E-Legal: Online Gambling Can Lead to Jail Time

Yet another admonition about online conduct? You bet. A federal court has found that online gambling can result in criminal prosecution and a prison term. In United States v. Cohen , the 2nd U.S. Circuit Court of Appeals upheld one of the first convictions of an individual accused of operating an illegal offshore Internet sports gambling operation.

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In yet another admonition about conduct over the Internet, it is worth knowing that forms of online gambling can result in criminal prosecution and a prison term. In United States v. Cohen, the 2nd U.S. Circuit Court of Appeals upheld one of the first convictions of an individual accused of operating an illegal offshore Internet sports gambling operation. THE ACCOUNT-WAGERING SYSTEM In 1996, Jay Cohen held a position at Group One, a San Francisco company that traded in options and derivatives. Wanting to ride the wave of the Internet revolution, Cohen decided that he wanted to own an e-business. He thus left his job at Group One and moved to the Caribbean island of Antigua to become President of the World Sports Exchange (WSE). WSE’s exclusive business involved bookmaking on U.S. sports events. The company targeted customers in the U.S. by advertising its business by radio, newspaper and television — inviting customers to bet with WSE online or by way of a toll-free number. As part of its business, WSE operated an account-wagering system that required new customers to first open an account with WSE and wire at least $300 into that account in Antigua. A customer wanting to bet then would contact WSE online or over the phone to place a specific bet. WSE then would provide automatic acceptance and confirmation of the bet, and maintain the bet from that customer’s account. In a period of about 15 months, WSE collected approximately $5.3 million from U.S. wire transfers. WSE also usually would receive a commission of 10 percent on each bet. Cohen reported that in its first year, WSE had gained nearly 1,600 customers. COHEN’S ARREST AND CONVICTION FBI agents in New York, as part of an investigation of offshore bookmakers, contacted WSE over the Internet and by phone many times between October 1997 and March 1998 to open accounts and place bets. Cohen was subsequently arrested in March 1998 and charged with multiple federal criminal violations. Specifically, Cohen was charged with violating 18 United States Code � 1084, which reads as follows:
Whoever being engaged in the business of betting or wagering knowingly uses a wire communication facility for the transmission in interstate or foreign commerce of bets or wagers or information assisting in the placing of bets or wagers on any sporting event or contest, or for the transmission of a wire communication which entitles the recipient to receive money or credit as a result of bets or wagers, or for information assisting in the placing of bets or wagers, shall be fined under this title or imprisoned not more than two years, or both.

Section 1084 contains a “safe harbor” provision which exempts from liability “the transmission in interstate or foreign commerce of information for use in news reporting of sporting events or contests, or for the transmission of information assisting in the placing of bets or wagers on a sporting event or contest from a State or foreign country where betting on that sporting event or contest is legal into a State or foreign country in which such betting is legal.” This safe harbor was found not to apply to Cohen, and, after a lengthy jury trial before U.S. District Judge Thomas P. Griesa of the Southern District of New York, Cohen was convicted on Feb. 28, 2000. On Aug. 10, 2000, Cohen was sentenced to a prison term of 21 months and allowed to remain free on bail pending the outcome of his appeal. THE APPEAL On appeal to the 2nd U.S. Circuit Court of Appeals, Cohen raised a number of arguments, including contentions relating to the safe harbor provision and his intent. Cohen argued that the safe harbor provision should have shielded him from criminal liability because (a) the betting in question was legal in both the place of origin and destination of transmission, and (b) the transmissions were limited to mere information that assisted in the placing of bets, as opposed to including the actual bets. The 2nd Circuit disagreed. In terms of legal betting, the court pointed to the New York Constitution, which states unequivocally that “there can be no dispute that betting is illegal in New York.” Indeed, Article I, Section 9 of the state constitution expressly provides that “no … bookmaking, or any other kind of gambling [with certain exceptions for lotteries and horseracing] shall hereafter be authorized or allowed within this state.” As to transmissions of actual bets, the court found that WSE booked the bets that its customers requested. “By making those requests and having them accepted, customers were placing bets,” and “so long as the customers’ accounts were in good standing, WSE accepted those bets as a matter of course,” according to the court. Cohen also argued that he did not have the requisite criminal state of mind because he did not “knowingly” transmit bets for purposes of Section 1084 and because he did not know that he was assisting the placement of bets to or from a jurisdiction that made betting illegal. Again, the 2nd Circuit disagreed, finding that it was not necessary that Cohen “intended to violate the statute,” so long as he “knowingly committed the deeds forbidden by Section 1084.” Thus, it was enough that Cohen knew that the deeds described in Section 1084 were taking place, and “a misinterpretation of the law, like ignorance of the law, was no excuse.” The 2nd Circuit therefore affirmed Cohen’s conviction. JURISDICTIONAL BOUNDARIES IN THE INTERNET AGE Be careful out there. The Internet and phone lines reach across geographic boundaries. Conduct that may be legal in one jurisdiction may be illegal in another jurisdiction, and the laws of a jurisdiction that you are unaware of could be applied to you. Eric J. Sinrod is a partner in the San Francisco office of Duane Morris, where he focuses on technology and litigation matters. His Web site is sinrodlaw.comand his firm’s site is Duane Morris. Mr. Sinrod may be reached by e-mail at [email protected].

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