Harsh financial penalty leveled against PokerStars in Kentucky

We know Kentucky has problems filling its budget gaps, but a state judge's Christmas Eve gift was a little extreme.

In essence, Franklin Circuit Judge Thomas Wingate is forcing owners of an online gaming company to pay penalties of $870 million, which could help bail out the financially troubled commonwealth.

Heck, you could buy all of Kentucky for that amount.

Maybe the judge had few mint juleps at the court's holiday party.

Wingate, ruling on a case that had been languishing since 2010 and relying on a centuries-old law that allows individuals with gambling losses to sue their opponents, said Amaya Inc. owed Kentucky the excessive amount. Why? Because online gaming giant PokerStars allowed Kentucky residents to gamble on the website for five years after the 2006 Unlawful Internet Gambling Enforcement Act took effect.

The figure is much more than the $731 million PokerStars forfeited in a settlement with federal prosecutors in 2012 to end a 16-month legal battle. Meanwhile, Canada-based Amaya didn't even own PokerStars during the years covered in the Kentucky case. The company spent $4.9 billion in 2014 to buy PokerStars' Isle of Man-based corporate parent.

In his ruling, Wingate said PokerStars' former ownership decided "that breaking the law was good for business." He calculated that 34,000 Kentucky residents lost $290 million wagering through PokerStars from 2006 to 2011. He tripled the damages and ordered the state to collect 12 percent interest until the amount was paid in full.

Needless to say, Amaya plans to appeal.

"This is a frivolous and egregious misuse of an antiquated state statute to enrich the contingent-fee plaintiff's attorneys hired by the commonwealth and not the people of Kentucky," Amaya General Counsel Marlon Goldstein said in a written statement.

On Monday, the Lexington Herald-Leader detailed the state's budget shortfalls heading into the 2016 legislative session.

"It's a pretty deep ditch that we find ourselves in," Kentucky Chamber President Dave Adkisson said. "And it's gonna take probably 20 to 30 years to climb out of it."

Instead, Wingate used PokerStars to cover the debt.

The ruling comes at an inopportune time for PokerStars, which is hopes to launch online gaming operations in New Jersey early in 2016. The business, which shut off its American arm following the April 2011 Black Friday crackdown on illegal online gaming, has been trying to get back into the U.S. — legally — since signing a deal with Resorts Atlantic City in 2013.

In September, the New Jersey Gaming Enforcement Division gave PokerStars the go-ahead to offer the state's residents online poker and casino games.

Much of the credit goes to Amaya CEO David Baazov and the Montreal-based gaming technology company. Amaya replaced PokerStars' former owners with a business publicly traded in Canada and the U.S. with access to credit markets for financing growth. Amaya says its online gaming products have 97 million users worldwide.

When it was operating despite UIGEA, PokerStars was easily America's favorite online gambling platform. Combined with FullTilt Poker, which is also owned by Amaya, the businesses controlled more than 54 percent of the Internet gaming market.

Launching in New Jersey offers PokerStars a vehicle to prove it can operate in a regulated gaming environment. It would also send a message to other states, such as California, which may legalize online poker, and Nevada, which sidelined PokerStars through a "bad actor clause" related to the UIGEA transgressions.

The Kentucky ruling was ludicrous. The judge didn't understand the basics of Internet poker.

The commonwealth's residents didn't lose money to PokerStars. They lost to other online players. At the most, PokerStars generated $18 million in gaming revenue from Kentucky through fees for operating the game over five years.

"A damages award in excess of $800 million is notable only for its absurdity," Goldstein said.

Amaya noted that no other U.S. state has sued relying the same law. The company also said the former owners of PokerStars would be on the hook for anything the company might have to pay.

Kentucky has long been considered a possible target for casino expansion. The state's former governor, a Democrat, was blocked by a Republican-controlled legislature in past efforts to legalize gaming as a way to generate tax dollars for shortfalls in public pension programs. Kentucky's current Republican governor is anti-gambling.

It looks like Wingate came up with his own a way to use gambling money for a budget fix.

Howard Stutz's Inside Gaming column appears Wednesdays and Sundays. He can be reached at hstutz@reviewjournal.com or 702-477-3871. Follow on Twitter: @howardstutz