PokerStars founder Isai Scheinberg pled guilty to charges of operating an illegal online gambling business Wednesday afternoon in a New York federal court.

The plea comes two months after the 73-year-old duel citizen of Canada and Israel originally surrendered to U.S. authorities. He was released on $1 million bail after initially pleading not guilty to all charges.

On Wednesday, however, he pled guilty to one count of operating an illegal gambling business. Scheinberg is now facing up to five years behind bars.

A Representative of Scheinberg said that the other charges were dropped and Scheinberg is excited to move on.

“Mr. Scheinberg is pleased to put this matter behind him and that all charges other than violating the 1971 Gambling Act have been dropped. Notably, all PokerStars players were paid back immediately and Mr. Scheinberg played an important role in ensuring that all of the players from other sites were repaid as well,” said Scheinberg’s representative.

According to the Department of Justice press release, Congress is recommending the maximum penalty. Scheinberg’s punishment will be levied by Judge Lewis A. Kaplan at a later date.

Scheinberg and 10 other executives of other major online poker rooms were charged with bank fraud, money laundering and illegal gambling in April 2011 on what the poker world refers to as “Black Friday.”

With Scheinberg’s admission of guilt, all 11 charged have now entered guilty pleas.

The government seized the domain names and funds of online poker rooms that were still operating in the U.S. after the 2006 passage of the Unlawful Internet Gaming Enforcement Act. For nearly nine years, Scheinberg stayed outside of the U.S. and continued to operate his business.

Even with the prison time recommended by Congress, it seems unlikely Scheinberg spends time incarcerated. Federal prosecutor Olga Zverovich told Forbes in January that the U.S. had “an agreement in principle on the basic terms” with Scheinberg.

“Ten years ago, this Office charged 11 defendants who operated, or provided fraudulent payment processing services to, three of the largest online poker companies then operating in the United States – PokerStars, Full Tilt Poker, and Absolute Poker – with operating illegal gambling businesses and other crimes,” said Manhattan U.S. Attorney Geoffrey S. Berman in a press release. “As Isai Scheinberg’s guilty plea today shows, the passage of time will not undermine this Office’s commitment to holding accountable individuals who violate U.S. law.”

Scheinberg founded PokerStars in 2001 and continued to operate in the legal grey area that existed in the United States after 2006.

In 2012, the company agreed to a civil asset forfeiture settlement wit the government and gave $547 million to the U.S. government. Just a year later, Scheinberg’s son, who took over the company following the 2011 charges, forked over an additional $50 million.

In 2014, the Scheinberg’s sold the company to Amaya for $4.9 billion. The company has since partially re-entered the U.S. market in the now legal and regulated New Jersey and Pennsylvania markets.

 

 

 

^Last Friday, Isai Scheinberg, the 73-year-old cofounder of PokerStars, the world’s biggest online poker company, boarded a plane in Switzerland for the 9-hour flight to New York City. On the other end, he would not be greeted at the airport by family members or businesses associates, but by federal agents who would take him into custody. Scheinberg, an Israeli-Canadian who spent years living in Canada and the Isle of Man, an offshore British dependency, has for two decades steered clear of American soil, especially since U.S. federal prosecutors had indicted him on gambling, bank fraud and money laundering charges in 2011. His sudden appearance in New York is the endgame of a high-stakes corporate and legal drama involving billions of dollars.

Federal prosecutors had launched extradition proceedings during a visit Scheinberg made to Switzerland. Scheinberg initially contested the extradition effort, but later decided to voluntarily travel to the U.S. to face the charges. In a hearing conducted in Manhattan’s federal court last Friday, Scheinberg pleaded not guilty and was released on $1 million bail. A representative for Scheinberg declined to comment.

Federal prosecutors in Manhattan had charged Scheinberg as part of a crackdown that shut down the U.S. facing web site of PokerStars and its main rival, Full Tilt Poker. Ten other men were also charged, all of whom have pleaded guilty in the years since to charges ranging from slap-on-the-wrist misdemeanors to felonies.

“Foreign firms that choose to operate in the United States are not free to flout the laws they don’t like,” Preet Bharara, the U.S. Attorney in Manhattan, said when the indictment was unsealed.

