Abstract
The point is, ladies and gentleman, that greed, for lack of a better word, is good. Greed is right, greed works. Greed clarifies, cuts through, and captures the essence of the evolutionary spirit.
—Gordon Gekko, Wall Street
T
This greed has also created clarity from a scholarly gaming law perspective, as a historical examination of gaming law is inherently compartmentalized. Greed has helped created nicely arranged eras of legalization, which form the basis of the Three Waves Theory. The First Wave involved gambling being legalized, only to become prohibited. The Second Wave, the same. Now, we currently find ourselves in the Third Wave of legalized gambling.
At the end of each wave, cheating and greed become so rampant that gambling becomes outlawed. This greed has been associated with, or categorically labeled as, “scandal.” This scandal, coupled with morality, has in the past thrown gambling back into a state of prohibition. In actuality, the term “scandal” has complex theological, and etymological roots. 1 The term is derived from the Greek word meaning “offense, downfall, or a stumbling against something,” 2 and appears a number of times in the Sacred Scriptures in a variety of contexts. 3 Yes, some might be surprised that the term has roots sunk deep in antiquity and was not popularized by the Netflix show Scandal, the band Queen, 4 or the Kardashian family.
This article is not focused on precisely defining or historically contextualizing the term “scandal,” either within or outside of gaming law. Such an endeavor would be scholarly work all itself. This article is also not an exhaustive examination of the Three Waves Theory, or even of cheating within gaming law. Again, that would be voluminous and plus, has been thoroughly documented elsewhere. This article is meant to be a cursory, historical, and entertaining overview of the historical role of scandal in gaming law, placing scandal within the context of the First, Second, and Third Waves. Why is this worthwhile? The concept of scandal is connective tissue weaving itself throughout each wave. Although its existence differs widely in form, it always exists in substance throughout the history of gambling. The article concludes by identifying a particular area of law that will need to receive additional attention in the future, as attempts to cheat continue to grow in the current Third Wave.
First Wave
With public opinion on our side, we can do anything, without it nothing.
—George Washington 5
The First Wave of gambling in the United States was from the Colonial period to the mid-1800s. 6 Gambling first started in the United States in the early 1600s, when the Crown allowed the Virginia Company of London to have a lottery to help develop the Jamestown Settlement. 7 The revenue generated by gambling during the formative years of the country played an important and positive role, such as raising millions of dollars for the American Revolution. 8
Following the American Revolution, states used lotteries for public purposes, such as building roads. 9 The improvements to the infrastructure from gambling were visible and substantive, giving gambling widespread support. The early perception of gambling was largely favorable. Support for gambling revenue also came from such prominent individuals as George Washington, Benjamin Franklin, and Thomas Jefferson, 10 as well as from prestigious institutions such as Harvard and Yale. 11 This visibility helped cultivate a positive public opinion towards gambling, to the point that a lottery was not even thought of as a form of gambling. 12 Since the revenue contributed to society, lotteries started to be viewed as charitable donations, with a side benefit of one lucky patron being named a winner. 13 Supposedly buying a lottery ticket during George Washington's era was easier than it is now. 14 The public perception of lottery vendors was similarly largely positive. It was a respectable shop, operated by volunteers or shopkeepers who did not rely on lottery revenue as their primary source of income.
However, selling lottery tickets started to become a business. The amounts wagered increased and selling tickets became profitable. Lotteries started to be operated by big businesses who had special privileges obtained from the legislature. 15 The experience became commercialized, as it was no longer citizens selling lottery tickets for the public good, and the drawings were no longer ceremonious. There was no longer a prominent member of the community conducting a ceremonial drawing; rather, paid employees conducted the drawings on a daily basis. 16 The regularity of the drawings undermined the emotional investment in and prestige surrounding the event. The notion of personal gain was washing over a once-ceremonious, public-spirited event. Naturally, all of these factors led to more dishonesty.
