More that one year has passed since Flutter Entertainment Plc—the conglomerate who own Paddy Power, Betfair and FanDuel—announced the acquisition of PokerStars’ owner, The Stars Group (TSG).
The merger, which was negotiated at the height of the Covid-19 pandemic, made Flutter the largest gambling company in the world. With 78% of Flutter’s revenue derived from sports betting, and exposure of $1.4 billion to land-based retail operators, the company’s Chief Executive, Peter Jackson, bet on the PokerStars name to offset risk of sustained league closures—completing the $12.3 billion merger on May 5th, 2020.
Traffic increases of 230% to poker sites during the first Europe-wide lock-down in March 2020 proved the PokerStars name an attractive proposition. The brand will celebrate its 20th birthday in September, and remains the largest poker site in the world. Yet the M&A was not without its risks.
Blighted by ownership intrigues, regulatory disputes, billion dollars court settlements, and reputational catastrophe, PokerStars wore many of its problems publicly—due in large part to the spotlight shone on corporate governance by an investigation by Canadian regulators.
The mergers afoot in 2021 will see online gambling consolidate further. Many may throw up similar problems. The cost of failing to undertake compliance could pose huge penalties from regulators. Yet actually performing due diligence—as would be typical in an ordinary merger—is not at all simple. In just 15 years, remote gaming in some markets has ballooned from a pipe-dream, to a billion dollar sector, that serves millions of customers out with any regulation.
PokerStars At 20 & The Changing Face Of Online Poker In 2021
Besides being the brand responsible for the online poker we now know, PokerStars, at 20, has just completed its second, record breaking sales, in the space of 10 years. It has paid regulators fines in excess of $800 million for breaches of the 2006 Unlawful Internet Gambling Enforcement Act (UIGEA), and may yet settle a fine of $1.3 billion in the U.S state of Kentucky, which dates back to 2006. For the past five years, it has been allegations of insider trading against David Baazov and other senior executives at The Stars Group, which could have easily overwhelmed the brand.
In 2014, TSG—then Amaya Inc.—negotiated PokerStars’ sale from the Scheinberg family for $4.7 billion dollars. Forbes crowned Amaya’s Chief Executive, David Baazov, “The King of Poker”, for managing to purchase the world’s largest publicly listed gambling company aged 33—with personal assets shy of $130 million, and liquidity of only $36 million per annum.
With minimal capital commitment, and the backing of Blackwood GSO, Amaya also saw its share price soar. By the completion date, shares had risen 2,600% in the 4 years since Baazov first floated Amaya on Toronto’s TSX Venture Index. The Canadian entrepreneur—who is of Georgian, Jewish descent—spoke kindly of Canada, where he had settled with his family as a child. He spoke candidly of his struggles to succeed, and his gratitude for his accomplishments—which were enormous, and hard won. For context, Baazov’s share of Amaya stock, by Q4 of 2014, stood in the vicinity of $800 million.
Then, the mood changed. Exactly 11 days after Forbes profiled Baazov, Quebec’s financial regulator, the Autorité des marches financiers (AMF), raided the offices of Amaya Inc., “in relation to Amaya’s purchase of PokerStars and FullTilt the previous summer”.
Baazov—who has maintained that no impropriety occurred since news of the raid broke—responded to media in a measured tone. “I would say that the investigation for us is something that we anticipated given that there was a historical stock run-up in advance” he told Canada’s Business News Network.
Leaks, Resignations & Insider Trading Charges Test Amaya
On April 16th, 2016, gambling industry portal CalvinAyre.com highlighted documents leaked by the International Consortium of Investigative Journalists (ICIJ) that heaped further pressure on Amaya. One month earlier, on March 23rd, the AMF had announced their intention to charge Baazov with 5 counts of insider trading. A week later, the CEO announced his decision to take an indefinite leave of absence, in order to prepare his defense. Six months later, he resigned as a director of the firm. For the avoidance of any doubt, Baazov maintained his innocence throughout.
Considering the size of Amaya, the initial charges announced by the regulator concerned sums of money that were small. The AMF alleged that, in his capacity as CEO, David had passed proprietary material to his brother, Josh, who is also known by his Hebrew name, Ofer. The AMF alleged that this was subsequently passed to Craig Levett—Josh’s business partner—who provided it to interested parties, including relatives, for criminal gains they alleged to be approximately $1.5 million. None of the accused—including David and Josh Baazov—were found guilty of this offence.
Yet the big compliance problem came in the form of the ICIJ leak and the media furore that accompanied journalistic scrutiny of PokerStars owner. Josh Baazov and Craig Levett had been associated with gambling site BetonUSA—which went bankrupt, while deposits owed to players of approximately $1 million were never repaid. The ICIJ leak also implied involvement the pairs involvement with Oddsmaker.com, which has been widely reported. All companies have uncomfortable secrets, but with the AMF’s investigation ranked, by 2015, to be Canada’s largest insider trading probe, uncomfortable characterizations of the people closest to the merger began to unfold.
