Full Tilt Prologue — Fantasyland

In terms of, you know, not being trustworthy or being tricky in the business world, you see, again, we come from a poker world where deceitfulness, that’s part of the game. That’s part of the rules. The person you’re playing against is also going to be deceitful. You know that ahead of time. They’re expecting it from you and therefore it’s a completely honorable game. The deceit is part of the rules of the game, right?

— Howard Lederer, Big Think interview, March 2009

Somewhere over the Black Sea, Friday, April 8, 2011:

Howard “The Professor” Lederer didn’t enjoy flying commercial. April was tourist season in the Middle East, and Dubai International Airport was chock-a-block. Lederer, one of the most recognizable players to emerge from the mid-2000s poker boom, and president of Full Tilt, the world’s second-largest online cardroom, may have been poker royalty, but that week all landing spots for private planes were reserved exclusively for the Emirates’ sheikhs.

The quickest available route from Vegas to the upcoming tournament in Dubai was via Dublin. This happened to suit Lederer. Five years earlier Full Tilt had relocated its headquarters from California to Cherrywood, a business park south of the Irish capital, with a view to listing on the London Stock Exchange. He’d made it over only twice before and was due another visit. As luck would have it, the timing couldn’t have been better: there was a board meeting scheduled for that Thursday. He could fly in Wednesday, attend the meeting, fly out to Dubai first thing Friday, and still make it to the tournament on time — killing two birds with one stone.

It wasn’t the loss of status that bothered Lederer about flying commercial. Airlines claimed to have “flat beds” in business and first class, but he had yet to find one that comfortably accommodated his bear-like 6'5'’ frame. With sleep out of the question, he took out a brand-new deck of cards, broke the seal, and nudged his travel companion. How else to spend the next eight and a half hours?

Sitting next to him was Huckleberry Seed, the 1996 World Series of Poker champ. He was still a decent player, but hadn’t kept pace with the new breed of internet sensations who now dominated the game. On playing ability alone, Huck probably wouldn’t have made it onto Full Tilt’s books as a “Red Pro”, a collection of the world’s top hundred or so players sponsored to represent the site. But he and Lederer went way back, and Lederer liked to keep his friends close. This wasn’t 100 percent altruism on Lederer’s part. It never was. Seed was known for his willingness to bet on anything and everything, and he’d taken on a host of audacious “proposition bets,” like attempting to float in the Pacific for twenty-four hours with nothing but a wet suit, or living in the bathroom of a Bellagio hotel room for thirty days straight, which had generated tremendous publicity for Full Tilt.

Among professional gamblers, someone who isn’t prepared to back their opinions is no different from anyone else. “You think Obama’s going to get reelected? … How much do you have down?” “You say you’re going to take ten minutes … How much a minute on the over?” “Hmmm, that wine’s delicious … I bet you wouldn’t be able to pick it out if I blindfolded you and put it next to two other random glasses.” Prop bets, the extreme manifestation of the put-up-or-shut-up principle, tend to fall into one of three categories: feats of athletic prowess, self-improvement, and goofy things that nobody in their right mind would want to do.

The Professor relished trying to figure out whether something never done before was possible and using it to test a person’s will and character. How much did they want it? How far were they were prepared to go? He had a long history of such bets with Seed. They’d never been for life-changing money — bet too little and no one cared; too much and they’d try too hard. They had to be for just the right amount to incentivize, and to test the hypothesis. As their bankrolls swelled over the years, so the bets had risen too.

Back in the summer of 2004, just a month after Full Tilt’s launch, the two men were drawn at the same table in a charity tournament. Gymnastics at the Athens Olympics was on a TV in the background, and Seed said he didn’t think it would take him long to learn to do a backflip from a standing start. Lederer knew of Seed’s athletic prowess — he’d been on Caltech’s basketball starting lineup before dropping out of its engineering program to play poker full-time — but he stood a gangly 6'7″, and Lederer hadn’t believe it possible or, more to the point, probable. He bet $10,000, giving Seed only forty-eight hours for the feat to be completed. What he didn’t know was that Seed’s uncle was a former acrobat. He taught his nephew the maneuver by hooking him up to a harness suspended over a swimming pool to practice for the better part of the next two days. Forty-eight hours later, Seed executed a perfect backflip, despite allegedly being under the influence at the time. Lederer was so in awe he almost smiled when he paid him off.

