UB and AP Since Black Friday

May 20, 2011 - 9:59 AM EDT
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Confusion surrounds sister sites Ultimate Bet and Absolute Poker post Black Friday, converging from multiple angles and leaving players to guess at what is and what isn’t. With high-profile legal firm Blank Rome directing UB and AP to say as little as necessary after the indictment, corporate headquarters has remained largely silent. The company waited six days after the indictment before releasing any statement, and this merely named legal counsel. They’ve provided only vague language about player funds and the future.

As a result of this effective silence, even basic questions like where UB/AP corporate offices are located remain unanswered, let alone more important questions like the viability of the sites or the whereabouts of player funds. And, though a cohesive and understandable message is not forthcoming from the company, significant information has leaked from inside sources, painting a picture of a company engaged in numerous complex internal struggles.

Meanwhile, player funds hang in the balance.

The Madeira Fjord AS Feud

On May 1st, a nasty shareholder dispute became public with dual articles in the St. Petersburg Times and long-standing Norwegian news bastion, Dagens Næringsliv. These reveal the story and struggle of the shareholders of Madeira Fjord AS (and Portuguese subsidiary Avoine), a Norway-based firm built to house early Absolute Poker investors while insulating them from direct involvement with online gambling. As originally configured, they were to receive twelve percent interest per year on a $250 million promissory note nominally written by Joe Norton’s Tokwiro company in 2007 after AP’s merger with Ultimate Bet. The note’s value was arbitrary and geared towards providing regular and ongoing profit to early AP investors. This allowed them to remain in the US and legally report their income as capital gains to the IRS while many of the original founders moved to Costa Rica to run the company.

In the two articles, Madeira shareholders reveal a pattern of financial irregularity, convoluted ownership structure, and missed payments to investors. According to the St. Petersburg Times article, when investors gained access to the 2009 UB/AP financials, they were immediately surprised by exorbitant expenses resulting in a roughly $34 million net loss. The documents allegedly showed charges of $10 million for “software owned by the company” and unidentified “consultants” receiving ”nearly $18M in fees.” Shareholders must have suspected that these fees might have gone to the founders themselves. The rocky relationship finally ended after Black Friday, when Blanca sent a memo to Madeira shareholders stating simply that it is currently unable to make any payments toward its debt obligations. Additionally, Blanca has further advised that there will be no future payments.

However, UB/AP itself has not declared bankruptcy. Instead, it is this $250 million shareholder investment vehicle that faces liquidation. Madeira may even be responsible for $40M dollars in taxes, despite the fact that its shareholders don’t hold title to the underlying assets at the poker site. Whether they will sue the small circle of founders who do hold these assets is an open question.

Large Layoffs and a Costa Rican Labor Dispute

On May 3rd, a leaked internal memo informed employees at the two main customer-facing divisions of UB/AP, Innovative Data Solutions and The Big Tree Agency of a large workforce reduction. Costa Rica has legally mandated severance pay that companies are required to set aside in case of situations like this. At IDS and TBT, the amount is nearly $3 million dollars, and leaked e-mails with UB/AP COO Paul Leggett show IDS President Olman Rimola trying to obtain these funds, apparently without success.

In the exchange, Rimola threatened to take corporate information to the FBI if the money is not paid, and he even said that he has given his lawyers this information in case “anything happens to me, or people close to me.” It’s not clear how serious these threats are, but the email exchange preceded an early-morning raid of properties associated with Rimola by local law enforcement. While we may never know exactly what occurred between the parties, this snippet is certainly very suggestive of another complex back story, with yet another party claiming to be owed money by UB/AP.

Non-US Funds Trickling Out, US Funds Frozen

After Black Friday, UB/AP stopped withdrawals for all players. The company later started processing withdrawals to non-US players with a cap of $250, and it has since raised the cap to $500 for non-US players and even to $1,000 for certain kinds of transactions. A payout status thread on 2+2 reveals approximately fifty successful transactions reported by 2+2 members in the 30 days since the indictments for a total of just under $15,000 with $1,000 payouts starting to go through. So, money has begun to trickle out of the site, but a number of reports of withdrawals pending since late April and early May suggest that all is not going smoothly, even for non-US players at the capped rate.

