Friday, October 06, 2006

No word of apology yet from all the City bankers, promoters, PR men, fund
managers and regulators who are responsible for the worst scandal to hit the
London stock market for years. Shares in online gaming companies have gone
through the floor after the U.S. Senate passed a Bill to forbid banks from
processing payments to gambling websites. That confirmed what many suspected
was already the case: online gambling in America is illegal. The pretence to
the contrary by the world's online gambling companies, congregated on the
London Stock Exchange, was wrong. Since Monday, investors have lost around
£3billion and shares in companies such as PartyGaming, Sportingbet and 888
Holdings, are worth about a third of what they were last Friday. One, World
Gaming, is close to being bust, and PartyGaming has cancelled its dividend.
So what, you may ask. Who cares if a few City slickers and spivs have lost
their shirts? Well, anybody with a pension should be worried. Some of these
companies were so large - PartyGaming was once in the FTSE 100 index - as to
form a significant part of the pension funds of most people up and down the
land. And big providers of unit trusts, like Fidelity, New Star and Merrill
Lynch, not to mention thousands of small investors, wandered like suckers
into the kind of chicanery which is the City at its worst.

To John Maynard Keynes, this story would be all too familiar. "When the
capital development of a country becomes the by-product of the activities of
a casino," he wrote, "the job is likely to be ill-done."

It is hard to think of a more obvious example of Casino Capitalism than a
bubble in shares of gambling companies, with no real assets, run by
secretive characters based offshore.

But for capitalism to work, it should not be a casino, where spivs can
easily part fools from their money. Indeed, there are important distinctions
between investment and gambling.

If you buy a share in a company, you own something, which gives you certain
rights: the right to receive a dividend, to vote at annual meetings, and to
participate in any capital uplift.

But a gamble is just a zero sum game. You either win or, more likely, you
lose everything.

"Gambling is a serious addiction that undermines the family, dashes dreams,
and frays the fabric of society," said Bill Frist, the Senate majority
leader.

"Congress has grappled with this issue for ten years and during that time
we've watched this shadow industry explode.

"The bottom line is simple: internet gambling is illegal. Although we can't
monitor every online gambler or regulate offshore gambling, we can police
financial institutions which disregard our laws."

President Bush is expected to sign the Bill in two weeks. I hope he does so.
It will be a sign that, unlike most politicians, he is not prepared to look
at the internet like a rabbit dazzled by headlights.

Of course there are those who are bound to cry that Bush is simply
protecting America's own offline gaming industry from competition.

But he is perfectly entitled to shield U.S. citizens from say, drugs,
fraudsters, computer hackers and the like.

If you are reminded of all the opportunities afforded to pornographers by
the internet, you would not be wrong. The link between the two is
personified by Ruth Parasol.

She is the founder of PartyGaming and was once heavily involved in sex lines
in Seattle, while working for a sex entrepreneur.

After the companies were prosecuted, she left and now lives in PartyGaming's
hometown of Gibraltar, where she refuses all interviews.

When Miss Parasol and her husband, Russ deLeon, plus two unknown Indian
colleagues, turned up in London two years ago, looking to float PartyGaming
on the Stock Exchange, the big American investment banks were not
interested.

Instead, the company hired Dresdner Kleinwort Wasserstein, a shadow of the
old Kleinwort Benson.

The Financial Services Authority could have proclaimed that PartyGaming was
an unsuitable company to list in London. But it declined to do so and, at
that stage, the four sold shares worth £960million.

The float was waved through, along with countless other dubious proposals,
such as the Russian oil giant Rosneft (but that's another story).

For the spivs of the world, London is the stock market of choice.

However, in America, online gambling is illegal. It always has been. It
counts as "wire fraud".

Congress has taken the decision that gambling should take place only in real
casinos, where it is easier to keep an eye on what is going on and where the
day-to-day regulation is the job of the individual states.

In the PartyGaming flotation prospectus, amid numerous risk warnings, the
company admitted it had received an email from the attorney general of
Louisiana ordering it to cease trading.

But, incredibly, the prospectus said: "PartyGaming has no knowledge of the
legitimacy of the email or its author" and "has not responded or sought to
determine its legitimacy."

Why on earth did all those professionals, investing our money, buy the
shares? Perhaps it was because they took some comfort that two bigwigs,
Michael Jackson, chairman of software group Sage, and Sir Brian Larcombe of
3i, had agreed to serve on the board, pocketing a million pounds each for
their services.

Say what you like about the founders of PartyGaming, they are not stupid.
Over the summer, they sold another big chunk of their holding, making a
further £230million. One of them resigned as a director, enabling him to
sell more shares.

Insiders scuttling from a company is a classic sign something is wrong, but
still the lemons at the big fund management houses held on. Then, in
September, two gambling executives were arrested while travelling in
America.