Many poker pros weren’t quite so athletic, a side effect of their sedentary lifestyle. While there weren’t exactly lines around the block outside of Weight Watchers’ Vegas branch, weight-loss bets were as common among the high-stakes poker community as the Dunkin’ Donuts that helped give rise to them. Lederer who’d always struggled to control his weight was over 300 pounds a few years after the backflip bet. Seed, a sinewy 200 pounds, had the opposite problem — he wanted to beef up. He came up with an ingenious way to align their interests, something a little different from the standard weight-loss bet of having to lose a certain amount by a certain date. He sought out legendary backgammon hustler Mike Svobodny and structured a deal where he and Lederer got to bet $50,000 each against “Svobo,” the proposition being they could “cross weights” within a year. For once, they were both on the same side. They lost. Lederer then opted for gastric bypass surgery.

The two were back at it during the following World Series of Poker. Seed wagered six figures he could break 100 four times in a single day on a local desert golf course, using just a five iron, a sand wedge, and a putter — even letting Lederer pick the day. Naturally, Lederer waited for the hottest day of the summer, and they teed off at six in the morning, an ungodly hour for any poker player. Seed shot 100 on his first attempt, missing out by just one shot, so at 8:30 he had to start over, knowing he had at least four more rounds ahead of him, in rising heat. A further condition of the bet was that Seed wasn’t permitted to use a cart or a caddy, so he had to run between shots to complete the remaining seventy-two holes before nightfall. Despite the temperature soaring to a record 117 degrees, he managed to improve with each round and won the bet. “I really got into a groove with the five,” he later put it.

Despite having the worst of it in a bunch of prop bets, Lederer had been “running good” ever since he invested in Full Tilt, and could well afford the losses. The business of poker had been kind to him. Anti-online gaming legislation by the US government in 2006 had put paid to Full Tilt’s multibillion-dollar plan to IPO — and his chance at a monster payout. Ironically, that worked out in his favor too. The following year, he was a member of the board that approved Full Tilt’s first shareholder distributions. Unencumbered as a private LLC, the distributions began to flow at the rate of $10 million a month. As the joint second-largest shareholder with CEO Ray Bitar (after founder and chairman Chris Ferguson), Lederer received $42 million in just four short years, a good chunk of which he made sure to lock up in seven Vegas properties. The days of hustling games for a living and never being more than a move or two from going broke seemed a distant memory as Lederer and Seed cruised in first class out of Dublin, bound for Dubai.

They debated which game to play while Lederer shuffled the deck. Even in their hyper-competitive, ego-driven world, there’s an unwritten rule that pros don’t challenge each other to heads-up Hold’em or other traditional forms of poker. Poker, after all, is about exploiting: there are the pros and the amateurs; the fish and the sharks. When no fish are in sight, the sharks are better off staying out of each other’s way rather than trying to feed on each other. Instead, they pass the time by experimenting with other variants of the game. Lederer and Seed settled on Chinese poker, a cross between solitaire and sudoku. It involves a small amount of skill but is mostly luck. Each player receives thirteen cards, one at a time, and simply takes it in turn to place each one face-up, ending with a grid of three poker hands: five at the bottom, five in the middle, and three at the top. The stronger your final holdings, the higher a bonus you score.

Six hours in, they were so focused on the game they might as well have been flying coach. Lederer was still running good. He’d reached fantasyland, a special bonus round where you’re dealt all thirteen cards at once instead of the usual one at a time, an edge so exacerbated it’s like you can do no wrong for a limited period — the equivalent of invincible mode in Super Mario Bros. At $1,000 per point, Lederer’s score was racking up quickly. Yet his mind began to wander …

♣ ♦ ♥ ♠

The board meeting the previous day had passed with no surprises. Over a few beers at CEO Ray Bitar’s house that night, however, Bitar had said casually: “There’s been some customer deposits we’ve credited to their playing accounts but haven’t been able to collect.”

