People of New York v. World Interactive Gaming Corp.

185 Misc. 2d 852, 714 N.Y.S.2d 844 (N.Y. County Sup. Ct. 1999)

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[NOTE: This case has been edited for classroom use by the omission of text and citations. See this alternate source for the full opinion.]

Judge Charles Edward Ramos


This proceeding is brought by the Attorney General of the State of New York (the "Attorney General" or the "State of New York"), pursuant to New York's Executive Law § 63(12) and General Business Law Article 23-A, to enjoin the respondents, World Interactive Gaming Corporation ("WIGC"), Golden Chips Casino, Inc. ("GCC"), and their principals, officers, and directors from operating within or offering to residents of the State of New York State gambling over the Internet. The State also seeks to enjoin respondents from selling unregistered securities in violation of New York State's General Business Law § 352 (also known as "The Martin Act").

The central issue here is whether the State of New York can enjoin a foreign corporation legally licensed to operate a casino offshore from offering gambling to Internet users in New York. At issue is Section 9(1), Article 1 of the New York State Constitution which contains an express prohibition against any kind of gambling not authorized by the state legislature. The prohibition represents a deep-rooted policy of the state against unauthorized gambling.

WIGC is a Delaware corporation that maintains corporate offices in New York. WIGC wholly owns GCC, an Antiguan subsidiary corporation which acquired a license from the government of Antigua to operate a land-based casino. Through contracts executed by WIGC, GCC developed interactive software, and purchased computer servers which were installed in Antigua to allow users around the world to gamble from their home computers. GCC promoted its casino at its website, advertised on the Internet and in a national gambling magazine. The promotion was targeted nationally and was viewed by New York residents.

In February 1998, the Attorney General commenced an investigation into the practices of WIGC. The investigation was prompted by an inquiry from the Texas State Securities Board which informed the Attorney General that WIGC was making unsolicited telephone calls to the public and disseminating offering materials for WIGC's securities. The petition alleges that respondents were attempting to sell what they termed a "private subscription offering," which consisted of 700,000 shares of "convertible preferred stock" at a price of $5.00 per share. The respondent's primary method of selling units of WIGC stock involved cold-calling prospective investors. The prospective investors were located throughout the United State, including New York. Respondents do not dispute that the calls originated from WIGC's headquarters in Bohemia, New York. At no time was this offering or the cold-callers registered with New York state as required by law.

During telephone solicitation, respondents claimed that investors would earn twenty percent (20%) annual dividend on their investment, twenty-five percent (25%) profit sharing and an initial public offering ("IPO") of WIGC's stock, which would likely take place within one year. Respondents also compared WIGC's projected stock price and earnings to that of land-based casinos. Respondents represented the profit margins of other Internet casinos at around eighty to eighty-five percent (80-85%). Respondents told investors that WIGC would earn an estimate of up to $100,000.00 in revenue during the first year. Respondents claimed that the investment was conservative.

Together, respondents sold approximately $1,843,665.00 worth of shares to approximately 114 investors throughout the country, including approximately $125,000.00 worth of shares to 10 New York state residents.

In June 1998, the Attorney General furthered its investigation by logging onto respondents' website, downloading the gambling software, and in July 1998, placed the first of several bets. Users who wished to gamble in the GCC Internet casino were directed to wire money to open a bank account in Antigua and download additional software from GCC's website. In opening an account, users were asked to enter their permanent address. A user which submitted a permanent address in a state that permitted land-based gambling, such as Nevada, was granted permission to gamble. Although a user which entered a state such as New York, which does not permit land-based gambling, was denied permission to gamble, because the software does not verify the user's actual location, a user initially denied access, could easily circumvent the denial by changing the state entered to that of Nevada, while remaining physically in New York State. The user could then log onto the GCC casino and play virtual slots, blackjack or roulette. This raises the question if this constitutes a good faith effort not to engage in gambling in New York.

The Attorney General commenced this action pursuant to Executive Law § 63(12) and General Business Law Article 23-A. Petitioner seeks: (1) to enjoin respondents from conducting a business within the State of New York until they are properly registered with the Secretary of State to conduct business in New York; (2) to enjoin respondents from running any aspect of their Internet gambling Business within the State of New York; (3) to be awarded restitution and damages to injured investors; and (4) to be awarded penalties and costs to the State of New York for violations of New York State's Securities Law (GBL § 352 also known as "The Martin Act"), federal and state laws prohibiting gambling, and New York State's Executive Law.

Respondents move to dismiss the petition on the grounds that (1) the Attorney General lacks the authority to bring a proceeding under Executive Law § 63(12), where a pattern of repeated or persistent fraud or illegal conduct is absent; (2) lack of personal jurisdiction over WIGC and GCC; and (3) lack of subject matter jurisdiction to prosecute alleged violations of the Federal Interstate Wire Act 18 USC § 1084(a) ("The Wire Act"), the Interstate and Foreign Travel or Transportation in Aid of Racketeering Enterprising Act 18 USC § 1952 ("The Travel Act"), and the Wagering and Paraphernalia Act 18 USC § 1953 ("The Paraphernalia Act").

