Federal law enforcement officials routinely seize money they suspect is connected to activities like money laundering, terrorism or drug smuggling. But in early April, United States marshals seized $3.2 million from Discovery Communications, the television and media company, in an aggressive effort to crack down on a new target, Internet gambling.
The money initially belonged to Tropical Paradise, a Costa Rica-based Internet casino operation, which in October paid Discovery for television spots to advertise an online poker room, ParadisePoker.com. According to court documents, the government seized the money and told Discovery, which is based in Silver Spring, Md., that it could be party to an illegal activity by broadcasting such advertisements.
Federal prosecutors contend that online gambling sites are illegal, but the offshore casinos fall outside their jurisdiction. So for nearly a year, the government has been trying to curb the sites' activities by investigating and pressuring American companies that provide services to offshore gambling sites on the theory that they are "aiding and abetting" the operations.
Until now, the effort has largely involved seeking information from American companies, including major broadcasters, Web portals and industry consultants. The seizure of money significantly escalates the government's attack.
The move has raised strong criticism from First Amendment experts, media industry executives and people involved with offshore casinos. They assert that the federal government is relying on an untested legal theory in taking action against American companies, and using tactics more typically used against organized crime activities.
"This is not drug money or terrorist money," said Rodney A. Smolla, dean of the University of Richmond School of Law. "The fact it is being treated as such shows a crusader's zeal against offshore gambling."
The possible message being sent, legal experts said, is that any American company that does business with an offshore casino - including software makers and consultants - could be in danger of having proceeds from that business seized.
"This is a strategy of intimidating anybody who is in the chain of commerce," said Lawrence Walters, a lawyer who works with offshore Internet casinos, as well as software companies that do business with the casinos.
The Justice Department declined to comment about this case or other investigations in this area.
Tens of millions of Americans place bets over the Internet, wagering on sporting events and on casino games like virtual blackjack, roulette and poker. But the casinos are outside the United States, typically in Costa Rica and the Caribbean or in Britain, where the operations are fully licensed and legal.
The legality of online betting is a complicated matter of some dispute in the United States. The government asserts that the federal Wire Act prohibits all Internet casinos, but the courts have been divided, legal scholars said.
The individual states also have laws that prohibit any gambling enterprises that they do not formally authorize. Some states, but not all of them, make it illegal for individuals to place a recreational bet; New York, for instance, does not make it illegal to place a bet online.
In June 2003, the Justice Department sent letters to trade groups representing major broadcasters and publishers, telling them their members could be violating the law by displaying advertisements on behalf of offshore casinos. The government said the businesses could be seen as aiding and abetting the activities of the casinos.
Then, Raymond W. Gruender, the United States attorney in the Eastern District of Missouri, convened a grand jury, sending subpoenas to companies asking them to provide a broad range of information about their relationships with offshore casinos. The investigation had a significant impact. Some major broadcasters, including Infinity Broadcasting and Clear Channel Communications, stopped taking gambling ads last fall. Google and Yahoo, the Internet search engines, said in April that they would stop taking such advertisements.
So far, executives at media companies have not voiced public challenges to the government campaign. An executive for one media company, who asked that his firm not be identified so as not to attract further attention from the Department of Justice, said that the government was promising to go easy on broadcasters and Internet sites that cooperate with its inquiry.
The executive said he had heard from people involved in the investigation that the government might begin levying fines or pressing charges against media companies.
The financial stakes are not insignificant. In court papers, Tropical Paradise, a Costa Rican casino operator, said it had entered into a contract, dated Oct. 5, to pay $3.5 million for advertising during broadcasts of the "World Poker Tour" on the Travel Channel, a part of Discovery Networks, which is a unit of Discovery Communications. (Discovery is a partner of The New York Times in another cable channel.)
Under the contract, the Travel Channel was to broadcast 308 30-second commercials in a six-month period for ParadisePoker.com, where people can play virtual poker free or for pay.