“You want me to go around with brass knuckles?” Lederer joked.

“The players are good for the money. They’re falling over themselves to deposit. We just can’t get it onto the site.”

“Why? What’s the problem?” Lederer asked.

“As you know, ever since Visa and Mastercard stopped authorizing US gambling transactions, we’ve had to rely on a bunch of third-party payment processors like Neteller. Everything was running like clockwork until Intabill got busted. Can you believe those crazy motherfuckers were labeling eight-thousand-dollar deposits as ‘petfoodstore.biz’ transactions?”

“Okay, we’re having issues getting American deposits onto the site, but why are we crediting player accounts before their money’s cleared?”

“You want our customers to go over to PokerStars?”

“So, how many accounts are gambling with phantom funds?”

Ray paused. It was hard to think of a way to sugarcoat this. “A hundred thirty thousand. But it’s all for real. We can afford to cash out the winners … so long as not too many cash out at once.”

“Chris, you got a second?” Lederer called out.

Chris Ferguson was just putting the finishing touches on an eggplant lasagne he was rustling up in the kitchen. “Be right there. Give me a minute.”

“And how big’s the backlog?” Lederer asked.

“Low nine figures.”

Lederer sat in silence trying to process the information.

“Low?”

“I can’t be sure, but at this stage we’re estimating it’s somewhere between one hundred thirty and one hundred fifty million.”

Chris walked in and overheard Ray’s projection. One hundred thirty to one hundred fifty million sounded like something to celebrate, and he reached to grab a beer. Lederer asked Ray to explain to Chris what he’d just told him, and Chris heard him out without interrupting.

“How long’s this been going on?” he asked.

“Since around last August.”

Chris erupted: “And you’ve stood by and said nothing all this time as we sign off on our distributions, weakening the company, month after month? If the shit hits the fan, you know how this is gonna look?”

Howard had never seen Chris — nicknamed “Jesus” for his shoulder-length brown hair, goatee, and soft-spoken demeanor — lose his temper before. Ever. It was especially surprising to him, as Chris and Ray were so close. It was Ray who’d planted the seed in Ferguson’s mind to start Full Tilt in the first place. After Ferguson won the Main Event of the 2000 World Series, he finally got around to completing his PhD in computer science at UCLA and took a seat at a day-trading firm across the street, managed by Ray, who turned out to be a poker enthusiast. Every afternoon, Chris would log off his Bloomberg terminal after Wall Street closed and log on to play poker. Ray regularly overhead Chris complaining — never about his cards, but that all the sites sucked, even the market leaders Paradise Poker and PokerStars. He felt their owners were tech entrepreneurs looking to cash in on the poker boom and had no idea what players actually needed.

Ray had challenged Chris to create a site for the player, by the player, and of the player. Who better to do it? Chris had the technical knowledge and was among the most recognizable world champions: at and away from the table, he wore a knee-length black leather coat and trademark Stetson. Straightaway, Chris started writing software for Tiltware, later to become the parent company of Full Tilt.

His motivation had never been to make a quick buck. He still lived in the same 1,500-square-foot suburban apartment he always had; and gave away the vast majority of his dividends to orphanages in Uganda and across Africa — a little-known fact, as Ferguson didn’t make a show of it.

Jesus felt especially betrayed because he’d gone out on a limb to appoint Ray as CEO. He wasn’t an elite poker player like almost everyone else in the Full Tilt circle, nor was he qualified for the job in any traditional sense. Bitar had no formal education, let alone an MBA — top pro John “Luckbox” Juanda had described him as practically illiterate. He also had no experience building a startup and had never run a company. Up till this point, however, Ferguson’s decision had been more than justified by Full Tilt’s meteoric success.