The growing amounts wagered created a greater incentive to steal. This, along with the lack of oversight, resulted in a vulnerable public. A popular way to swindle lottery goers was to collect tickets and leave town without a drawing. The lottery operator would stall, claiming that there were not enough tickets sold, only to subsequently leave town without a winner. This form of swindling was particularly abhorrent, and the public developed a revulsion for a lottery with no winner. The complete absence of anyone winning seemingly made this form of criminality worse than a crooked or fixed game: apparently, a gambler could live with a rigged game if it was the only one available, 17 but would draw a line in the sand when nobody won. 18
As a noteworthy aside, England also battled corruption with government-run lotteries during this time. Similar to the American ruse described above, the lottery offices cheated their customers by disappearing before a winner was determined. 19 Immediately following the American Revolution and into the early 1800s, the English lower class was a prime target for fraudulent gaming. While the upper class played a legitimate lottery, the lower class played two forms of lotteries that were riddled with dishonesty—the “little goes” and “insurance.” 20 The lower class enjoyed these games, although it appears to be common knowledge that they were illegal and rigged. Similar to the American mindset, being the only game offered trumped integrity. A gambler would tolerate a fixed game, as long as the game was the only one in town. By the mid-1800s, as the popularity of racing grew, the number of scandals continued to grow and Parliament finally addressed gambling in 1853. 21
Back in the United States, there was growing dissatisfaction with gambling; eventually, the newspapers turned against lotteries. The existence of cheating became widely known and, consequently, states began prohibiting lotteries in their state constitutions. As new states were born, their constitutions contained similar provisions outlawing lotteries 22 and the First Wave of legalized gambling came crashing down.
The First Wave ended around 1840. The resulting prohibitionist regime set the stage, by way of backlash, for the Second Wave. President Andrew Jackson is credited with playing a role in giving the Second Wave momentum. 23 Ironically, President Jackson was a gambler himself. 24 What is less known is that Jackson became president of the United States at least in part due to a scandal. In 1824, John Quincy Adams defeated Jackson in the presidential election. Although Jackson actually had a plurality of votes, he did not win because the contest was decided in Congress. 25 Jacksonians claimed that there was a scandal (a “corrupt bargain” between Adams and Henry Clay) which led to this victory. 26 This was followed by another accusation of scandal. Once John Quincy Adams moved into the White House, he bought a second-hand pool table to entertain guests. 27 Jackson supporters immediately decried that “public funds” were used to purchase gambling equipment and argued that the White House should hold no such equipment 28 and accused Adams of “royal extravagancy.” 29
For the sake of balance and context, it is worth noting that President Adams was likely not the first president to gamble and during this time, gambling was popular in the nation's capital. The most famous gambling house in Washington, D.C., the Palace of Fortune, was notorious for having congressmen as card players, and lobbyists would often try to curry political favor from congressmen. 30 The Palace of Fortune was apparently “neutral ground,” where gambling transcended political beliefs. 31 The owner of the Palace of Fortune was not only one of Washington's most influential men because of the nature of his patrons, but had virtually celebrity status for running such a popular shop. 32
Adams eventually clarified that he did not gamble using the pool table and that he had purchased the table with his own money. 33 While the billiards scandal did not bring down Adams' presidency, the argument set the stage for a looming battle. The controversy created a palpable tension between the parties and set the stage for Jackson's victory in the 1828 election. At the risk of overstating matters, it is possible that the scandal was even symbolic of the growing strife between the parties and the nation's divisiveness in general, the culmination of which would be the Civil War.
Second Wave
The second wave of legalization caught momentum after the Civil War, with southern states needing additional revenue after experiencing economic devastation. The return of lotteries, however, once again led to the return of fraudulent gambling. Professional gamblers would cheat unsuspecting individuals or those who were traveling. In the early nineteenth century, gambling grew increasingly intertwined with criminality. 34 The culmination of fraudulent gaming in the Second Wave is the gold standard of scandal: the Louisiana Lottery Scandal. Based on its breadth and volume, the Louisiana Lottery Scandal was one of the largest gambling scandals in history. The scandal has been nicknamed the “Serpent” because it spread its tentacles to every corner of the nation. 35
The story begins in 1868, when the Louisiana Legislature was bribed into passing the charter. 36 That same year, Louisiana lawmakers chartered a private company, the Louisiana State Lottery Company (LSLC) to run the lottery for a period of 25 years. For the purposes of looking legitimate, two retired Confederate generals were hired to supervise and promote the lottery.
