
Full Tilt Ponzi - MaysonL
http://blogs.reuters.com/felix-salmon/2011/09/20/full-tilt-ponzi/
======
encoderer
Some backstory for those not all that familar w/ online poker:

Full Tilt, along w/ PokerStars, has long been regarded as a premier
destination for online poker. A lot of marketing presence, a lot of players, a
large range of games.

They rolled out an innovative way to play cash-game poker where you never had
to wait for a hand. Several thousand people would join a, say, $1/2 game of NL
Holdem, and as soon as 9 people were ready to play, they sat and formed a
table and were dealt a hand. You fold? As soon as 8 other people fold, bam,
you're in another hand. In practice, you never had to wait more than 1 second.

They certainly did make millions in profit on a "rake." However they have an
aggressive and lucrative affiliate program that would see them paying out as
much as 1/3 of a players lifetime rake to the entity that referred them to the
site. (aka "Rake Back")

As an American player, until the crackdown earlier this year, I had no
problems playing. When I cashed out, they mailed me a check drawn on a US
bank. If I had to deposit more, I could do so from my credit card.

This is a big blow for the credibility of the industry IMO.

~~~
TheCowboy
The 'rush poker' innovation was relatively recent and likely inconsequential.
It definitely was only a tiny amount of their revenue stream

(It also seemed rare to not have your credit card blocked for making deposits.
So I wouldn't express it as a commonality.)

The industry has been lacking credibility for some time. Players have been
pushing to get it regulated to avoid something like this from happening.

~~~
dustingetz
if your average player is 1-tabling, he's getting (maybe) 80 hands/hour. that
same player at a rush table is getting 250 hands per hour. rush poker probably
tripled their revenue. who knows how many times it multiplies their profits.

~~~
ssharp
You lose some competitive advantage with the rush style, mainly in reading
your opponents tendencies in betting patterns, hands played, etc., so win-
rates don't scale entirely with hands/hour.

~~~
dustingetz
House revenue and rake, not player winrates.

Edit as an ex midstakes amateur, frankly I speculate rush is unbeaatable after
rake bc the nash equilibrium style is ez and widely known, good players have
no edge, bot wet dream. Sent from mobile

~~~
ssharp
That makes sense then - I completely misread what you were saying.

I only tried rush poker in passing once. By the time it came around, I had
already been out of the online poker game (I pretty much gave it up after
PartyPoker withdrew from the market), but if the tracking programs w/ heads-up
displays still worked and you could get enough data on the people you were
paired with, you could figure out people's pre-flop tendencies enough to
probably squeak out an edge. Losing post-flop data hurts though, unless that
data was still tracked even though you moved on after folding.

------
heyitsnick
To clarify a couple of points raised through the comments thread.

\- According to the DOJ, prior to black friday, FT had $60m in the bank and
owed $390m to players. Shortly after black friday, in June this figure was
$6m.

\- There are two main reasons for this - one is the exorbitant payouts - over
$440m was paid out to FT partners who held equity in the company - that were
taken from players funds. Named are 4 people, Bitar, Lederer, Ferguson and
Furst. The DOJ alleges almost $120m was paid out to these 4 alone, and
Ferguson is 'owed' another $60m in dividend payments.

\- However, unnamed are many others who also received payouts; the DOJ claims
FT - even when they knew they were insolvent - "continued making payments of
approximately $10 million per month" up until April.

\- Furthermore, they were making sizeable loans to their roster of
professionals with players funds. One mention of "Player Owner 1" almost
certainly refers to Phil Ivey.

\- Finally, they were basically fronting US players millions - the DOJ alleges
$120m in total - because they were unable to process deposits.

\- The reason this is nothing like a bank investing a customers money and why
the DOJ is alleging this is "fraud" and a "ponzi scheme" (nb there is nothing
in the amended complaint that suggests charges of a ponzi scheme; but it did
come from Preet Bharara, U.S. Attorney for the Southern District in a
statement) is because the money was not invested; it was used for dividend
payments. Meanwhile, FTP was publicly claiming their players funds were
maintained separately to operating accounts, deceiving players.

\- This really has nothing to do with affiliates "taking money out of the
system."

If you're interested in reading more, I write for this online poker news site:
<http://pokerfuse.com/news/law-legislation/fraud-tilt-poker/>

~~~
martinkallstrom
I like how their brand name invites writers to construct these headlines like
Full Tilt Ponzi and Fraud Tilt Poker. A Google search reveals that a couple of
forum posts actually have referred to them as Full Theft Poker which completes
the set.

