July was an exciting and rather scary month for the internet gambling industry. There was the arrest of David Carruthers, the CEO of Betonsports.com. The indictment released by the Department of Justice (DoJ) of eleven people in the industry for racketeering, tax evasion, and more. Plus H.R. 4411 and H.R. 4777, anti-internet legislation which has gone further in the House of Representatives than any similar legislation has gone before.

All of this left the industry feeling uneasy, which is fair enough. If the anti-internet legislation was passed it could be devastating for the industry. We weren't sure exactly how much the indictment against these eleven leaders in the industry would affect us. Is the DoJ out to get the industry as a whole or just Gary Kaplan, the owner of Betonsports.com? Bodog.com postponed the conference which was set to be in Las Vegas for a later date and a different venue. Other internet casino owners have been trying to decide whether they should avoid the US altogether. However, the most surprising casualty of this month was the Mohawks of Kahnawake.

The Mohawks of Kahnawake have been able to weather every storm sent at the internet gambling industry. After all, they are online casino hosts and regulators, without them the casinos can't function (or they must be hosted by someone else). They have hosting services, security services, and a certification program for internet casinos, poker rooms, and sports books. Betonsports wasn't even hosted by them, so why should they be affected by the current situation?

The Mohawks of Kahnawake were planning on going public.

The Mohawks have 40 percent ownership in a company called Continent 8 Technologies PLC which was meant to have gone public on the London Stock Exchange's junior AIM market. However, with the current situation creating a highly volatile market in the online gambling industry Continent 8 decided to postpone their IPO until the fall.

"There's a lot of questions about what things will look like going forward," said David Shore, an analyst with Desjardins Securities.

"But in Canada the criminal code is very clear that, even if gambling itself is illegal, it's OK to provide a service to a company operating in a jurisdiction where it is legal. The real question is whether the U.S. Department of Justice is going after Gary Kaplan, Betonsports or the industry as a whole."

Internet gambling is a $12 billion dollar industry and many of its biggest players are already public. Going public is a great way for a company to raise more money, which will allow them to become and even bigger player. Their goal is to raise money for a "global grid" of computer centers, including Mohawk Internet Technologies (MIT) facilities, to serve the gaming industry and other e-businesses.

The Kahnawake are already one of the most popular jurisdictions for hosting internet gambling sites due to MIT's powerful computer servers. The world's top five poker sites and seven of the top 10 online casinos are among its 61 clients, according to Continent 8's preliminary prospectus. I know that almost every internet casino I've played at is hosted by Kahnawake as their certificate is always on the homepage.
I know that this is an IPO I would want in on. The Kahnawake have some wonderful benefits for being an Indian reservation. For example, they don’t pay taxes. This makes business remarkably profitable. MIT posted a net profit of $17.4 million U.S. in the year ended March 31 on revenue of $24.7 million U.S., according to their IPO prospectus. Half of their business is profit, which means they can charge less than a company which has to pay taxes, and still earn a larger profit. It's no wonder so much of the industry is hosted there.

Everything was set, and then Betonsports chief executive officer and owner were charged in the U.S. with racketeering and fraud. Shares for the entire industry took a nose dive, including those of PartyGaming PLC, the world's largest online gaming operator, whose chief executive is Montrealer Mitch Garber. US players are extremely important to the internet gambling industry as they make up over half of the players for the industry worldwide.

Analysts have since decided that it really was only Betonsports that the DoJ was after. The Senate leader hasn't mentioned being interested in the anti-internet gambling bills they have been presented with from the House of Representatives. One would think that the IPO would go forward, now that the share prices have recovered and things are back on track. However, it is this volatility that has made the investors take a step back and re-evaluate according to Continent 8 chief executive Michael Tobin.

"Due to the market conditions, the investors pulled back," Tobin, a longtime adviser to MIT, said. "We fully intend to see how the markets change by the autumn and look at doing the IPO then."

While the Mohawks own 40 percent of Continent 8 the rest of the company is owned by Tobin and other investors.

During the step-back Continent 8 intends to look into alternative options such as a private-equity investment or borrowing money to finance its expansion. If they don't find what they are looking for within the next few months then there should be a public offering in October or November.

This doesn't mean that Continent 8's expansion plans are on hold. The company is completing a computer center in Singapore and building another facility in the Isle of Man, off the coast of England. They also are searching for another center in Europe to buy. In addition, Continent 8 is negotiating with the Mohawks to participate in the building of second center on the Kahnawake reserve.

There is a risk if the Kahnawake become even more successful. The Canadian tax authorities could decide to stretch their long arm into Indian territory. While the Mohawks assert their jurisdiction over gambling the provincial and federal government maintain only the provinces and territories can operate gambling ventures. As such the Canadian government could decide to shut them down completely. Perhaps it isn't the US government the Mohawks should be worried about.

Posted on: August 3, 2006

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