The federal action turned Scheinberg, 73, into a folk hero among online poker enthusiasts. In the aftermath, Full Tilt Poker collapsed and was unable to refund $330 million of player deposits. Bharara described Full Tilt as a “Ponzi scheme” and, in a bizarre twist, worked with Scheinberg to come up with a solution. The result was a $731 million deal that saw PokerStars acquire Full Tilt and settle a civil forfeiture proceeding. The Justice Department used the proceeds to repay Full Tilt’s U.S. customers in full while PokerStars covered the tab for Full Tilt non-U.S. customers.

But despite his help on the Full Tilt matter, federal prosecutors never gave up on going after Scheinberg. His son, Mark Scheinberg, went on to sell PokerStars for $4.9 billion in 2014 to a publicly traded company and Forbes estimates he is now worth $4.5 billion. Scheinberg Sr.’s surrender to the authorities marks the end of one of the wildest sagas in internet history, when offshore companies of dubious legality raked in billions of dollars from everyday American Janes and Joes who all thought for a minute that they could make millions online as poker stars.

^In 2003, Chris Moneymaker, a regular 27-year-old guy who worked as an accountant in Tennessee, sat in his home one afternoon and entered an $86 online poker tournament hosted by a company based in Costa Rica called PokerStars. He won the tournament and its prize—a $10,000 seat at the World Series of Poker. At Binion’s Horseshoe casino in Las Vegas, Moneymaker beat 838 other entrants, including the best poker players on the planet, to win the World Series of Poker’s Main Event and its $2.5 million purse.

It was a made for TV moment. ESPN had started popularizing poker programming in 2002 by building a camera directly into the table so viewers could see players’ “hole” (or face down) cards. Its broadcast of Moneymaker’s World Series of Poker run was as thrilling as any traditional sporting event. “This is beyond fairytale,” ESPN commentator Norman Chad bellowed. “It’s inconceivable!”

Moneymaker’s win sparked an online poker boom in the U.S. Millions of Americans rushed on the internet to try their hand at winning big cash. Poker seemed to be on TV all the time. By 2006, 8,773 poker players were contesting the World Series of Poker’s Main Event and PokerStars had hosted 38 million online tournaments. The “Moneymaker effect” was apparent, but the man who helped make it happen remained anonymous.

Isai Scheinberg is no ordinary guy. He grew up in Lithuania, earned a math master’s degree at Moscow State University, and bolted the Soviet Union by going to Israel. There, he fought in the 1973 Yom Kippur War and worked at IBM, eventually moving to its offices in Toronto. A gifted computer programmer, Scheinberg played a key role in the development and adoption of the now universal Unicode computing standard that allows computers everywhere to process the world’s different languages. Like many smart, numerate people of his generation, Scheinberg also liked to play poker, particularly in tournaments, even making an appearance at the 1996 World Series of Poker in Las Vegas.

In 2000, Scheinberg started PYR Software in Toronto to develop software for online poker companies, but he couldn’t get anyone in the nascent industry to license his software. So in 2001 Scheinberg and his son, Mark Scheinberg, decided to start their own company, PokerStars. Like many of their online gambling competitors, Mark Scheinberg initially set up shop in Costa Rica.  

The software that Scheinberg’s PYR developed was unique because it was designed for tournament play. PokerStars also offered traditional online poker tables, charging a commission fee for operating the games. But it was the tournaments that made PokerStars a hit with players. For a small amount of money—often less than $25— players could buy into a single-elimination tournament and have a chance at winning a huge payday without the fear of incurring big losses. Players also enjoyed the knock-out format that had players advance to successive rounds until an ultimate winner was declared. PokerStars emerged as the industry’s second-biggest company, trailing only Gibraltar-based PartyGaming, which dominated the world’s biggest online poker market and golden goose in the U.S.

But the U.S. Justice Department did not approve of foreign online poker companies operating in the U.S. Officially, it took the position that online poker violated the Wire Act of 1961. PokerStars and PartyGaming, however, kept serving up games in the U.S. So did another off-shore online upstart, Full Tilt Poker, which was promoted and run by famous professional poker players Howard Lederer and Chris “Jesus” Ferguson, together with Ray Bitar, Fergusons’ former colleague from his stock-brokering days. The big online poker companies advertised on television, promoted televised events, and sponsored the most famous poker players. Seinfeld’s Jason Alexander and baseball legend Orel Hershiser became PokerStars brand ambassadors. For a number of years in the early 2000s, with PokerStars advertisements appearing on television and the ease of setting up an account (sometimes only a credit card was needed) it seemed like the U.S. government was turning a blind eye to what was going on. 

