention of federal prosecutors.

"Because the statutes are so weak, the federal government is waging a war of intimidation against the industry," says I. Nelson Rose, a law professor from Whittier College in Costa Mesa, Calif. "What they're doing is they're going after the easy case and then making a big splash."

David Carruthers
AP Photo/Tom GannamDavid Carruthers, former CEO of BetonSports, is a critic of U.S. gaming laws. He was arrested in July while changing planes in Dallas and awaits trial in St. Louis.
The "big splash" for U.S. prosecutors actually came weeks ago with the arrest of Carruthers, CEO of BetonSports.com, an online gaming company traded on the London Stock Exchange. He is one of the most frequent and vocal critics of U.S. gaming laws. The arrest of the Scottish-born Carruthers and a wave of indictments against company officials sent shock waves through the online gaming industry.

"The message drawn from it should be that this is an illegal activity, and an illegal activity will be prosecuted," says U.S. Attorney Catherine Hanaway, who will prosecute the case from her office in St. Louis, where Carruthers was recently released to house arrest.

Under Carruthers, BetonSports evolved into one of the more aggressive marketers in the online gaming world, almost brazen in its defiance of U.S. Internet gambling laws. The company went so far as to park a "Betmobile" outside NFL stadiums -- an RV sleeved in the BetonSports.com company logo, which football fans could enter to learn how to open up Internet gambling accounts.

Catherine Hanaway
AP Photo/James A. FinleyU.S. Attorney Catherine Hanaway is prosecuting the case involving BetonSports CEO David Carruthers.
"BetonSports was very aggressive in their advertising of their product … that certainly made them much easier to find and to locate," Hanaway says.

Said Rose, when asked about the case: "If you're asking for it, you're going to get it. The federal laws are fairly weak. The Department of Justice doesn't have a lot of weapons in its arsenal. But [if] you walk in front of them wearing a target you're going to get hit by them."

One of the most sought-after fugitives in the government's case against BetonSports remains at large. Gary Kaplan, the company's founder, was among the 11 people named in a July indictment. A former bookie from New York City, Kaplan was arrested in New York in 1993 for running a betting operation. Prosecutors say he eventually moved that operation to Florida and later Costa Rica, where he now resides. Kaplan is accused of failing to pay federal wagering excise taxes on $3.3 billion worth of bets taken from U.S. gamblers. The United States is now seeking $4.5 billion in forfeitures from Kaplan and his associates.

BetonSports once boasted a call center in Costa Rica with 2,000 employees and said it took in more than a billion dollars a year in sports bets, almost entirely from American bettors. But when faced with a restraining order to shut down its Web site, the company, to the surprise of many within the industry, agreed.

Today Carruthers remains on house arrest in St. Louis awaiting trial. After his arrest, he was promptly fired by BetonSports, the same company he helped build and publicly defend. The Costa Rican call center, once a flurry of activity at times like the opening of the NFL season, now sits empty as the company has effectively shut its doors.

"I'm getting e-mails from people who have thousands of dollars sitting in an account with BetonSports and they can't get their money out," Rose says. BetonSports declined repeated requests from ESPN for an interview. A company spokesperson said all of its customers will eventually be paid in full.

Russ Hawkins is one of those bettors still waiting to get paid.

"There's a telling post right there, what do we have to do to get our money from BetOnSports?" Hawkins says as he scrolls through a list of online postings from his condominium in Toronto. Hawkins runs the Web site Majorwager.com. He readily admits he takes money from 30 of the world's largest online sports books. Still his Web site, frequented by those who gamble on sports on the Web, has become something of an industry watchdog where disgruntled bettors air their beefs about different gaming sites.

Hawkins also bets online and says he's owed more than $20,000 by BetonSports. "We all knew that someone was going to be made an example of," Hawkins says. "We didn't particularly think it would be Carruthers and BetonSports but we knew that it was going to happen and we hoped it happened to a company that would fight it."

Back in Antigua, Haden Ware can only shake his head at the recent actions of his former online competitor. "The industry right now is at a pivotal time and I think it's really important that the industry stand together and stand up to this rather than backing down from it."

If anyone can appreciate the pressure BetonSports now faces from U.S. prosecutors, it's Ware and his colleagues at World Sports Exchange. Federal prosecutors targeted Ware, Schillinger and Cohen eight years ago in a similar criminal complaint. Ware remains under indictment and under the threat of arrest if he returns to the U.S.