Respondents contend that the transactions occurred offshore and that no state or federal law regulates Internet gambling. They claim that they were operating a duly licensed legitimate business fully authorized by the government of Antigua and in compliance with that country's rules and regulations of a land-based casino. They further argue that the federal and state laws upon which the State relies either do not apply to the activities of WIGC or are too vague and ambiguous to criminalize the activity of Internet gambling, when such activity is offshore in Antigua.

Executive Law

Executive Law § 63(12) authorizes the Attorney General to bring a special proceeding against a person or business committing repeated or persistent fraudulent or illegal acts. Any conduct which violates state or federal law or regulation is actionable under this provision. Under Executive Law § 63(12), fraud has been interpreted broadly requiring only a showing that the action has a potential to deceive. In order for fraudulent or illegal acts to be actionable under Executive Law § 63(12), respondents' activities must be repeated.

In order to defeat the petition, respondent must present facts having probative value "sufficient to demonstrate an unresolved material issue which can be determined only at a plenary trial." State v. Waterfine Water Conditioning Co. of New York, Inc., 87 Misc. 2d 18, 19 (NY Sup. Ct. 1975). Respondents have failed to submit evidence of any probative value to refute the allegation of the petition.

Personal Jurisdiction Over WIGC and GCC

[Editor's note: See infra at Chapter 11 for the court's discussion of jurisdiction in this case.]

. . . .

Subject Matter Jurisdiction and Application of New York Law

Respondents argue that the Court lacks subject matter jurisdiction, and that Internet gambling falls outside the scope of New York state gambling prohibitions, because the gambling occurs outside of New York state. However, under New York Penal Law, if the person engaged in gambling is located in New York, then New York is the location where the gambling occurred. Here, some or all of those funds in an Antiguan bank account are staked every time the New York user enters betting information into the computer. It is irrelevant that Internet gambling is legal in Antigua. The act of entering the bet and transmitting the information from New York via the Internet is adequate to constitute gambling activity within the New York state.

Wide range implications would arise if this Court adopted respondents' argument that activities or transactions which may be targeted at New York residents are beyond the state's jurisdiction. Not only would such an approach severely undermine this state's deep-rooted policy against unauthorized gambling, it also would immunize from liability anyone who engages in any activity over the Internet which is otherwise illegal in this state. A computer server cannot be permitted to function as a shield against liability, particularly in this case where respondents actively targeted New York as the location where they conducted many of their allegedly illegal activities. Even though gambling is legal where the bet was accepted, the activity was transmitted from New York. Contrary to respondents' unsupported allegation of an Antiguan management company managing GCC, the evidence also indicates that the individuals who gave the computer commands operated from WIGC's New York office. The respondents enticed Internet users, including New York residents, to play in its casino.

As for respondents' claim that none of the federal statutes apply to operation of an Internet casino licensed by a foreign government, there is nothing in the record or the law to support their contentions. To the contrary, the Wire Act, Travel Act and Wagering Paraphernalia Act all apply despite the fact that the betting instructions are transmitted from outside the United States over the Internet. The scope of each of these statutes clearly extends to the transmission of betting information to a foreign country. Nor can it be convincingly argued by respondents that the federal statutes are unconstitutionally vague. Because the Wire act, the Travel Act and the Wagering Paraphernalia Act have all been found to be constitutionally valid, and have been found not to be overly broad or vague, and because respondents' conduct falls within the scope of New York's prohibition against gambling, all of these statutes apply to respondents' activities.

The evidence demonstrates that respondents have violated New York Penal law which states that "a person is guilty of promoting gambling . . . when he knowingly advances or profits from unlawful gambling activity" (Penal Law § 225.05). By having established the gambling enterprise, advertised, solicited investors to buy its stock, to gamble through its on-line casino, respondents have "engage[d] in conduct which materially aids . . . gambling activity", in violation of New York law (Penal Law § 225.00(4) which states "conduct includes but is not limited to conduct directed toward the creation or establishment of a particular game, contest, scheme, device . . . [or] toward the solicitation or inducement of persons to participate therein"). Moreover, this Court rejects respondents' argument that it unknowingly accepted bets from New York residents. New York users can easily circumvent the casino software in order to play by the simple expedient of entering an out-of-state address. Respondents' violation of the Penal Law is that they persisted in continuous illegal conduct directed toward the creation, establishment, and advancement of unauthorized gambling. The violation had occurred long before a New York resident ever staked a bet. Because all of respondents' activities illegally advanced gambling, this Court finds that they have knowingly violated Penal Law § 225.05.