For their part, the online poker companies argued that the Wire Act, with its reference only to “wagers on any sporting event or contest,” did not apply to poker. Another federal law, the Illegal Gambling Business Act, did not apply to poker because it was a game of skill, not gambling – or so they claimed. PokerStars, which moved its headquarters to the Isle of Man in 2005, obtained legal opinions from leading American law firms backing these positions. Scheinberg also moved to the Isle of Man and officially served as PokerStars’ chief technology officer.

^In March 2006, Calvin Ayre appeared on the cover of Forbes Magazine, which ran an article with the headline “Catch Me If You Can.” The son of Saskatchewan pig farmers, Ayre had moved to Costa Rica and built Bodog into a massive online sports betting company by taking bets in the U.S. Forbes figured Ayre was a billionaire and pointed out that Bodog appeared to violate the Wire Act. It was the kind of coverage that got attention in Washington.

A few months later, Congress passed the Unlawful Internet Gambling Enforcement Act. The law spooked the buttoned-up board members of publicly traded PartyGaming, which fled the lucrative U.S. market. Its stock plunged and never recovered. PartyGaming, which also offered online casino games in the U.S., would go on to strike a non-prosecution deal in 2009 with federal prosecutors, admitting it violated U.S. law and paying $105 million.

Scheinberg, on the other hand, ran a private company that only offered poker. The UIGEA law did not actually make online gambling illegal, but focused on regulating payment methods for gambling that was illegal under federal or state law. PokerStars immediately took over the U.S. market and became the biggest online poker company in the world. Its only serious competition came from Full Tilt, which also decided to keep offering online poker in the U.S. Scheinberg hired Richard Gephardt, the former majority leader of the House of Representatives, as PokerStars’ lobbyist in Washington and by 2010 PokerStars was generating about $500 million in annual profits on $1.4 billion in revenue.

The huge sums of money involved ensured that the industry remained in the cross-hairs of the Justice Department, particularly prosecutors in Manhattan. Led by an ambitious young Assistant U.S. Attorney, Arlo Devlin-Brown, government lawyers targeted the oceans of online poker money running through the U.S. financial system as the weak point. Most banks and credit card companies were not willing to process online poker payments, leaving PokerStars and Full Tilt to rely on small payment processing firms that were sometimes shady and paid well for their services. In 2009 and 2010, the feds seized tens of millions from companies processing online poker transactions in the U.S., even indicting or arresting some payment processors. “There is a guerrilla war going on,” Ian Imrich, a lawyer for Full Tilt, told Forbes in 2010.

A big issue was the miscoding of credit card charges to obscure gambling transactions. To disguise them from the issuing banks, player deposits were coded to look like the money had been spent on, say, flowers or pet supplies rather than sent to a poker site. The underdog, Full Tilt, pushed the envelope, helping the upstart company grow. PokerStars always has claimed it never engaged in miscoding.

Still, with the law seemingly gray and big shot politicians like Barney Frank working to legalize online poker, the online poker industry largely viewed federal prosecutors as an expensive nuisance. “The federal government is not going to take any action against them because they would stand a chance of losing it,” Frank Catania, who used to run New Jersey’s Division of Gaming Enforcement and advised the online gaming firms, told Forbes in 2010.

^On a Friday in April 2011, federal prosecutors in Manhattan dropped an atom bomb on the industry in what would become known among poker players as Black Friday. U.S. Attorney Bharara unsealed the indictment of 11 online poker industry businessmen, including Scheinberg, Bitar and other employees of PokerStars, Full Tilt, and a smaller company, Absolute Poker. Four men who ran payment processors and a banker were also charged. None of the men were charged with violating the Wire Act. The government charged Scheinberg with violating the Illegal Gambling Business Act, the newer UIGEA law, and conspiracy to commit bank fraud and money laundering. Mark Scheinberg was never charged by the government.