Which in turn leads to the inevitable mashup of nicknames: The eponymous Fraud
Theft Ponzi. Zing! Pow!

~~~
heyitsnick
You might be interested in the #FTPstandsfor hash tag.

------
0x12
Bank run in 3, 2, 1...

From the full tilt poker homepage:

"System Update

We apologise but the system is currently down. Please check back later. Please
direct all enquiries to support@fulltiltpoker.com."

wsj article:

[http://online.wsj.com/article/SB1000142405311190410670457658...](http://online.wsj.com/article/SB10001424053111904106704576582741398633386.html?mod=googlenews_wsj)

Layman explanation: Full Tilt Poker runs a wallet system, the sum all the
users money is smaller than what they have in their bank accounts.

The 'Ponzi' element comes from their ability to attract new players at such a
high rate that they can pay the withdrawals.

What makes it doubtful that this really is a Ponzi scheme is that - a bank run
excepted - they probably would end up _not_ paying out a very large percentage
of the money they owed if operations continue, simply because most of the
those playing online poker get fleeced incrementally, every dollar placed as a
bet has a rake associated with it and that rake could cumulatively be a large
percentage of the total money deposited. I don't run an online casino so I
have no clue how often a given deposited dollar passes the tables before being
withdrawn.

If there was one part here that is sloppy/criminal then that should be that
they overpaid their affiliates.

A typical Ponzi scheme does not have affiliates taking a bunch of money of the
table.

~~~
ncavig
Excuse my ignorance, but isn't this quite similar to how banks work? I was
under the assumption that banks don't have enough cash on hand to pay out all
clients if everyone decided to withdraw.

~~~
pmiller2
That's true. It's called "fractional reserve banking." (
<http://en.wikipedia.org/wiki/Fractional-reserve_banking> ) In fact, most of
the money in the economy _doesn't even exist_ as physical coins or bills
because of this.

~~~
zby
The difference is that a bank invest that money, when it receives the money
back it can pay the clients. FT payed it as dividends to it's owners - there
was no plan to return it to the players.

------
muyuu
Even if the complaint is true, this is not a Ponzi scheme any more than any
bank in a fractional reserve system, like basically everywhere nowadays.

In a Ponzi scheme you take new money fully aware that you aren't going to be
able to repay in the medium/long term. In other words: you know you don't have
a scheme that actually works well enough to pay the profits you are promising.
This is not the case here at all. If the complaint is true - which may or may
not be -this is theft, plain and simple.

Note that the difference between a Ponzi scheme and a recklessly run
investment shop is sometimes academic. One can sometimes be unable to tell
apart failed, unrealistic expectations and successful fraud. But here the
business model is solid and they have simply taken from users pockets for fun
and profit. Again, if the complaint is true.

Bit tired of hearing "Ponzi" misused time and again. I guess it makes for
sensational headlines.

~~~
markmccraw
FWIW, the language comes from the DOJ attorney, so I don't think you can blame
the headline writers.

------
pyoung
It will be interesting to see if Full Tilt has a solid defense behind how they
handled the cash. Full Tilt (and most other poker sites) make their money by
taking a rake (small percentage) of every pot. Theoretically, over the long
run (i.e infinity), almost all of the money would end up in full tilt's
pockets. If deposits were outpacing the withdrawals, then they could possibly
argue that they didn't need to have much cash on hand to cover future
withdrawals. Additionally, considering they are a poker site, I doubt that
banking regulations apply to them.

~~~
justincormack
Its not about having cash in hand. Thats cashflow, although businesses fail on
cashflow issues, you are allowed to take that risk. However it is illegal for
any company to trade while insolvent, when they have negative assets like
here.

------
wonjun
Full Tilt had the best user interface and experience. I'd love to see someone
write about their software.

------
jgeerts
2 things always bothered me about poker sites:

1\. No one ever takes a look if the code that is run by these poker sites is
indeed valid.

2\. No one ever knows what happens with the poker players money once it's been
deposited and it's never clear how easy it is to get it back.

There should be some kind of independent organism checking if the site is
credible or not. Now the thing checking these sites are their users...

------
vide0star
This is further evidence the industry should be regulated and taxed in the US.
The amount of money following around the poker/betting/online gambling
industry is immense and there's no reason with a little oversight that this
mess can be avoided.

------
robjohnson
I agree with the statement that this is precisely why we should regulate it.

------
InclinedPlane
I don't get it, a Ponzi scheme is an investment program, in what sense is
poker ever considered an investment program?

------
ShawnJG
this is a perfect example of taking something that would normally be legit and
because it is outlawed rules and regulations are flouted at best, a massive
fraud and corruption at worse. When I see cases like this, I was wonder how
people involved but they would be able to get away with this if you look at
the amount they supposedly had on deposit versus what they actually had it
doesn't take an accounting major to know there is a huge discrepancy that you
will unlikely be able to pay back. It's clear the poker sites make some money
through ads and transactional commission but since people play against each
other they don't benefit from the advantages a normal casino would have.
Although people lose their money they lose it to the person across the table
not to the "house". With this high-profile company now under a dark cloud of
suspicion, they are definitely putting a big if not final nail in their
coffin. With player bots, player collusion and security vulnerability in their
systems people start to think long and hard before they wager money online.

~~~
mc32
Financial "products" are regulated by the gov. That didn't seem to have the
desired effect back in 2008.

I don't think fraudsters care about regulation. They care that they can sucker
people.

~~~
notahacker
The financial crisis (and gambling losses at legitimate sites) weren't the
result of bankers diverting investors' funds into their personal bank
accounts, as is alleged here.