Not only are respondents guilty of violating New York state's gambling laws but they have also violated several federal laws. Like the great majority of states, federal law also proscribes gambling. Statutes such as the Wire Act, the Travel Act and the Interstate Transportation of Wagering Paraphernalia Act are just three examples of the federal government's policy against gambling. As the Wire Act's legislative history states:

The purpose of the bill is to assist various States and the District of Columbia in the enforcement of their laws pertaining to gambling, bookmaking, and like offenses and to aid in the suppression of organized gambling activities by prohibiting the use of wire communication facilities which are or will be used for the transmission of bets or wagers and gambling information in interstate and foreign commerce.
H.R. Rep. No. 967, 87th Cong. 1st Sess. (1961), U.S. Code Congressional and Administrative News 1961, p.2631.

The Wire Act bars citizens from engaging "in the business of betting or wagering knowingly using a wire communication for the transmission of interstate or foreign commerce of bets or wagers or information assisting in the placing of bets or wagers." 18 U.S.C. § 1084(a). A Wire Act violation occurs when a defendant is in the business of betting or wagering.

Furthermore, the Travel Act, 18 U.S.C. § 1952, proscribes similar interstate gambling activity by stating:

[The] us[e of] any facility in interstate or foreign commerce, including the mail, with intent to
(1) distribute the records of any unlawful activity . . . or

(3) otherwise promote, manage, establish carry on or facilitate the promotion, management, establishment or carrying on, of any unlawful activity . . .

shall be fined not more than $10,000 or imprisoned for not more than five years or both.

Respondents' interstate use of the Internet to conduct their illegal gambling business violates federal law. As the legislative history behind the Wire Act indicates, the purpose of these federal controls is to aid the states in controlling gambling. Like a prohibited telephone call from a gambling facility, the Internet is accessed by using a telephone wire. When the telephone wire is connected to a modem attached to a user's computer, the user's phone line actually connects the user to the Internet server and then the user may log onto this illegal gambling website from any location in the United States. After selecting from the multitude of illegal games offered by respondent, the information is transmitted to the server in Antigua. Respondents' server then transmits betting information back to the user which is against the Wire Act. The Internet site creates a virtual casino within the user's computer terminal. By hosting this casino and exchanging betting information with the user, an illegal communication in violation of the Wire Act and the Travel Act has occurred.

Respondents attempt to circumvent federal law by asserting that none of these statutes apply to the operation of an Antiguan casino. Moreover, they allege the federal government has not explicitly ruled on Internet gambling therefore it is an unregulated field. Respondents disregard that the Interstate Commerce Clause gives Congress the plenary power to regulate illegal gambling conducted between a U.S. and a foreign location. gambling conducted via the Internet from New York to Antigua is indistinguishable from any other form of gambling since both the Wire and Travel Act apply to the transmission of information into a foreign country. Therefore, the respondents are culpable for violating the Wire Act and the Travel Act.

Additionally, respondents violated The Interstate Transportation of Wagering Paraphernalia Act. Under this act:

[w]hoever, except a common carrier in the usual course of business, knowingly carries or sends in interstate or foreign commerce any record, paraphernalia, ticket, certificate, bills slip, token, paper, writing or other device under, or to be used, or adapted, devised, designed for use in (a) bookmaking; or (b) wagering pools with respect to a sporting event or (c) in a numbers, policy, bolita, or similar game shall be fined not more than $10,000 or imprisoned for more than five years, or both.
18 USC § 1953(a).

The respondents intentionally sent records of gambling activity from the GCC location in Antigua through international and interstate commerce into various United States locations, among them New York. When respondents solicited perspective investors, they sent them a multitude of materials which were specifically to be utilized for the setting up and advancing of the Internet gambling business through U.S. mail. Furthermore, the actual computers which would be used for gambling between the United States and Antigua was bought and delivered through U.S. mail from Florida to GCC's location in Antigua.

The respondents' total activities unambiguously advance gambling in direct violation of the explicit safeguards that New York and the federal laws have placed against unauthorized gambling activity.

In addition, several of New York's registration requirements have been violated . . . .

. . . .

This Court further finds that respondents also violated the Martin Act's prohibition against the use of deception, misrepresentations, or concealment in the sale of securities . . . .

. . . .

Because of the clear illegality present in respondents' actions, and absence of any triable issue of fact, respondents are found liable under Executive Law § 63(12) for their state and federal law violations.


The Attorney General is entitled to injunctive relief which is routinely granted in special proceedings under Executive Law § 63(12). The requirement of a bond to assure future proper behavior on the part of an enjoined party traditionally accompanies such an injunction. This Court finds the request for an injunction warranted, and directs fixing of the amount be incorporated in an order to be settled.

As for the Attorney General's request for restitution, penalties, and costs, which are available under Executive Law § 63(12) and GBL § 353(3), this Court finds the circumstances warrant awarding them in this case. The manner of the accounting, the mechanism for restitution, and the amount in penalties and costs to be awarded shall be resolved at a hearing.

. . . [E]ach respondent is individually liable for the actions conducted by both WIGC and GCC . . . and shall be fined appropriately . . . .

. . . .



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