In a separate contract, dated Oct. 14, Tropical Paradise agreed to pay $350,000 to run advertisements on the Discovery Web site. According to the court papers, filed in federal district court in Maryland, Tropical Paradise paid the amount of the contracts in full, and was told the money would be refunded if the advertisements did not run.
Indeed, only a small portion of the advertisements were broadcast. On Oct. 25, Discovery, after learning of the government's position about advertising of offshore gambling, told Tropical Paradise that it would cease broadcasting the commercials. According to court papers, the parties agreed Discovery would refund the money for commercials that did not run.
But Tropical Paradise never got its money back, and in April it sued Discovery for breach of contract in federal district court in Maryland, asserting that it is owed $3.25 million for the unperformed portion of the two contracts. In response to the lawsuit, Discovery, without challenging Tropical Paradise's right to the money, said it no longer had the money because it had been seized by the United States marshals on April 6.
"The issues presented by this case are intertwined with an ongoing criminal investigation (and seizure of money) conducted by the United States Department of Justice of offshore online gambling operations," according to Discovery's court filing on May 7.
Sanford Saunders, a partner for Greenberg Traurig, a law firm representing Tropical Paradise, said Discovery should not have taken the money in the first place if it had doubts about the legality of the advertising. "Discovery knew our business," Mr. Saunders said. "They knew the purpose of our advertising, and they told us this could be legally done."
The issues are considerably broader than a contract dispute between the two companies, said Mr. Smolla, the dean of the University of Richmond law school. It is not clear that the operators of offshore casinos are violating federal law, he noted. And he said there are First Amendment protections that apply to broadcasters, which could weaken any case against them in this context.
The issues are made even murkier because federal prosecutors are trying to extend their reach to companies operating legally overseas. The World Trade Organization in March issued a preliminary ruling that said the United States is violating its free-trade obligations by prohibiting online gambling operations.
Some members of Congress reacted angrily to the W.T.O. ruling, calling it an effort to extend the values of other countries to the United States.
But that argument could be applied to federal actions as well, Mr. Smolla said.
"It's an extraordinary exercise of American hubris to say that we have the right to seize the money," Mr. Smolla said. "This is a global worldwide and economic network, and we're using this vehicle to extend our laws into another nation in a very aggressive way."
NY Times.
The money initially belonged to Tropical Paradise, a Costa Rica-based Internet casino operation, which in October paid Discovery for television spots to advertise an online poker room, ParadisePoker.com. According to court documents, the government seized the money and told Discovery, which is based in Silver Spring, Md., that it could be party to an illegal activity by broadcasting such advertisements.
Federal prosecutors contend that online gambling sites are illegal, but the offshore casinos fall outside their jurisdiction. So for nearly a year, the government has been trying to curb the sites' activities by investigating and pressuring American companies that provide services to offshore gambling sites on the theory that they are "aiding and abetting" the operations.
Until now, the effort has largely involved seeking information from American companies, including major broadcasters, Web portals and industry consultants. The seizure of money significantly escalates the government's attack.
The move has raised strong criticism from First Amendment experts, media industry executives and people involved with offshore casinos. They assert that the federal government is relying on an untested legal theory in taking action against American companies, and using tactics more typically used against organized crime activities.
"This is not drug money or terrorist money," said Rodney A. Smolla, dean of the University of Richmond School of Law. "The fact it is being treated as such shows a crusader's zeal against offshore gambling."
The possible message being sent, legal experts said, is that any American company that does business with an offshore casino - including software makers and consultants - could be in danger of having proceeds from that business seized.
"This is a strategy of intimidating anybody who is in the chain of commerce," said Lawrence Walters, a lawyer who works with offshore Internet casinos, as well as software companies that do business with the casinos.
The Justice Department declined to comment about this case or other investigations in this area.
Tens of millions of Americans place bets over the Internet, wagering on sporting events and on casino games like virtual blackjack, roulette and poker. But the casinos are outside the United States, typically in Costa Rica and the Caribbean or in Britain, where the operations are fully licensed and legal.
The legality of online betting is a complicated matter of some dispute in the United States. The government asserts that the federal Wire Act prohibits all Internet casinos, but the courts have been divided, legal scholars said.