It was The Mail who broke the news that 3 companies owned by Josh Baazov were subjects of investigation in 1996 by the Federal Trade Committee, in a crack-down on fraudulent telemarketing code-named “Operation Jackpot”. In February 1997, a judge in the Northern District of Ohio ordered Josh Baazev to repay victims of the same scam $776,997.00 in damages—which had not been paid in 2016. The previously undisclosed fact that David Baazov’s older brother had served a 90 day prison sentence for 5 counts of cocaine possession, coupled with allegations by Buffalo News that Amaya’s lobbyist G. Steven Pigeon had solicited, and secured, an illegal donation of $25,000 to Governor Cuomo’s 2014 re-election campaign so that Baasov could attend a fundraiser with the New York Governor, did not help matters. Pigeon subsequently pled guilty to conspiracy to cause a foreign donation in a state election in violation of federal law, on October 9th, 2018.
Baazov Acquittal: Trial Disclosures Mean Difficult Questions Remain
On June 8th, 2018, David Baazov, and the other 13 parties charged by the AMF, were vindicated. Referring to the defence’s assertion that it had inadvertently received 320,000 privileged documents that it shouldn’t have seen, Judge Salvatore Mascia castigated the AMF’s “repeated errors” “laxism” and “lack of rigor”. David Baasov has brought civil proceedings against the AMF for $2 million, citing the Quebec regulator’s “abusive” tactics when investigating charges. Baasov’s failing was one common to the online casino industry in its first 20 years of operation. Remote gaming in America has operated in a grey space.
A former shareholder in William Hill—the gambling multinational who began merger talks with Amaya in 2016—told me that he “had strongly supported the major shareholders who, when canvassed, opposed any merger with The Stars Group”. “While many of the charges were against former C-Suite executives, or were still subject to investigation, it seemed inconceivable to me that anyone was entertaining a deal worth $6.5 with a company whose founder was facing insider trading charges of a scale rarely seen. However, now I have come to understand that this sector is very different to the traditional view I have of William Hill, which has been operating land-based retail betting premises which offer sports-books in the United Kingdom since the 1930s. Now, I wonder what due diligence could be put on my desk that would persuade me that as I was safe as can be with an online casino provider”.
Balancing Risk: Does United States Legal Reform Mean Safer Remote Casino Bets & Mergers?
The irony of TSG’s acquisition of PokerStars in 2014, was that in some respects the changes which Baasov had hoped to introduce—in the form of regulation, and licenses for poker stars United States market—are greatly limited in their scope by legislation. By 2006, as the biggest privately owned gambling company in the world, the company—then owned by Isai Scheinberg—was valued at $2 billion dollars. Yet the 1961 Interstate Wire Act, which clearly prohibits sports wagers, meant incorporation on the Isle of Mann, and mailing checks to payment processing companies in Costa Rica. The 2006 Unlawful Internet Gambling Enforcement Act (UIGEA)—which focused squarely on preventing internet wagers on casino products and games of chance—was the final nudge which Scheinberg needed to be done with the brand.
Today, the five states which allow remote gambling—Delaware, Nevada, New Jersey, Pennsylvania and West Virginia—will generate more than $500 million in tax revenue. Research & Markets projected in April that the global online gambling market was worth $58.7 million in 2020, rising to $96 million by Q4 of 2025. Yet, as JD Supra added, these figures are not the motivation for mergers. “With an estimated US$150 billion black market sports betting industry in the US, ongoing deregulation suggests that the long-term potential will drive considerable revenue growth and, with it, M&A interest”.
Regulating the sector seems to be the direction of choice, and there is cause to say that were companies like PokerStars not forced to operate within the narrow bounds of legality, it would encourage an environment that was far more corporate. Several further ownership debacles may yet blight gambling, as the big companies consolidate to control a $150 billion market.
But while the culmination of PokerStars’ insider trading case has been positive for Scheinberg’s legacy, and for millions of players, as it has not—for now—diminished PokerStars global standing, deeply uncomfortable questions for gaming stem from disclosures made by the AMF investigation. When individuals with proven criminal convictions have not disclosed them, this is because they know such convictions may prohibit their owning shares, or would detriment a company’s standing before market, lenders and competitors. Moreover, why did it take the largest insider trading investigation in Canadian history, a leak from the ICIJ and the prosecution of a Cuomo linked lobbyist to tell the gambling industry facts which Stars Group could have easily explained?
The insider trading accusations may have been cleared for now, but it remains to be seen whether further cases will be brought in the aftermath of the pandemic, and PokerStars merger with Flutter.