Sure, Ray wasn’t universally popular among the company’s twenty-three player-owners. When you throw that many of the world’s best players in a room together, each with wildly different personalities and so much at stake, that was never going to be the case. Chris was all for constructive conflict within the company, but felt most of the grievances against Ray were unwarranted. He certainly hadn’t heard any of them complaining when receiving their “monthlies” — shareholder distributions that had totaled $443,860,529.89 to date — yet when things didn’t go their way they demanded a change in CEO like a change in dealer after a bad run of cards. They could demand whatever they pleased; with Chris, Howard, and Ray at the head of the Full Tilt hierarchy, Ray was never going anywhere. The triumvirate’s combined shareholding came to 35 percent, which made it nigh on impossible for them to lose a majority vote on any matter if it came down to it, and all the other owners knew it.

Now they would have to defend their choice.

“So why didn’t you mention it this afternoon?” Chris asked.

“Because the meeting was minuted. The second anyone gets wind of this, there’ll be a stampede of cash-out requests, like a run on a bank. So long as it’s business as usual, we can earn our way out of this situation within six months, and no one has to know any better. The number was higher. It’s already coming down.”

“So right now, the capacity to handle processing is actually outstripping the demand for the deposits?” the Professor asked, taking his usual analytical approach.

“Right, the backlog’s being cleared. And in the meantime, we’ve got new deposits from European players coming in.”

Ray’s explanation seemed reasonable to Howard. The underlying business was incredibly profitable, making this just a hiccup, a short-term cash-flow issue. Establishing a presence in the Middle Eastern market was a priority for Full Tilt and Lederer had committed to play in the new USO tournament. His flight was taking off in five hours. While he didn’t have time to fully wrap his head around Bitar’s news, it didn’t seem serious enough to cancel the trip. It didn’t sound good, but it didn’t sound like an emergency either.

There was nothing he could do right now anyway. Trying to figure out the effect on the cash coverage for a backlog involving 130,000 accounts was no trivial matter. He was scheduled to return to Dublin twelve days later, by which time the accountants would have run the numbers and he’d be better placed to investigate further.

Moreover, Lederer was itching to actually play some poker. For seven years now, he’d spent the majority of his time on the operational side of the company, with a laser focus on software and marketing — making sure the features Full Tilt offered were ones its customers wanted, and its promotions the type people were going to enjoy. As president, he’d seen a balance sheet often enough to feel confident the company had cash well in excess of customer deposits, but monitoring payment processing had never been his department. Playing in tournaments to promote the site was the only excuse he had to compete these days. The USO tournament may not have been the World Series, but it sure as hell beat work. Whatever riches Full Tilt had brought him, he missed playing. He missed the competition. If he’d wanted to become an accountant, he would have stayed in college in the first place, not become a poker pro.

Clearly things had gotten out of hand in Dublin, and Ray shouldn’t have taken the actions he did without board approval, but Howard believed Ray did what he thought best, acting in the best interest of the company. And the backlog was coming down. Chris wasn’t happy, but given the circumstances, he didn’t see any alternative but to run with Ray’s plan. He had gotten them this far; he would get them out of this mess. In business, as in poker, they both understood you had to take the rough with the smooth.

What Ray neglected to disclose was how perilous Full Tilt’s financial position had actually become. When Intabill went belly-up, it owed Full Tilt over $100 million, creating a black hole. In order to meet the company’s $15 million a month marketing costs, make payroll for its 500 employees, and continue with the $10 million monthly distributions to himself and the other shareholders, Ray had begun to dip into player funds. All other sites treated player funds as sacrosanct, segregating them from their operating accounts. Full Tilt never had, but had always promised on their website that customer deposits were “safe, secure and available for withdrawal at any time.” By now, the difference between cash on hand and player deposits was anything but — Full Tilt owed approximately $390 million to players around the world, including $150 million to players in the US. With only around $60 million on deposit in its bank accounts, the shortfall had ballooned to $330 million.

Unbeknownst to Howard, Chris, and the rest of the board, on February 1, Ray had received a projection from Full Tilt’s financial staff warning him that the company would run out of cash within months.

♣ ♦ ♥ ♠

Seed was angling for a way to make back his Chinese poker losses as he and Lederer stepped off the plane onto the scorching tarmac. “I wonder if they have any golf courses here?”

Lederer, already breaking out in a sweat, wasn’t tempted. He was looking forward to spending the week safely ensconced in the Atlantis, the heavily air-conditioned resort where the tournament was taking place.

