03/22/2007 11:00PM

An Internet gambling monopoly - sort of


NEW YORK - The recent decision by the Eighth Circuit of the U.S. Court of Appeals to overturn the 2005 convictions of Susan Bala and Racing Services Inc. shed some interesting light on both prosecutorial overreaching and the status of account wagering in American racing.

Bala and the high-flying North Dakota rebate shop she founded were convicted of conducting an illegal gambling business, transmission of wagering information, and eight counts of money laundering. The focus of the case was a seven-month period in 2002 and 2003 during which RSI acknowledged it failed to pay the proper state and charitable taxes on $99 million of handle that was flowing through the Fargo-based operation.

Rather than simply resolve the tax and payment issues, state prosecutors went to federal authorities, who took the matter to another level. Even though RSI had been specifically licensed by statute to be the state's lone simulcasting processor, prosecutors convinced a jury that Bala had been running "the largest illegal-gambling operation in North Dakota history."

By the time Bala was sentenced to 27 months in federal prison, she was broke and RSI was in bankruptcy. Nevertheless, RSI was ordered to "forfeit" $99 million, as if it had retained the entire underreported handle amount, and Bala was personally ordered to forfeit $19 million.

The appeals court overturned the convictions and forfeitures, and Bala was released from prison March 8 after serving 18 months. The court's primary argument was that the failure to pay proper taxes on a legal gambling operation did not make the enterprise illegal.

"The evidence at trial established that the North Dakota Racing Commission knew charities must receive the 'net proceeds' of the account wagering that RSI, and only RSI, was authorized to conduct," the court wrote, "Yet the Commission neither drafted regulations prescribing how this complex task should be accomplished nor adequately monitored RSI's compliance. Issues predictably arose.

"Rather than pursue possible violations in state court, the Commission brought the complicated situation to federal authorities, who then commenced a federal prosecution based upon flawed interpretations of state law. The result was a trial at which the government failed to prove any of the offenses charged."

Just before reaching that conclusion, the court could not resist a digression: "There is an aspect of this issue unnoticed by the parties that could have serious implications for the future of interstate account wagering. The prohibition in [the Wire Act] encompasses bets and wagers as well as information assisting bets and wagers, whereas the exception in [it] is limited to information assisting bets and wagers. Thus, the plain language suggests that Congress intended to prohibit all interstate wagering by wire, whether or not legal in the States between which the bets are transmitted. . . . North Dakota passed the 2001 account wagering statute in an attempt to attract interstate electronic betting. If the reach of [the Act] is as broad as its legislative history suggests, the attempt if successful will violate federal law. We leave that issue to another day."

Unfortunately, this thinking is shared by the Justice Department, which has repeatedly gone out of its way in congressional hearings and other forums to note its ongoing legal opinion that existing electronic interstate betting may not be entirely kosher, despite the so-called "exemption" carved out for racing in last year's legislation prohibiting other forms of Internet betting.

While there is no indication that the government has any plan or inclination to go after the widely accepted simulcasting that is the lifeblood of American racing today, its position is one of the things stopping racing from exploiting what should be a tremendous selling point: the only way to gamble legally over the Internet. Track executives say privately that they don't want to wake any sleeping dogs by appearing to gloat over this exceptional status. Meanwhile, there are literally millions of former online poker players who have been disenfranchised by last year's prohibitions, and racing is making no effort to woo this action-starved constituency.

The racing industry needs and deserves clarity on this issue. Even if the North Dakota court is right that the Congress once meant to prohibit all interstate betting, that clearly is not the case today. Moreover, anti-gambling sentiment appears to be on the wane, and polls have shown that last year's Internet-betting prohibitions were highly unpopular with voters.

Even some former hardliners seem to be changing their tune. In 2003, Sen. John McCain (R-Ariz.) introduced federal legislation to ban all wagering on Olympic, college or high-school athletics, even in Nevada. "Betting on amateur athletics is wrong," he said.

Four years later, McCain's presidential-candidacy website features a "McCain Basketball Bracket" on the NCAA men's tournament, inviting readers to "Get started today and fill out your bracket to be eligible to win a McCain 2008 fleece, hat, or pin for your prognostication prowess."