"It's tough not being able to see your family and see your friends and go back to the country in which you were born and that you're a citizen of," Ware says when asked about his legal status. "It's not fun to have any country, whether it's the most powerful country in the world or any country, deem you to be a criminal."

'SELECTIVE PROSECUTION'

In 1998 World Sports Exchange President Jay Cohen decided to test the strength of U.S. gambling laws by returning to the United States to take his chances in court. It was a bad bet. Cohen eventually lost his lengthy court battle and spent a year-and-a-half in a federal prison in Nevada. But, even with Cohen behind bars, Ware and Schillinger never stopped taking bets.

"Now you're talking about hundreds of millions, possibly in the billions, in wagers per year," Ware says when pressed about the amount of money bet through the World Sports Exchange Web site each year.

After the indictments targeting World Sports Exchange and other online gaming sites in 1998, then-Attorney General Janet Reno famously proclaimed: "You can't hide online and you can't hide offshore." But eight years later, World Sports Exchange stands as evidence to the contrary.

"I think unless it's like BetonSports, which voluntarily closed up, the United States can't do anything about it," says Rose when asked about the vulnerability of offshore gaming sites to U.S. prosecution.

Bet on Sports Office
AP Photo/Kent GIlbertBetonSports, with an office in San Jose, Costa Rica, closed because of legal problems in the United States.

Rose admits that could change if supporters of tougher Internet gambling legislation in Congress are successful. In July, by a bipartisan vote of 317-93, the House of Representatives passed the Internet Gambling Prohibition and Enforcement Act. The bill has stalled in the Senate, but if it becomes law it would block U.S. banks and credit card companies from allowing transactions to finance Internet gambling and broaden the language of the Wire Act  specifically banning all forms of online gambling, even Internet poker. Playing Texas hold 'em online could very well become a federal crime.

"Internet gambling is the scourge of society," said Rep. Bob Goodlatte of Virginia in July, during the debate on the House floor. He went on to talk about the threat to children, the long-held belief that online gaming sites are merely convenient tools for money laundering and the potential revenue streams the Web sites could provide for global terrorists.

The operators of online gaming sites simply look at the bill and see a double standard. Lawmakers have carved out exemptions for state-run lotteries and horse racing, which can both be bet legally over the Internet in many states.

"It's selective prosecution," Ware says. "Why are the horse tracks in the United States that offer online gambling right now in the United States, why aren't they indicted?" Ware insists he's motivated by more than just greed. Like many operators of online gambling sites, he's convinced the industry can be effectively licensed and regulated. And he's putting his money where his mouth is.

World Sports Exchange bankrolled the Antiguan government's recent attempts to change U.S. polices through the World Trade Organization. Antigua filed a complaint against the United States with the referee of global commerce, arguing that because the U.S. allows Internet gambling on horse races and lotteries, it can't restrict trade with Internet gambling sites based overseas. As international standoffs go, this one was a huge mismatch: an online bookie and a tiny Caribbean island teaming up to take on the world's only superpower. Antigua is the smallest country in the WTO, with a population (69,000) that would fit into most NFL stadiums. But betting the underdog in this global trade dispute would have paid off. Antigua won a landmark ruling with WTO judges in 2004.

"This isn't just about gambling," Ware says. "You can have an opinion on whether you like gambling or not, but that's more or less irrelevant. It's about freedom for commerce, the freedom for a sovereign nation to make its own laws."

The recent victory by Antigua and World Sports Exchange might prove to be symbolic. The fact remains the WTO can't force member nations to do anything. The Department of Justice, far from acknowledging the ruling by the global court of commerce, remains undeterred in its efforts to pursue those who make book offshore.

"What business does a foreign company have importing into our country crime on a billion dollar a year scale?" U.S. Attorney Catherine Hanaway asks from her office in St. Louis, now the focal point in the latest federal case against the online gaming industry. "We have to right to enforce the laws of our country," Hanaway says, answering her own question, "and that's what we're doing."

John Barr is a reporter for ESPN's Outside the Lines. Producer Nicole Noren contributed to this story.

John Barr | email

Reporter ESPN Enterprise Unit