Flutter has agreed to pay a $4 million settlement to the Securities and Exchange Commission (SEC) for alleged due diligence failures relating to PokerStars‘ lobbying efforts in Russia. It’s the second time PokerStars’ gray market history has returned to haunt its new owner, following a much larger settlement with Kentucky in 2021.
Flutter’s shares trade on the London Stock Exchange, so it isn’t under the SEC’s direct authority. However, The Stars Group (TSG) was from May 26, 2015, to May 15, 2020, when Flutter acquired the company. Flutter is now considering a secondary listing on either Nasdaq or the NYSE, providing an additional incentive to stay on amicable terms with the US financial regulator.
The SEC had charged TSG with due diligence failures under the Foreign Corrupt Practices Act (FCPA). The regulator claims that the company ignored red flags and continued to make payments for vague lobbying expenses to three Russian consultants. It says that emails revealed those $8.9 million in expenses included:
- Reimbursement for gifts to Russian government officials.
- Payments to Roskomnadzor, the agency overseeing internet censorship in Russia.
PokerStars (before becoming TSG) had contracted with the consultants to lobby for legal online poker in Russia. However, the SEC says their contracts didn’t include anti-corruption and anti-bribery clauses until 2017 and that TSG failed to enforce those clauses even after signing new contracts.
Flutter hasn’t admitted to wrongdoing. It has, however, agreed to pay the SEC $4 million, discontinue its relationship with the contractors, and avoid any further violations.
PokerStars’ Past Keeps Coming Back to Haunt It
PokerStars’ relationship with the consultants dates back to before 2014 when the company went public. It did so through a reverse takeover by the much smaller Canadian casino software supplier Amaya. At the same time, PokerStars parted ways with all its former executives.
From 2006 to 2011, PokerStars served US players in violation of the Unlawful Internet Gaming Enforcement Act until being shut down by the Department of Justice in a series of events now known as Black Friday. The strategy behind the Amaya takeover and leadership transition was to make a clean break from the company’s unregulated past and create a path for legal operations in the US.
The strategy was successful in that PokerStars now operates in New Jersey, Pennsylvania and Michigan and is the leading poker brand in the US regulated market. However, Amaya, which later became TSG, remains responsible for things the company did before 2014. By acquiring TSG in May 2020, Flutter took on that same burden.
The most painful manifestation of that came in 2021 when Flutter settled with the state of Kentucky for $300 million. It could have been on the hook for $1.3 billion had it fought the case to the end. The state had filed suit against the company for its activities before Black Friday, using a law intended to allow victims of illegal gambling to reclaim losses.
This $4 million to the SEC is a trifling sum compared to that $300 million. On the other hand, TSG leadership can’t put all the blame on its predecessors. The contractors may predate the takeover, but the alleged compliance failures occurred during the Amaya/TSG era.
Russia: an Important but Controversial Market
From Black Friday until it invaded Ukraine, Russia was the most important market for PokerStars. Poker is very popular in Russia and Eastern Europe. The region also has a combination of low income and high education, which creates a large population of professionals and aspiring professionals who dominate the low and mid stakes.
Like most international operators (save GGPoker), PokerStars pulled out of Russia following the invasion of Ukraine. It has lost roughly 20% of its traffic since then, while GGPoker has risen to become the uncontested international leader.
The war left PokerStars no choice, but the impact on its traffic makes it clear why it was reluctant to leave Russia earlier. Like many operators, it had long considered Russia a “gray” market, despite Roskomnadzor’s efforts to block offshore gambling. While continuing to serve Russian customers, it employed the three contractors to lobby the government to create a regulated market.
In the years before the invasion, it looked like those lobbying efforts might be paying off. PokerStars struck a deal with Casino Sochi to host its servers in one of Russia’s designated gambling regions. Though Russia never formally legalized online poker, the arrangement seemed to satisfy its authorities, even as competitors like Entain left the market.
In carrying out its lobbying, however, TSG allegedly failed to adhere to internal policies and the terms of its contracts. According to the SEC, the contractors continued to submit invoices with generic claims for “consulting services” or “legal services.” The company allegedly paid these without demanding the more detailed reports stipulated in the contracts.
Flutter Cooperated With the SEC
Given that the alleged violations spanned five years, $4 million may amount to a slap on the wrist for Flutter. The SEC’s order makes it clear that it felt lenience was appropriate because the new owner fully cooperated with the investigation and acted to rectify the problem.
The relevant part of the order reads:
In determining to accept the Offer, the Commission considered the Company’s and Flutter’s cooperation and remedial efforts. The Company’s and Flutter’s cooperation included sharing facts developed in the course of its own internal investigation and forensic accounting reviews, providing translated copies of various documents and relevant witness statements, and encouraging parties outside of the Commission’s subpoena power to provide relevant evidence and information. Flutter’s remedial measures have included taking steps intended to enhance its internal accounting controls, global compliance organization, and its policies and procedures regarding due diligence, use of third parties, and maintenance of adequate records.
It goes on to say that PokerStars had already terminated its relationship with two of the consultants in March 2021. The remaining consultant has stayed on, but only temporarily to tie up loose ends in Russia.