That's illegal, and easily prevented at a regulated site where deposited funds
are required to be accounted for (and preferably held in escrow). Regulation
in banking or in gambling doesn't make it impossible to lose; it makes it
possible for winners to get their money and impossible for the company
handling the money to simply pocket it.

~~~
mc32
My point was that regulation and scrutiny didn't prevent the likes of a Bernie
Madoff providing a financial product and running a ponzi scheme.

In addition, the financial industry at large can legally provide all kinds of
leveraged products which pass scrutiny and result in hefty bonuses (personal
profit) but which can end with ruin for the individual and group investors
because they are structurally unsustainable (i.e subprime lending had to come
crashing). On top of that, the institutions which benefitted during the boom
then turned around and asked the people to prop them up despite the
questionable risks they took because the world could not afford to have them
fail --we blinked.

~~~
Steko
Your premise seems to be that all regulation is the same. Correct me if I'm
wrong but your argument essentially is saying: "financial products were
regulated in 2008, well see how that worked out, therefore regulation doesn't
really work well"

Sorry I don't buy that. Financial regulations put in place during the great
depression worked pretty good. Then they were slowly pared back over three
decades starting with Reagan. All the evidence I've seen is that the financial
products were massively under regulated.

~~~
mc32
I see what you are saying. I think regulation helps and it provides a way for
redress. Those are good byproducts of regulation. I think my point was that
bad people will still try to pull fast ones -regulated or not. I imagine the
frequency of fraud could be reduced by regulation.

So, from that standpoint it might be better to have it on the up and up and
supervised -but supervised with a very keen eye and a regulation with teeth,
as it were.

------
rorrr
The numbers don't add up.

    
    
        Owed to the players: $390,695,788
    
        In the bank:          $59,579,413
    
        Lederer took:         $42,000,000
    
        Ferguson took:        $85,161,305
    

What happened to the rest $204 million?

~~~
suking
I imagine they had a ton of employees, server costs, other executives that got
paid well. They could have also given out lines of credit to some players and
never collected the actual $, etc.

------
aneth
This is the government fishing for a law to prosecute unrelated behavior that
is insufficiently regulated or completely legal. This was not a ponzi scheme
as many others have commented. They kept enough cash to pay more than enough
of the anticipated withdrawals, and had an operating business that could
quickly earn any need for more funds should withdrawals spike. This is
standard practice in banking and insurance. I hear Warren Buffet heads a big
ponzi scheme too.

If FTP did not segregate finds as advertised, perhaps they committed some sort
of fraud, but theft and ponzi this is not.

~~~
justincormack
No, they were clearly trading while insolvent. Saying you can cover
liabilities from notional future profits is illegal. As this is hacker news,
recommend you dont run a startup while you do not understand this.

~~~
aneth
"Saying you can cover liabilities from notional future profits is illegal"

Almost every business does this, so I suppose they should all be prosecuted
and we should send our financial system back to the Middle Ages. If I take out
$1M loan and invest it in my business, my intent is to pay that liability with
notional future profits. If I purchase something Net 90 and don't have the
money in the bank, I'm apparently violating the law. Off to jail I go.

------
BrandonM
If FullTilt is a Ponzi, then any startup is a Ponzi. Investors put money into
the startup, the founders spend that money (in part on their own incomes), and
based on the company's business model, the investors reasonably expect to get
a return on their money.

FullTilt made probably $1M+ per day in rake alone. Even taking costs into
account, FullTilt could rake enough to pay out all accounts within a couple
years. That is decidedly _not_ a Ponzi scheme, which has no hope of ever being
able to pay back its investors.

~~~
jarrett
The difference is that players were not _investors_ , they were _depositors_.

When you invest money in a company, you do so with the understanding that the
money becomes the company's and will be spent. In return, you get equity
(typically). You don't have an "account" with the company from which you can
make withdrawals.

By contrast, poker sites operate like banks, taking deposits from people with
the understanding that those deposits will be held in trust. You're not buying
equity in the poker site, and your money doesn't become their money. It's
still your money; it's just being held in an account they manage. This is why
commingling is bad--it obliterates the distinction between their money and
yours.

Obviously, these poker sites are not FDIC insured like banks. But a legitimate
poker site would still take all reasonable precautions (such as segregating
the company's funds from depositors') to protect your money.

~~~
TheCowboy
Another angle is that players might not even legally be considered depositors.

There is a payment processor whose funds were seized where the government even
put on a display of the giant check of funds seized. These funds ultimately
belonged to players (good or bad). The situation is still unclear, as
information is limited, but it appears that players will not be legally
entitled to any of the seized funds.

As far as poker sites go, they may also not be considered depositors. Some
sites/casinos view it this way: you're buying chips.

~~~
justincormack
Hard to say you are buying chips when you do not receive anything, would be
hard to argue that. I dont think regulated operators are allowed to work like
this. Aside from the US issues, Fulltilt was actually shut down by the
gambling regulator in Alderney, so they were not unregulated.