The first drawing was conducted on January 2, 1869 and proved to be a surprising success. The exact reports on profit margins differ, but the Louisiana State Lottery Company likely took 40% to 50% of all the revenues produced. 37 The lottery gained popularity for huge payouts; however, huge payouts shouldn't be surprising, considering the Louisiana Lottery was a legal monopoly and allowed to pay a stipend of $40,000 in lieu of taxes. The operators paid off the newspapers, banks, and public officials, and made donations to various state projects to maintain support for the lottery. 38 The Louisiana newspapers, however, probably didn't need to be bribed, as most of them owed their own financial well-being to the Louisiana Lottery.
The Lottery was so entrenched in society that “a winning ticket was accepted everywhere in the country as the equivalent of a certified check.” 39 At its height, estimates have the nationwide monopoly making profits of up to $13 million, paying out $3 million per year. 40 The modern postal system allowed the Louisiana Lottery to reach customers across the country, 41 and by 1877 tickets were sold in every state. 42 Incredibly, 93% of the lottery's gross revenue came from outside the state of Louisiana 43 and agents for the lottery were located in every state. 44 In 1890, 45% of the New Orleans post office volume was lottery-oriented. 45 While other states began shutting down their lotteries, the Serpent held strong. The Louisiana Legislature wouldn't shut down the lottery and other states couldn't keep Louisiana's lottery out, so the federal government intervened. Attempts to renew the lottery were unsuccessful and by 1894, Louisiana had banned their lottery the way the rest of the country had. Once the lottery was finally shut down, the public began to learn about the enormous scope of the lottery and the Louisiana Legislature was rocked with bribery accusations. 46
The Louisiana State Lottery Company was, if nothing else, a cunning, amusing, and legally creative operation. From a public relations standpoint, the Lottery understood the importance of appearance. The Lottery regularly contributed to public causes and returned the previous pomp to the drawings, hiring a theater for the drawing, which included a free concert. 47 They also used some interesting legal tactics when trying to get revenge. When the Philadelphia Times aggressively campaigned against the LSLC, the LSLC tricked the publisher into traveling to Louisiana. 48 Upon arrival, the publisher was promptly served with process for a libel suit filed by the LSLC. 49 After Congress passed legislation prohibiting the use of the mail for lottery tickets, the LSLC then used a loophole in Florida's law to distribute tickets via private carriers. 50 Congress had to expand their powers in order to combat that development and even then, it took physical searching of luggage to finally end the smuggling of lottery tickets. 51 The fall of the Serpent in 1907 marked the end of the Second Wave of legalized gambling.
Third Wave
The Third Wave technically started with the repeal of Prohibition and the start of the Depression. When the Stock Market Crash of 1929 occurred, the public once again clamored for legalized gambling. The Third Wave really picked up steam in the 1960s, when New Hampshire introduced their state lottery and other states couldn't resist adding their own. Geopolitically speaking, the northeastern United States was the perfect region to create a domino effect among states. By 1983, 18 other states had lotteries; by 1990, 34 states operated lotteries. 52 Things continued to escalate when, around 20 years later, fantasy sports gained popularity and most recently, daily fantasy sports has exploded.
This article will conclude by examining two recent scandals, involving two mainstream forms of gambling in the Third Wave: daily fantasy sports and a state lottery. Examined first is the FanDuel/DraftKings controversy.
FanDuel/DraftKings scandal
The most valuable commodity I know of is information.
—Gordon Gekko, Wall Street
The Gordon Gekko references risk getting old, but on multiple levels, this widely publicized scandal was about information. The story began on September 27, 2015, when DraftKings employee Ethan Haskell accidentally published ownership data for a DraftKings contest on a DraftKings blog. 53 The link was then posted on RotoGrinders and described as a leak. Haskell, who had previously worked at RotoGrinders, went to the forum where the information had been posted and apologized. Haskell took full blame for erroneously posting the information and also mentioned that as a DraftKings employee, he was “not allowed to play on site.” 54
However, the next development created a full-blown national controversy. On October 4, 2015, Haskell won second place and received $350,000 on FanDuel's $5 million “NFL Sunday Million.” Irrespective of Haskell's inadvertent post a week before, the optics of Haskell playing on FanDuel was problematic. DraftKings is an operator of a top-heavy duopoly in an industry where integrity is paramount; a DraftKings employee winning large amounts of money on the rival platform cannot but look bad. Throw in the inadvertent release of ownership information the week before, and the situation had national scandal written all over it.