The individual states also have laws that prohibit any gambling enterprises that they do not formally authorize. Some states, but not all of them, make it illegal for individuals to place a recreational bet; New York, for instance, does not make it illegal to place a bet online.
In June 2003, the Justice Department sent letters to trade groups representing major broadcasters and publishers, telling them their members could be violating the law by displaying advertisements on behalf of offshore casinos. The government said the businesses could be seen as aiding and abetting the activities of the casinos.
Then, Raymond W. Gruender, the United States attorney in the Eastern District of Missouri, convened a grand jury, sending subpoenas to companies asking them to provide a broad range of information about their relationships with offshore casinos. The investigation had a significant impact. Some major broadcasters, including Infinity Broadcasting and Clear Channel Communications, stopped taking gambling ads last fall. Google and Yahoo, the Internet search engines, said in April that they would stop taking such advertisements.
So far, executives at media companies have not voiced public challenges to the government campaign. An executive for one media company, who asked that his firm not be identified so as not to attract further attention from the Department of Justice, said that the government was promising to go easy on broadcasters and Internet sites that cooperate with its inquiry.
The executive said he had heard from people involved in the investigation that the government might begin levying fines or pressing charges against media companies.
The financial stakes are not insignificant. In court papers, Tropical Paradise, a Costa Rican casino operator, said it had entered into a contract, dated Oct. 5, to pay $3.5 million for advertising during broadcasts of the "World Poker Tour" on the Travel Channel, a part of Discovery Networks, which is a unit of Discovery Communications. (Discovery is a partner of The New York Times in another cable channel.)
Under the contract, the Travel Channel was to broadcast 308 30-second commercials in a six-month period for ParadisePoker.com, where people can play virtual poker free or for pay.
In a separate contract, dated Oct. 14, Tropical Paradise agreed to pay $350,000 to run advertisements on the Discovery Web site. According to the court papers, filed in federal district court in Maryland, Tropical Paradise paid the amount of the contracts in full, and was told the money would be refunded if the advertisements did not run.
Indeed, only a small portion of the advertisements were broadcast. On Oct. 25, Discovery, after learning of the government's position about advertising of offshore gambling, told Tropical Paradise that it would cease broadcasting the commercials. According to court papers, the parties agreed Discovery would refund the money for commercials that did not run.
But Tropical Paradise never got its money back, and in April it sued Discovery for breach of contract in federal district court in Maryland, asserting that it is owed $3.25 million for the unperformed portion of the two contracts. In response to the lawsuit, Discovery, without challenging Tropical Paradise's right to the money, said it no longer had the money because it had been seized by the United States marshals on April 6.
"The issues presented by this case are intertwined with an ongoing criminal investigation (and seizure of money) conducted by the United States Department of Justice of offshore online gambling operations," according to Discovery's court filing on May 7.
Sanford Saunders, a partner for Greenberg Traurig, a law firm representing Tropical Paradise, said Discovery should not have taken the money in the first place if it had doubts about the legality of the advertising. "Discovery knew our business," Mr. Saunders said. "They knew the purpose of our advertising, and they told us this could be legally done."
The issues are considerably broader than a contract dispute between the two companies, said Mr. Smolla, the dean of the University of Richmond law school. It is not clear that the operators of offshore casinos are violating federal law, he noted. And he said there are First Amendment protections that apply to broadcasters, which could weaken any case against them in this context.
The issues are made even murkier because federal prosecutors are trying to extend their reach to companies operating legally overseas. The World Trade Organization in March issued a preliminary ruling that said the United States is violating its free-trade obligations by prohibiting online gambling operations.
Some members of Congress reacted angrily to the W.T.O. ruling, calling it an effort to extend the values of other countries to the United States.
But that argument could be applied to federal actions as well, Mr. Smolla said.
"It's an extraordinary exercise of American hubris to say that we have the right to seize the money," Mr. Smolla said. "This is a global worldwide and economic network, and we're using this vehicle to extend our laws into another nation in a very aggressive way."
NY Times.
