Sun, Jun 26, 2005 page12

• US frets over online gambling

  A giant in the online gambling business, PartyGaming is an often-overlooked megasurvivor from the dot-com crash of the late 1990s with revenues and profits growing exponentially

  • By Kurt Eichenwald / NY TIMES NEWS SERVICE
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  As a rule, companies don't draw attention to business practices that could land their executives in jail. But for PartyGaming, potential illegalities aren't a secret buried in its business plan -- they are the centerpiece of it.

  A giant in the online gambling business, PartyGaming is an often-overlooked survivor from the dot-com crash of the late 1990s. As hundreds of profitless commercial sites disappeared into the digital ether, PartyGaming's popular gambling sites -- like Partypoker.com -- have soared, with revenue and profit growing exponentially year after year.

  This week, the company is scheduled to go public in what is expected to be the largest offering in years on the London Stock Exchange, one that will make billionaires out of its ragtag assortment of founders and major stockholders, including a California lawyer who earned her first fortune in online pornography and phone-sex lines.

  

  A frame grab from the PartyPoker.com interface.

  PHOTO COURTESY OF PARTYGAMING/NY TIMES

  All told, as much as US$9 billion is expected to be raised, with all the cash going to private shareholders selling portions of their stakes.

  But there will be no Wall Street investment houses lapping up fees in the giant deal, no victory dances in the offices of American corporate lawyers. That is because PartyGaming, based in Gibraltar, maintains no assets in the United States, and its officers or directors could well risk being served with a civil suit -- or an arrest warrant -- if they came to the United States to work on their business.

  The reason? The Justice Department and many state attorneys general maintain that providing the opportunity for online gambling is against the law in the United States -- and PartyGaming does it anyway.

  Indeed, out of the company's US$600 million in revenue and US$350 million in profit in 2004, almost 90 percent came from the wallets and bank accounts of American gamblers.

  Walking the line

  To justify this, PartyGaming walks a very thin line. Providing online gambling is not illegal per se in the United States, the company argues -- federal prosecutors just say it is. The company has already received an e-mail message from the Louisiana attorney general demanding that it cease providing online gambling in that state, but PartyGaming simply ignored the communication and waited for additional action that never came.

  The company's prospectus -- a British document that is not available in this country -- at times reads something like a legal brief, citing American case law to support the company's position that no prosecution would ever take place.

  Still, in its offering documents, PartyGaming makes no secret that if its interpretation of the law proves wrong, the company is banking on its executives' belief that there is little that law enforcement can -- or will -- do to prosecute.

  "In many countries, including the United States, the group's activities are considered to be illegal by the relevant authorities," PartyGaming says of its business in the offering document. "PartyGaming and its directors rely on the apparent unwillingness or inability of regulators generally to bring actions against businesses with no physical presence in the country concerned."

  That type of unusual disclosure is typical of the entire PartyGaming story -- a stranger-than-fiction tale laced with an unlikely combination of sex, money, technology and the kind of luck that is only fitting for a gambling company. And there are already signs that, before this bizarre saga is done, it could well inflame trade disputes between the United States and Britain over America's arguably inconsistent behavior toward the gambling industry.

  Fergus Wheeler, a spokesman for PartyGaming in London, said that the company and its executives could not comment, in part because no offering of shares was being made in the United States.

  The story begins, improbably enough, at a collection of lucrative massage parlors operated in San Francisco. Their owner, Richard Parasol, saw fabulous wealth from the businesses. State property and business records show that Parasol -- at times in deals involving his Swedish wife, Gunna -- moved his family into a upscale home in Marin County and bought an array of investment properties while simultaneously putting money into a leather goods concern and other businesses.

  By the early 1990s, Parasol had a new business partner in his ventures, one of his three daughters, Ruth, the woman who ultimately would prove to be a driving force behind PartyGaming. After spending years in private school, state records show that Ruth Parasol attended college at the University of San Francisco, before moving on to Western State University in Fullerton, California, where she earned her law degree.

  Ruth Parasol, now 38 and a resident of Gibraltar with her husband, J. Russell DeLeon, has universally declined to be interviewed and did not respond to an e-mail message.

  Not the average lawyer

  But the lawyer's life of filing briefs and making court appearances was not to be for her. Her father brought her in as an adviser on a phone sex-chat business he had formed with Ian Eisenberg, a young Seattle businessman whose father, Joel Eisenberg, was a pioneer of pornographic phone lines in the 1980s.

  Quickly, Ruth Parasol emerged as one of the small clique of prominent executives in the growing world of interactive pornography. In 1994, she split off from her father's business, forming her own premium sex-chat phone business with Seth Warshavsky, another young Seattle businessman who had worked with Ian Eisenberg.

  But her business dealings with her father were not over. California state business records show that Ruth Parasol and her father established Starlink Communications, another phone-sex business. They also invested with Warshavsky's biggest venture ever, the Internet Entertainment Group, or IEG.