Obviously, unreleased information is inherently advantageous, and there is general acceptance that using such information is cheating. 55 But perhaps more disconcerting is the complete lack of self-awareness. DraftKings and FanDuel were already highly controversial and operating under a metaphorical microscope in the digital age, 56 where news spreads instantaneously. This heightened scrutiny was largely self-inflicted, due to their brazen marketing tactics. The historical and unprecedented marketing campaign by both operators created public outcry, if not outright enemies. DraftKings' failure to properly monitor their employees gave critics ammunition that this top-heavy industry lacked not only basic internal controls, but common sense. 57
DraftKings and FanDuel immediately went on the defensive, denying that Haskell had access to ownership data until the FanDuel lineup was locked. 58 DraftKings hired a law firm to conduct an independent investigation; ultimately, there were no criminal or civil charges pressed against Haskell. 59 What, if anything, Haskell did wrong apparently became moot because Haskell was immediately, and perhaps irretrievably, villainized. 60 An ESPN article on daily fantasy sports pointed to the Haskell incident as taking the daily fantasy sports controversy to another level and stated that Haskell had even received death threats on social media. 61
The incident highlighted the daily fantasy sports controversy The New York Times proclaimed, “Scandal Erupts in Unregulated World of Fantasy Sports” 62 and New York Attorney General Eric Schneiderman labeled the daily fantasy sports industry a “multi-billion-dollar scheme intended to evade the law and fleece sports fans across the country.” 63
New York's position created a clash of interests between New York's gaming industry and daily fantasy sports, pitting politics versus practicality. The New York state government, like many other states, has a major interest in their state lottery. New York has one of the largest state lotteries in the nation 64 and the state judiciary has even explicitly acknowledged the value of their lottery revenue. Competition for gaming dollars is notoriously fierce, and the New York state lottery competes with tribal casinos and nearby gambling havens in New Jersey (i.e., Atlantic City), Connecticut, and Pennsylvania.
However, daily fantasy sports already had business interests in New York. FanDuel is headquartered in New York, while DraftKings has a massive satellite office in Manhattan. 65 DraftKings has a deal with Madison Square Garden, which means DraftKings has more than a passing interest in the New York Knicks, New York Rangers, and the Women's National Basketball Association's (WNBA's) New York Liberty. 66 DraftKings also has deals with the New York Giants and New York Yankees, while FanDuel has advertising deals with the Brooklyn Nets and New York Jets. 67
The New York controversy did not last long. Months after the declaration of war, New York became the eighth state to pass daily fantasy sports legislation. 68 It has been postulated that the controversy might have even helped DraftKings and FanDuel from a publicity standpoint. 69 It may also be argued that passing daily fantasy sports legislation in New York illustrated that regardless of the vehement opposition, daily fantasy sports is firmly entrenched in our culture. 70
The public may not have heard the last of the infamous Ethan Haskell. 71 When Haskell worked for RotoGrinders, he participated in an interview titled, “Better Know a Grinder—Ethan Haskell.” 72 Haskell was asked if he had any special skills which the readers of RotoGrinders might not know about. Haskell stated that if he was pushed for an answer, “I'd say I might have a career in Hollywood.” 73 Ironically, Haskell might end up being portrayed on the big screen; reportedly, there is a book in the works, and the movie rights have already been auctioned off.
Iowa Lottery controversy
For fifteen thousand years, fraud and short[-]sighted thinking have never, ever worked. Not once. Eventually you get caught, things go south. When the hell did we forget all that? I thought we were better than this, I really did.
—Mark Baum, The Big Short 74
On December 23, 2010, a $16.5 million dollar winning Hot Lotto ticket was purchased in Des Moines, Iowa. Several people attempted to claim the ticket, including Canadian resident Phillip Johnston. Johnston correctly identified the serial number, but he did not resemble the purchaser from the surveillance video. The Iowa Lottery Division declined to pay him because Johnston admitted that he was not the owner of the ticket but that he was representing an anonymous party. 75 An attorney on behalf of Johnston also tried to claim the ticket.
