On Tuesday the DoJ alleged that Full Tilt Poker was not a legitimate poker site but rather a global ponzi scheme. According to the complaint filed by the DoJ in the Southern District Court of New York, between 2007 and 2011 Full Tilt informed players by email that their money was safe and placed in a separate account from operating income. But the DoJ claims that in reality the money was never segregated and instead was used to pay directors and shareholders. These payments to directors and shareholders continued even after Black Friday (April 15 - the date when the DoJ seized the .com domain names of Full Tilt, Poker Stars and Absolute Poker), constituting a ponzi scheme. The complaint further alleges that the company continued funding player accounts even though they were unable to collect money from those players which consequently set up a large shortfall. By the time the company stopped operations that shortfall was in excess of $130 million owed to American players.
 
By definition, a ponzi scheme involves fraud where older investors are paid with funds supplied by newer ones. As long as there are new players the scheme will go undetected but the truth of the fraud will show when new investors stop coming in and the scheme falls apart. The most famous ponzi scheme in recent times was Bernie Madoff although some believe that AIG, Countrywide Financial and even the U.S. Social Security system could be given the same title.
Daniel Richman, a professor at Columbia University perhaps described it best in a comment to Reuters:
 
"Ponzi scheme is certainly the term du jour these days," said Daniel Richman, a professor at Columbia Law School. "If you want to drive home the point of taking people's money and not giving it back and sustaining it through later deposits, using the word Ponzi captures it."

Jeff Ifrah, also denied the claim that Full Tilt was a ponzi scheme in an interview to Reuters on Wednesday:
 
“FTP may have made mistakes, but I have seen no evidence to support the DOJ's characterization of it as a global Ponzi scheme,” Ifrah said.

I spoke with someone close to Full Tilt recently who agreed to talk with me on condition of anonymity. The source was quick to refute the claim that the company was running a ponzi scheme but instead suggested the situation was a mixture of greed, incompetence and denial perpetuated predominantly by one man, Ray Bitar, the CEO and founder of Full Tilt Poker beginning in November 2010. From 2008 to April 2011, Full Tilt made well in excess of $1 billion in net gaming revenue. This was real money and not player deposits and all post up money was always available to players for withdrawals. So the suggestion that the company dipped into player accounts to pay dividends to shareholders was patently false. While it’s also true that the company had ACH deposits seized by the DoJ prior to Black Friday, the amount wasn’t significant enough to cause a shortfall. The Alderney Gaming and Control Commission (AGCC) regularly audited Full Tilt Poker preceding Black Friday and the company passed each time further suggesting that Full Tilt was operating legally and by the rules set out by the AGCC.
 
The real issue with Full Tilt started in November 2010 when the DoJ shut down Full Tilt’s major payment processor. Players continued to make ACH deposits which were being credited to player accounts even though the company was prevented from taking money from 10 states including New York and Maryland. At the end of November the shortfall was already in the tens of millions, which while significant could have been easily cleared since Full Tilt at the time was making over $2 million a day. The payment processing manager, Nelson Burtnick urged Bitar to stop accepting ACH deposits and crediting player accounts until they could be properly funded but Bitar did not want to lose those customers and was confident that new ACH processors would come along and things could return to normal. Bitar felt that gains could be made on PokerStars, who were not accepting similar deposits plus he felt the company needed the liquidity to grow Full Tilt in the rest of the world. New ACH processors were added but none lasted more than a few days. Finally in March 2011 a new solid ACH processor was brought on board but by that time the shortfall exceeded the final DoJ figure of $130 million in “phantom payments”. Moreover, in an attempt to cover up the shortfall, the company continued to pay its directors and shareholders (which constituted mostly poker pros) $10 million per month in dividends so that no questions would be raised. Then of course on Black Friday the DoJ seized the .com domain name of Full Tilt. The company immediately cut off U.S. players and 5 days later got its domain name back, but they were unable to pay the amounts owing. The DoJ argued that the company was stalling and indeed had the funds to repay U.S. players but the truth was later revealed. Eventually in June the AGCC pulled Full Tilt’s license and the company has ceased to be operational since. There was a plan to move the operations out of Alderney but the company thought better of it. The source added that very few in the company knew about the shortfall or the unfunded account payments and were caught by surprise when the indictments were first filed by the DoJ against Bitar and Rafe Furst and later against Howard Lederer and Chris Ferguson, who made up the Board of Directors.
 
The source added that after Black Friday there was no plan in place nor was there any damage control done. Even if there was, it wasn’t being relayed within the company because those in charge had a bunker mentality, so nothing was ever revealed to staff or shareholders. Apparently, days after Black Friday Howard Lederer and other shareholders flew in to Full Tilt’s offices demanding that all U.S. players be paid out immediately since PokerStars were paying its players and hurting the reputation of Full Tilt. The company began the process of converting earned bonuses, tournament tickets, ring games and ticket store purchases to cash equivalents, and moreover the company had to figure out which accounts were not funded. The payments likely were never made because the size of the hole could never be truly covered by what was left in Full Tilt’s bank account implying that Howard Lederer and the rest of the board did not know of the true situation. The official statement given to those in the company was that the lawyers were putting the brakes on the payouts because the company was never given the green light to process payouts by the DoJ. As most know now, this was untrue.
 
The source also added that sometime in late April or May all shareholders were told the truth about the financial situation at the company and a coup was attempted at the shareholder/board level. The coup failed and all negotiations and communication from that point on took place only with CEO Ray Bitar, Chris Ferguson and CFO Gil Coronado. To make matters worse some of the Full Tilt shareholders made statements which detracted investors from coming forward. Tony Guoga (Tony G) who is was a spokesperson for Party Poker lambasted Howard Lederer and Chris Ferguson for allowing players to go unpaid and Phil Ivey (a poker pro and shareholder of Full Tilt) launched a lawsuit against the company claiming he was doing so as a way of supporting customers owed money. He also announced he wouldn’t play in the World Series of Poker. Most saw right through this and realized it was an attempt by Ivey to clear his name and also set up for the inevitability that he wasn’t paid moneys owed to him by Full Tilt. Eventually Ivey withdrew the suit.
 
The source mentioned that it was important to note that even after Black Friday the company was generating over $1 million in gross profit and was still a going concern. And as most know in June Jack Binion agreed to buy part of Full Tilt Poker in an effort to help pay the money owed by them but the Full Tilt side continued to believe the company was worth more than what Binion offered and eventually Binion backed out before a deal could be reached. After the AGCC withdrew the license the operations ceased and became virtually worthless. There should be a lot of money left over, but unfortunately the money which the company had was somehow lost – most likely to dividends, bad investments or simply gambled away. What assets are left at Full Tilt now are likely not liquid and thus not available for cash at the bank. Jeff Ifrah, a lawyer for Full Tilt mentioned that a French company is still interested in the non-liquid assets of Full Tilt, so there may be hope for American account holders yet. While the name has been badly damaged, Full Tilt’s software is still highly regarded as one of the best in the business and there may still be some goodwill in the company name. All player balances were safeguarded as a condition of the deal and the fine issued by the DoJ was to be settled as part of any agreement. The DoJ is aware of the French buyout of the company’s assets. Full Tilt staff believes the action to include the fine in any settlement was to prevent initial shareholders who are not named in the lawsuit from walking away unscathed.
 
There is a real concern that Full Tilt could lose its AGCC licence for good. The issue there is that all of the company’s servers and infrastructure are hosted in Alderney and with the loss of staff since Black Friday there could be a long delay in the company going live again either in Alderney or in a different jurisdiction. Without question this would severely hamper any interest by investors.