In a creative move, the feds even seized the U.S. web sites of Poker Stars, Full Tilt and Absolute Poker. Millions of players hoping to log in for their regular Friday night game were instead greeted by a stark notification that their favorite poker site had been seized by the FBI. There was no easy way to get their money back. The government also sued PokerStars civilly. A few months later, Rod Rosenstein, then the U.S. Attorney in Baltimore, indicted Calvin Ayre, the founder of Bodog, the online sports betting company.

If Scheinberg was shocked by the move, Bharara and his prosecutors were also taken by surprise when Full Tilt collapsed and was unable to repay $330 million of player deposits. Bharara would blame Full Tilt CEO Bitar, and his two partners, Howard Lederer and Chris Ferguson, claiming in a civil lawsuit they used player deposits to help pay Full Tilt owners and board members $440 million of dividends.

For his part, Scheinberg had kept PokerStar players’ funds operationally separate and quickly repaid U.S. players all the $150 million they had on deposit with the company. PokerStars would go on to enter into the $731 million civil lawsuit settlement with federal prosecutors that made Full Tilt’s players whole. PokerStars did not admit any wrongdoing, but as part of the deal Scheinberg agreed to no longer have a formal management position at PokerStars.

Over the next several years, all the defendants in the U.S. government’s online poker case except for Scheinberg pleaded guilty to charges ranging from misdemeanors to felony bank fraud conspiracy, with the longest prison sentences going to the payment processors, including one three-year sentence. But generally the punishments meted out to the online poker operators were light. Ray Bitar, CEO of Full Tilt, pleaded guilty to conspiracy to commit bank fraud and was sentenced to time served, partly because of a heart condition. He also agreed to forfeit $40 million. Scott Tom, president of Absolute Poker, which also was unable to refund U.S. player deposits, pleaded guilty to a misdemeanor. Calvin Ayre, the former Bodog billionaire whose company offered sports betting in the U.S., also pleaded guilty to a misdemeanor. Ayre was even allowed to not appear in a U.S. court and plead guilty from his lawyer’s office in Vancouver.  

With Mark Scheinberg as its official CEO, PokerStars went on with its business from the Isle of Man, limiting play to non-U.S. gamblers. Scheinberg also started to field a barrage of calls and visits from David Baazov, a young CEO who ran a tiny publicly traded gambling software company in Montreal and wanted to buy PokerStars. Baazov’s pursuit would be backed by the credit arm of Blackstone Group, the world’s biggest private equity firm, and his timing was great. New Jersey regulators, which had joined Delaware and Nevada in legalizing online poker in 2013, were giving PokerStars pushback about operating in its state because of its ties to Scheinberg, who was ready to move on for the right price.

When Blackstone’s dealmakers finally got a look at PokerStars’ financials and data, they realized that Scheinberg had built a first-class company. Even after being ejected from the U.S., the company was earning $400 million annually on $1.1 billion of revenues. PokerStars had 89 million registered users, about 5 million of which were active monthly, and the company breezed through the audit of Blackstone’s cyber security chief. Incredibly, PokerStars was hosting 500,000 online tournaments each day. In August 2014, the Scheinbergs sold PokerStars to Blackstone-backed Amaya Gaming for $4.9 billion.

^On the surface, Donald Trump’s election to White House might have seemed like a positive for online gambling. He had been in the casino business and at one point even started an internet gambling joint venture. “This has to happen because many other countries are doing it and like usual the U.S. is just missing out,” Trump told Forbes at one point. “It seems inevitable, but with this country you never know if it’s inevitable.”

Yet, once Trump was in office, his administration went in the opposite direction.  The Justice Department, led by Jeff Sessions, reversed the federal government’s opinion on the Wire Act law yet again, saying it did apply to online gambling broadly and poker. The New Hampshire Lottery sued and in 2019 got a federal judge to claim that the Wire Act only applies to sports betting, a ruling the government is currently appealing.

Now, federal prosecutors in Manhattan, led by U.S. Attorney Geoffrey Berman, have turned their attention to Scheinberg. The real issue for Scheinberg appears to be the charges that he violated the Illegal Gambling Business Act, not the allegations related to the movement of money. The IGBA law is a little less gray today because of a 2013 ruling from the U.S. Court of Appeals in Manhattan that found offering poker in a state where poker is illegal violates the federal law, no matter whether poker is a game of skill or not.

Either way, Scheinberg is now in New York to deal with the charges filed against him. He was released on bail of $1 million and has surrendered his passports, court records show.

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