  Cash was coming in by the fistful for everyone. While online pet stores and cosmetics companies were struggling, Internet pornography was a gold mine. The phone lines virtually printed money, and, through IEG, Warshavsky became the most prominent businessman in online pornography, with hundreds of thousands of paying members. Time magazine called him the "Bill Gates of Internet porn."

  But soon, everything began crashing down in a storm of unpaid debts and lawsuits. Warshavsky moved overseas, leaving behind a huge collection of unpaid bills that piled up from his free-spending ways. Eisenberg, meanwhile, had a falling out with Parasol and his daughter, and the dispute ended up in court. Warshavsky and Ruth Parasol became co-defendants in lawsuits contending improper business practices.

  The Federal Trade Commission sued Eisenberg for engaging in deceptive trade practices by tricking customers into authorizing billings to their telephone lines for Internet access. The pornography business was beginning to look dicey. But fortunately for Ruth Parasol, she had another idea.

  While many of her former associates found themselves in legal trouble, she emerged relatively unscathed. According to people who have spoken with her, she and her father sold off their interests in electronic pornography, just as the litigation was heating up.

  Instead, Ruth Parasol pursued a new venture: online gambling. It was the new buzz of the Internet world, and she decided to apply the knowledge acquired from her pornography ventures to the more reputable gambling business.

  Using her profits from the pornography business as seed capital, she and a handful of others opened up a Web site called Starluck Casino in 1997. According to company records, Starluck maintained all of its operations -- servers, offices and headquarters -- in the Caribbean, beyond the reach of American authorities. But the business was nothing special; the software that drove the site was simply licensed from a third party.

  Then, the next year, she struck up the relationship that would transform her company into the giant it is today. She spoke with Anurag Dikshit, then a 25-year-old computer engineering specialist who had graduated from the Indian Institute of Technology in New Delhi. She asked him to write a proprietary program for casino games. Within a year, as Dikshit's skills were recognized as crucial to her company's future, he became an investor.

  By 2000, the new team of executives began exploring the idea that would bring them billions: developing a platform to let gamblers from around the world play against one another online, either at individual virtual tables or in larger tournaments. PartyGaming then is paid a commission, known as a rake, for its role in running the games. The timing could not have been better.

  Craze

  At that point, a poker craze was about to sweep across the United States, pushed by the advent of televised poker events like the World Poker Tour and the World Series of Poker. These programs helped to transform poker, once a penny-ante game played on kitchen tables by neighbors and friends, into a glamorous event with celebrity matches and color commentators.

  Helping to increase the appeal was the use of cameras positioned under the tables during the competitions, which allowed viewers to see a player's cards and gain an insider's view of the unfolding game.

  Once Dikshit's software was improved to allow sessions for as many as 70,000 players at once, Ruth Parasol's company further fueled the game's popularity. Now, players could join a game any time, from any place, without having to wait for their buddies or to restock on beer and potato chips.

  Players responded in droves, making poker by far the fastest growing segment of the online gambling market. Total revenues for online poker from all providers was already a healthy US$92 million in 2002, but it then exploded, surpassing US$1 billion two years later, according to Christiansen Capital Advisors, a consulting firm in New Gloucester, Maine, that specializes in advising gambling companies.

  Ruth Parasol's company, by then known as PartyGaming, did its part to fuel the mania. To help introduce its poker Web site, it hired a well-known poker player named Mike Sexton as a marketing consultant, and with his help it developed the "PartyPoker.com Million" tournament -- a live contest played on a luxury cruise ship with a guaranteed first prize of US$1 million. With cable channels hungry for more poker programming, the PartyPoker.com contest was soon on television -- featuring none other than Sexton as a commentator.

  The company's player population and the cash it generated mushroomed. In 2002, the casino business at PartyCasino.com, which included slot machines, blackjack games and roulette wheels, was still the big piece of PartyGaming, with 535 registered players compared with 105 registered poker players. By the end of 2004, the number of registered casino players had jumped to 1,296, while the number of poker players had soared to 5,225.

  escalation

  But that is only part of the story. After a blitz of TV advertising in the United States, the poker games attracted an escalating number of casual players. By the end of 2002, the average daily active players were 1,297. Two years later, that had risen to 77,094, and by the end of March it had climbed even faster, to 121,570 average daily players.

  Profits rode right along with the growth in players. The company had revenue of just US$9 million from its poker business in 2002; by the end of 2004, revenue had climbed to more than half a billion dollars.

  As the business grew, PartyGaming brought in more professional managers. It hired Richard Segal, the head of Odeon Limited, Britain's leading operator of movie theaters, as chief executive in 2004, and hired Michael Jackson, the chairman of the Sage Group, a big British software company, as non-executive chairman.

  Ruth Parasol and her husband, DeLeon, now serve as consultants to the company and, after the offering, will retain the right to name one director to the board.

  At the same time, PartyGaming adopted a long-term strategy for managing its growth, which is likely to continue to be robust. According to the Christiansen Capital analysis, poker players should continue to migrate to online games over the next five years, even as new players are attracted to the game. In the process, the firm estimates, the total online poker market will expand to US$6 billion in 2009 from US$1 billion in 2004.
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