Four years after the purchase, the surveillance footage was released in an attempt to identify who purchased the ticket. 76 An out-of-state lottery worker saw the footage and identified Eddie Tipton, the information security director for the Urbandale-based Multi-State Lottery Association, as the purchaser. This was a cause for concern because the Multi-State Lottery Association employees were not allowed from purchase lottery tickets. However, while purchasing a ticket was disallowed by Multi-State Lottery Association employees, the act was not made criminal by the Iowa legislature. 77 Since there are other activities that are criminalized associated with the ticket purchases, the state charged Tipton with first, passing or attempting to redeem a lottery ticket with the specific intent to influence winnings, and second, tampering with lottery equipment with the intent to influence winnings.
The investigation into Eddie Tipton purchasing the lottery ticket started to uncover a major scandal. Eddie Tipton was one of the people in charge of building the machines that generated the random numbers for the lottery. Tipton apparently installed a self-deleting software called a rootkit. 78 In general, rootkits have become increasingly sophisticated in terms of their stealth, making them hard to detect. 79
The rootkit would manipulate the outcome of the lottery, and Eddie Tipton would be able to determine what the winning numbers would be. 80 The self-deleting software was allegedly inserted with a USB flash drive and would fix the outcome of the drawing. Since the software was self-deleting, there was initial difficultly detecting it. The rootkit made the numbers generated not random on three particular days. Rather, certain numbers would be drawn on three particular days of the year, on two particular days of the week, after a certain time of day. 81 The actual numbers that would be drawn on this designated time were predictable, based on an algorithm that Eddie Tipton could solve.
Tipton's defense argued that there was no forensic evidence that tampering existed 82 and that the person in the surveillance footage was not Eddie Tipton. The evidence against Eddie Tipton was inherently circumstantial because of the difficulty tracing the self-deleting software back to him. 83 In July 2015, after a week-long trial, Eddie Tipton was found guilty on both counts and sentenced to ten years' imprisonment. The presiding judge labeled Tipton's behavior “as large a breach of trust as I can imagine.” 84
The scandal continued to grow. Eddie Tipton's conviction generated publicity, which led the police to receive a tip that Eddie Tipton's brother, Tommy Tipton, purchased winning tickets in Colorado in 2005 and Oklahoma in 2011. 85 Tommy Tipton, who had held an elected position as a justice of the peace before the allegations surfaced, testified in Eddie Tipton's trial that the person in the surveillance footage did not look like Eddie Tipton. 86
The criminal complaint alleges that Tommy Tipton won $568,990 in a fixed Colorado lottery, conducted by a computer programmed by Eddie Tipton and that Tommy sought out a friend to claim the prize in exchange for 10% of the lottery winnings. 87 The allegation also states that a similar type of winning occurred in Oklahoma, where Tommy Tipton again had a friend collect the cash prize. 88 The conditions of the Oklahoma and Colorado lottery winnings by Tommy Tipton are alleged to be similar to that of Eddie Tipton. The trial for Tommy Tipton has tentatively been scheduled for January 23, 2017. 89
In the summer of 2016, Eddie Tipton's appeal was addressed by the Iowa Court of Appeals and the charge of passing or attempting to redeem a lottery ticket with the specific intent to defraud was reversed. The issue was whether the statute of limitations had passed on the crime. The Court of Appeals agreed with Tipton that the latest he could have acted was December 29, 2011, which was the last day to redeem the ticket. 90 Since the Iowa Lottery Division was physically in possession of the ticket on December 29, 2011, Tipton could not have physically passed the ticket on to anyone. 91 Since the trial information was filed on January 15, 2015, this exceeded the statute of limitations period of three years from date of the offense. 92 Therefore, the trial information was untimely. The written opinion did state that there was adequate circumstantial evidence to convict him of the first count of fraud.
