More trouble may lie ahead: Gamblers anxious to clear out their accounts could cause a run on the bank at PartyGaming. The company, with cash of $133 million, owes clients $193 million.
ernment would likewise find all but impossible to access.
But the Leach,Kyl measure hits the Internet gam, ing industry where it hurts the most. It effectively cuts the companies off from all U.S. wagering, the very lifeblood of the business. The bill makes any transfer of U.s. funds for the purpose of wagering or settling accounts illegal. Among other things, financial .institutions will receive ongoing assistance from the Treasury, the Fed and the Department of Justice to identify new domain names and other conduits used by online'gaming companies to circumvent the rules for U.S. funds. A fairly ironclad "coding and blocking"
Party's Over
Shares of ,once-promising online gambling concerns have been under increasing pressure this year as legal and regulatory woes have mounted. Congress' move-banning the transfer of U.S. funds for betting-was the capper.
system will be capable of identifj-ing and thwarting III
Internet-gambling transactions. -
For example, PartyGaming of late has directed U,S. P; gamblers to send money to a phone-card company front tu called PccPay.com, apparently to disguise the real pur- SJ1 pose of the transfer requests from U.S. financial institu- Ir tions. Other companies that probably will be targeted vi: are such offshore "electronic wallet" concerns as Ne- in teller and FirePay, which have become popular payment If conduits for the offshore gaming industry since eBay's PayPal service, under regulatory pressure, stopped facili-
tating such transfers.
The legislation also will impose severe civil and crim- g< inal penalties on online-gambling companies and officials accepting illegal U.S. wagers. Seizing executives I Dr gaming-company assets in their offshore redoubts will, as always, be difficult. But any major U.S. legal action against industry players, particularly those publicly held, would severely damage the companies' repu tations and force them to incur heavy legal expenses.
At a minimum, U.S. authorities under the new ban would be able to easily win injunctions and default judg ments in U.S. courts against offending gaming compa nies that fail to close down their U.S. operations, virtu ally eliminating the companies' abilities to advertise or maintain a U.S. Web presence. U.S. officials are also exploring whether international tax treaties might allow regulators to go after companies and executives on their home turfs for U.S. tax evasion.
Under the Internal Revenue Code, there's a 2% excise tax imposed on all wagers not authorized by state law. Such an imposition on PartyGaming last year on the U.S. portion of its $48 billion in wagering would come to about $800 million before penalties and interest. That alone would've nearly wiped out its net revenues of $977.7 mil, lion for the year.
Representative Leach, for one, thinks that the indus' try's prospects have been blighted by his legislation. "This may well be the death knell of offshore Internet gam, bling," he tells Barron's. "Only time will tell, however."
The dominant figure in the online'gaming business remains the 39'year'old Ruth Parasol. In this month's Forbes 400 Richest Americans list, she and her husband, J. Russell DeLeon, are shown to have a combined net worth of $3.6 billion, which exceeds that of even longtime Las Vegas gambling mogul Steve Wynn, who weighs in at $2.6 billion. The magazine hit the newsstands just the week before the collapse in the stock, which lopped an estimated $1.5 billion off the couple's net worth.
Parasol has long shunned the spotlight and today lives a quiet life with her husband and two kids on Gibral, tar. A PartyGaming spokeswoman told us curtly that Parasol doesn't grant interviews.
Too bad. For hers is one fascinating life story. An excellent profile from the Los Angeles Times last year describes her unconventional upbrinbring in San Fran, cisco's Marin County as the daughter of a holocaust survivor, Richard Parasol, and his Swedish wife.
Ruth-Parasol went to an exclusive private school in the area where in her senior year she posed in a fur coat, with the caption underneath ·proclaiming that "Dia monds Are a Girl's Best Friend." Then it was on to the Jesuit-run University of San Francisco, followed by law school at Western State University in Fullerton.
Her father, according to The New York Times, had a long career in the porn industry, starting out with a chain of successful San Francisco massage parlors. The apple didn't fall from the tree: Shortly after her gradua tion from law school, Ruth joined her father as a legal adviser to his phone-sex billing operation. And soon she branched out into her own business, investing in, among other things, a porn Internet site that made a killing in 1996 by distributing a sex video featuring actress Pam ela Anderson and her then-husband, rocker Tommy Lee, in jlagmnte delicto.
As regulators turned the heat up on the sex industry, Parasol diversified into online gambling in 1997. Her ven ture, Starluck Casino (now PartyGaming), was strictly small potatoes until she teamed up with a bright young Indian computer programmer, Anurag Dikshit, who de vised the software for online poker players to join remotely in games involving literally thousands of other players. Internet poker exploded in popularity, creating a tidal wave of demand that the company has ridden ever since.
But if Parasol hu.., learned nothing else operating in the demimonde of the business world, no good thing goes on forever. One must always have an exit strategy to get out of Dodge before the regulators m"rive. Thus, she and her husband have been monetizing their owner ship in PartyGaming as fast as possible in recent years, even with the company's booming business and succu, lent operating mm"gins of about 60%.
The yem" before the company's IPO, PartyGaIning bought an entity called ElectraWorks for $826 million . While ownership of Electra Works wasn't revealed at the time, Parasol and her husband were clem"ly major hold, ers of the unit. The transaction was similaI' to the way private-equity firms often pay themselves huge special dividends before taking their controlled company public.
Then, in the IPO last year, which raised £1 billion, Parasol and her hubby sold 40% of the shares in the offering, reaping 436 million British pounds, or $815 mil lion dollars at current exchange rates. The IPO was fol lowed in June of this year with another insider sale of 200 million shares of PartyGaming stock for £232 million. In that sale, Pm"asol and DeLeon dumped exactly 66,666,666 shares for €77.3 million, or $145 million. The shaI'e tobil implies a certain puckish, if not devilish, intent. The in sider secondary issue would have been fm" larger if mar ket conditions had permitted.
So all in all, it appears that there will be no tag days for Pm"asol and her husband, even as PartyGaming shm'ehold ers are suffering huge losses. The pair has already cashed out an estimated $1.5 billion from the company. That cer tainly reduces much of the pain of the $1.5 billion loss they've taken on their remaining 30% stake.
More trouble could lie ahead for PartyGaming. Gam blers anxious to clear out their accounts could cause a run on the bank. For according to the company's June 30, 2006, balance sheet, PartyGaming owes its clients $192.6 million in liabilities and prize pools, while having only $132.9 million in cash and cash equivalents to meet that obligation. And those cash holdings are likely to have fallen sharply, because of $130.5 million of cash spent on an acquisition in August. Meanwhile, The Financial Times reported the cancellation of a $500 million bank credit line that the company had made some use of. PartyGaming recently cancelled a $115 million special dividend to shore up its cash.
The problem all this poses for gamblers is that, unlike the brokerage industry, customer accounts aren't segre gated and insured. Your money and the house's money tend to be one.
Several phone inquiries by Bar-ron:9 to PartyGaming on its cun'ent cash situation went unanswered.
Of course, the company could make good on its obligation with its retained earnings and shareholders equity, if there were any. But unfortunately the com pany has a negative tangible net worth of minus $53 million. And after what happened in Washington, one can bet that its servers and other physical assets are no longer worth the $58.3 million shown on the bal ance sheet. Nor are its goodwill and other intan gible assets likely worth any where near their $144.4 million balance-sheet value.
Not when the business has just gone up in smoke.
PartyGaming offers a sad tableau. Investors have already lost a ton. Its players may have their money fro zen, or never get all of it back. There are no winners in this sordid tale, except Parasol and the other insid ers. You don't beat the house.
