US regulator casts shadow over boom in online poker

American regulators are threatening to clamp down on illegal internet gambling in a move that could damage prospects for PartyGaming's planned $10bn (£5.5bn) stock market flotation later this month.

American regulators are threatening to clamp down on illegal internet gambling in a move that could damage prospects for PartyGaming's planned $10bn (£5.5bn) stock market flotation later this month.

The official US position is that virtually all online gaming is against its laws, a fact that is also a huge source of uncertainty for PartyGaming and its main UK rival, Sportingbet. Both companies derive a large chunk of their revenues from American customers.

In the face of an explosion of electronic gambling across the US, the Department of Justice has in the past few months been stepping up its campaign against firms that offer it. The DoJ has written to several warning that internet gaming is against the law under the 1960s-era Wire Act and has issued subpoenas to companies associated with the business.

A spokesman for the DoJ said yesterday various "investigations are ongoing" against internet gambling companies. He added there was a "potential liability" of criminal prosecution for individuals who it finds have gone against the Act.

Esquire magazine admitted in April it had received a subpoena for carrying an advert for the online poker site Bodog.com. A letter from federal authorities earlier this year also appeared to have nipped in the bud an effort by the North Dakota Legislature to legalise certain forms of internet gaming.

Yet, because the DoJ has held back from any heavy-handed enforcement action so far, US customers can access a series of internet sites offering gambling on anything from tennis to poker over the internet.

The flotation of PartyGaming, the world's largest internet poker company, could spur the DoJ to further action. The majority of players on its Party Poker website are Americans, with just 5 per cent of customers coming from the UK. Some two-thirds of Sportingbet's revenues come from US customers.

Sportingbet maintains it is not breaking the law because it is based in the UK, where online gambling is legal and became subject to a host of regulations under the recently passed Gambling Act. PartyGaming is regulated and licensed in Gibraltar and its lawyers believe the Wire Act only applies to sports betting, and not poker.

The uncertainty, however, means investors will be demanding clarity from PartyGaming on the legal position of internet betting in the US before they invest. Greg Feehely of Altium Capital, said: "There is no doubt that there is a regulatory risk attached to this company and investors need to be aware of that. But that risk has also already been priced into PartyGaming's valuation. A company with that sort of growth record and potential would float at more than 20 times earnings. It is only being valued at around 10-12 times earnings, because of the risk of the uncertain legal situation in the US." He believes it is highly unlikely the US would begin prosecuting overseas poker companies.

Sorting out the contradictions between America's official legal position and the reality of the booming online industry is likely to move further up the agenda of Capitol Hill after a recent ruling at the World Trade Organisation which broadly upheld a complaint from Antigua, one of the WTO's smallest members. The island has built up a booming business in hosting online gaming businesses and said the US was being unfair by allowing online horseracing betting by US operators, while outlawing all other others of internet gambling.