Eddie Tipton might not be done with the judicial system, as the ongoing investigation has implicated Eddie Tipton in other lottery schemes. Eddie Tipton now faces more felony charges of ongoing criminal conduct stemming from allegedly fixing drawings in 2005 and 2007. 93
There is also another interesting development in the Iowa Lottery scandal. “Lucky” Larry Dawson, 94 a financial planner by trade, 95 bought $19 in tickets for every biweekly drawing. Dawson made the purchase after reading a book claiming to divulge secrets on winning lotteries. 96 In 2011, luck was indeed on Larry's side and he won $6 million, after taxes, from a Hot Lotto ticket. This, of course, was the same game that Eddie Tipton defrauded in 2011.
In 2016, Dawson filed a lawsuit against the Multi-State Lottery Association with a relatively straightforward claim. The game Dawson won involved a progressive jackpot, which is one where the value of the jackpot increases until there is a winner. Eddie Tipton's illegitimate winning ticket reset the Hot Lotto progressive jackpot to $1 million, as if there was a legitimate winner. The money was returned to the 16 states that participated in the Hot Lotto game. 97 The claim is that the underlying negligence gave Tipton the opportunity to defraud the lottery, while the states have benefited from this negligence by getting their money back.
Dawson contends that, but for the negligence of the lotteries, the progressive jackpot would never have been reset. However, the Iowa Lottery contends that Dawson's claims are speculative. While Dawson's claims are probably technically hypothetical, his argument has a chance, particularly with a jury, because it is intuitive. When holding a public press conference to announce their lawsuit, the Dawson's attorneys criticized the security and the integrity of the lottery 98 and questioned whether the public wants to play a lottery they couldn't trust. 99 A motion to dismiss was denied and as of this writing, the case appears to be headed for trial.
Conclusion
If you aren't cheating, you aren't trying.
—Navy Seal Motto
The Navy SEALs are often considered the most elite and cohesive special forces unit in the world. 100 One part of the training required to become a Navy SEAL is Basic Underwater Demolition/SEAL, or BUD/S. BUD/S is considered by some to be the most physically and mentally demanding training on earth. The training challenges the way the cadets think. In an incredibly informative book about BUD/S and the process of becoming a Navy Seal, Breaking BUD/S, a former Navy SEAL compared BUD/S training to the legendary Spartan agoge training. 101 The goal of agoge training was to train young warriors to have mental and physical toughness. 102 In agoge training, a Spartan wasn't punished for stealing, but they were punished for being caught. 103 Similarity, BUD/S encourages this type of mindset—take any advantages you can, and if you are going to try and cheat, you better be able to get away with it. 104
So what is the relevance? 105 That random piece of information serves as a useful framing device to weave together some conclusory themes. The SEALs are perhaps the finest working teams in the world because of their unrivaled preparation. 106 In gaming law, the easy part is knowing that attempts to cheat will occur. Gambling and cheating are inseparable. Whether cheating be gaining information for daily fantasy sports or deliberately manipulating the lottery, cheating will exist. There always have been, and always will be, unsavory individuals trying to gain an advantage or even blatantly stealing. The preparation has to be done to try and prevent successful cheating.
The difficult question is, how will the cheating occur in the future? The two incidents discussed in the Third Wave section highlight the obvious direction of cheating: attempts to cheat will be predicated on technology. Technology is the battlefield of the future in gaming law, and the major attempts to cheat the system will be done using technology. Our society has become one of one technological advancement after another. The days of the traditional lottery tickets are numbered, and terrestrial casinos are jeopardized because people don't want to leave their couches to gamble. The key to preventing cheating, or at least minimizing the damage from cheating, will involve the oft-neglected area of cybersecurity. The number of cybersecurity threats are increasing and will likely continue to climb. 107
As the scope of legalized gambling widens, 108 more information and data will be stored online. This means more exposure to hacking. The fact that cybersecurity laws need to be more progressive and preventive is not a novel idea. A cursory review of scholarly work in cybersecurity reveals, however, that there is a lack of legislative cohesion and cooperation. This means the status quo will be problematic, if not financially disastrous, if (but more likely, when) sports betting and fantasy sports wagering become legalized. In other words, cybersecurity law needs to progress in lockstep with gaming law. There should be, and inevitably will be, more scholarly focus on the intersection of cybersecurity laws, privacy laws, and gaming law, as the types of available gambling widens out. The information and data that will be collected and organized online will become more pervasive and invasive, and accordingly needs to be more closely guarded, as the Third Wave embraces legalized gambling in the sports world.