Meanwhile, US players’ funds are still frozen. On May 4, UB/AP signed an agreement with the DOJ for processor access to return funds to US players. However two things are strange about the agreement: First, neither Blanca nor the DOJ issued a press release until May 10th, a full six days later. Second, when both of the other sites involved in the indictment, Poker Stars and Full Tilt Poker signed similar agreements, those documents returned the domain names that the DOJ had seized, and the DOJ issued a press release stating that “The Government stands to enter the same agreement with Absolute Poker if it so chooses.” In spite of this, the UB/AP agreement does not return the domain names; the company actually explicitly waives the right to ask for them back instead. Subject: Poker has not heard an adequate explanation of these inconsistencies, but they certainly show that UB/AP is having difficulties that Stars and Full Tilt are not.

Indeed, in spite of the agreement, US players are still unable to withdraw. As a result, across the internet, account holders have been negotiating the purchase and sale of accounts based on handshake trust with prices fluctuating wildly, ranging from ten cents to 85 cents on the dollar. Subject: Poker’s own Isaac Haxton caused a stir by offering to sell his $300,000 at twenty cents on the dollar. (Haxton that he received interest, but he withdrew the offer before selling any of his funds.)

To provide a rough sense of scope, EGR magazine reports competitor Poker Stars has returned over $100 million dollars to American players since Black Friday. Before Black Friday, Poker Scout, a site that tracks traffic at online poker sites, showed UB/AP operating at roughly 8% of total Poker Stars traffic on average. Using this number and many rough assumptions, back-of-the-envelope calculations1 suggest that Absolute Poker and Ultimate Bet have roughly between $22 million and $38 million of player funds on their site and that roughly between $14 million and $30 million of that comes from the US. While these numbers are likely inaccurate, they should provide a sense of the magnitude of the situation.

Speculation about What’s in Store

The press releases state Cereus intends to carry on outside of the US, and why not? They have a reliable platform currently operated by a skeleton crew, though it’s questionable whether the company can slug it out in the intense competition for players overseas. So, UB/AP will likely continue, perhaps under a new name, but its glory days are probably in the past; the only question is how hard the firm works to return player money.

Unfortunately, the capped payouts, the shareholders’ memo, and the company’s silence all suggest that the company does not have the money to repay players. Moreover, speculation that UB/AP had a weak overseas presence is proven correct by current Poker Scout numbers which are down nearly 85% and continue to drop. Rakeback affiliates also report in e-mails to customers that the company has ceased payments. In addition, the DOJ civil complaint lists five corporate accounts seized in addition to processor accounts. The Kahnawake Gaming Regulations do not require sites to ring-fence player deposits into protected pools, meaning the DOJ likely trapped a significant amount of player funds. For a company accused by shareholders of accounting irregularities with founders suspected of enriching themselves via consulting and other spurious expenses, it is hard to imagine a large pool of player money untouched.

Meanwhile, Blank Rome is in all likelihood negotiating to unfreeze bank accounts containing player deposits. This probably stands a good chance of success over the long run even if it means the company opening up the books to the DoJ. For players, this could mean a situation similar to Neteller where funds are fully or close to fully returned after a long several months and a lot of maneuvering. The civil complaint poses the main challenge, since it seeks monetary damages far in excess of player deposits. If prosecutors play hard ball by refusing to release accounts and then prevail in the case, players will almost certainly lose everything.

Edited on 5/21/2011 10:23 PM: Changed “indicted companies” to “sites involved in the indictment”.

Footnotes

  1. Assuming that between 30% and 50% of Poker Stars’ traffic came from the US and between 60% and 80% of Cereus’ traffic did, then Cereus had roughly between 10% and 20% as many US players as Poker Stars. Further assuming that the $100 million represents 70% of Star’s total US liability and that the ratio of traffic to average player balance was comparable across sites, these numbers suggest that UB/AP has roughly between $14 million and $30 million in US player funds on their site. Assuming that US and non-US players behaved similarly, this translates to a total worldwide player funds of between $22 million and $38 million.

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