Excuse my ignorance, but isn't this quite similar to how banks work? I was under the assumption that banks don't have enough cash on hand to pay out all clients if everyone decided to withdraw.
For banks, customer's accounts are liabilities. When you put money in a bank account, you are in effect lending it to the bank; the bank owes you that money. When the bank itself lends out money to borrowers, those loans in turn are assets from the bank's perspective. For the bank to be solvent, the assets (loans) must exceed the liabilities (current and savings accounts and the like).
If what Felix wrote about FTP was accurate, FTP considered money from customers as assets, not liabilities, so that they could be disbursed to investors. It's a fundamental category error in accounting, and pretty clearly fraudulent, if it's as plain as that.
The difference is that a bank invest that money, when it receives the money back it can pay the clients. FT payed it as dividends to it's owners - there was no plan to return it to the players.
banks are allowed to do that and in exchange are regulated and insured
FTP was always going to fall apart, the government investigation into UIEGA violations triggered it sooner. It may have otherwise become a billion-dollar ponzi
I lost money in FTP and was a regular player (I noticed the dodgy merchant names on credit card bills years ago and knew what was up but kept playing)
FTP's case is an exception due to the ridiculously large amounts that the owners and executives were paying out to themselves. Amounts significantly in excess of the actual profits.
Rake adds up quickly. If poker sites only carried enough money to cover player balances, they wouldn't suffer.
Pokerstars is an example of a poker site that successfully paid out to players.
From my quick skim of the complaint, it appears that the problem wasn't just paying insiders amounts that were needed to cover player balances (which would be bad enough). Check out paragraph 113:
113. Beginning in or around August 2010, Full Tilt Poker was often unable to find payment processors to withdraw funds from the bank accounts of its United States players. Instead of disclosing this fact, Full Tilt Poker secretly began to credit funds to players’ online gambling accounts that Full Tilt Poker had never actually collected from players’ bank accounts. As players gambled, and lost, these phantom funds, Full Tilt Poker developed an undisclosed shortfall of approximately $130 million owed to players that Full Tilt Poker had never collected because, in reality, these funds were never withdrawn from players’ bank accounts. The management of Full Tilt Poker, including the FTP Insider Defendants, operated Full Tilt Poker with the hope that only a small number of players would try to withdraw funds at any one time, and that Full Tilt Poker would regularly receive additional deposits in amounts greater than any withdrawal requests.
If I'm understanding that right, it's essentially "We're using the rest of the world's players to give Americans (for whom this service is technically illegal) free money"?
Well, on a very small scale, under certain assumptions, extending credit in this manner might be a net win for the business. Legal casinos offer credit backed by their ability to collect through normal channels. Even offshore/illegal, if the amounts forwarded are small, and the users have shown a propensity to zero their debts after a while in order to deposit new funds without 'burning' their whole account/name, it could make sense here, too. (I didn't notice substantiation of the magnitude of these 'phantom balances'.)
But atop the other allegations, and depending on the magnitude, it seems fishy... like a desperate move to give the insiders a bit more time to withdraw remaining funds or 'gamble for resurrection'.
One difference being that your deposit with your bank is insured up to $250,000 (I think) by the FDIC. The bank has to achieve an accreditation to get this insurance and maintain standards.
Though I can't be sure, I'd assume that banks might hold a little bit higher percentage than what Full Tilt was holding.