Clearing customs, they were greeted by an Atlantis representative and taken to the venue in a Mercedes with blacked-out windows. Traffic ground to a halt as they approached the Palm Jumeirah, one of three artificial islands created in the Persian Gulf. Advertised as “visible from the moon,” from above it resembled a palm tree within a circle, with the hotel at the apex of the archipelago. By the time Lederer was finally shown to his comped suite, looking out over the gulf’s shimmering turquoise waters, he hadn’t slept for thirty-six hours. He drew the curtains and crashed.

Over the next week the two men settled into a rhythm: wake at nine, grab some breakfast, take care of their media obligations and then play from 11:00 a.m. to 10:00 p.m. Hardly coal mining, yet long, grueling days at the table nonetheless. At the close of play the following Friday night, Lederer was still in the hunt for the title in the week’s flagship event. Seed, busted earlier in the day, was strategically placed near the front of the spectator rail, wearing a shirt and baseball cap, both emblazoned with the bright-red Full Tilt logo, supporting his friend and hoping to gain the company extra exposure when the TV cameras turned the crowd’s way. It was 10:45 by the time Lederer bagged up his chips, and the two men wandered over to Nobu, conveniently located just off the hotel’s lobby near the playing area.

They hadn’t made a reservation, but the hostess squeezed them in for the night’s last seating. Taking their jackets and the backpack Seed had been carrying all day, she led them to their table, and a waitress seamlessly appeared: “Can I get some drinks for you gentlemen?”

Lederer ordered a vodka martini; Seed a beer.

“Sorry to rush you, but I need to let you know the kitchen’s closing in twenty minutes,” she said, handing the menus over.

Lederer glanced at his menu before thinking better of it: “Just bring us two of every vegetarian dish you’ve got, please.” As an afterthought, he turned to Seed. “You good with that, Huck?”

“Perfect. Throw in one of your signature Wagyu burgers as well, and add some cheese if possible.”

“Man, how can you eat that garbage?” Lederer had become a committed vegetarian since his gastric bypass, after which his surgeon had warned him that there was a nontrivial chance meat could get stuck in his esophagus.

“Garbage? It doesn’t get any better. Come on, try one.”

“Do you have any idea how hard it is to digest meat?”

“It’s practically gonna dissolve the second it hits your tongue. So tender. They massage the Wagyu’s butt in Japan and fly it straight over.”

“For seventy bucks, it’s me that should be getting my butt massaged.”

“What the fuck do you care? What’s the difference?”

“Seventy bucks is the difference. No matter how much you’ve got, everything has a price.”

“So, what’s the price you eat a Wagyu with cheese?”

“I guess I’d do it for 10k.”

“Booked.”

Lederer looked up at the waitress who’d been waiting patiently, doubting the two men could be serious. “Okay,” Lederer told her, “so bring two Wagyu cheeseburgers as well. And make sure to add tons of extra lettuce and tomato to mine.”

“You know why they massage the cow’s butt?” Seed asked. “Stress creates cortisol, which deteriorates the quality of the beef.”

“Any other tips for stress management?” Lederer asked.

“Cows who don’t get along are separated, because what’s more stressful than grazing next to your nemesis?”

“How do you know all this anyway?”

“My uncle’s a farmer.”

“I thought he was an acrobat.”

“Come on, Professor. You wanna bet on how many uncles I have?”

The waitress returned with the first plates of food before Seed had time to make a betting line. To Lederer’s delight, the burgers were no bigger than a slider you’d find at a cocktail party. Without much fanfare, he devoured his in two bites. The cheese, lettuce, and tomato masked the taste of beef, and the meat was so delicate he hardly noticed it go down.

“That was the easiest ten grand anybody’s ever won,” Lederer said.

Seed didn’t mind Lederer ribbing him over smallish bets. If he developed a reputation as a “locksmith,” only betting on sure things, he’d never get any action when the stakes were higher. He got the attention of their waitress and asked her to bring over his backpack from reception. She returned with it shortly and Seed rummaged past a laptop, a hoodie, and a bottle of water for a $10,000 brick of tightly bound $100 bills at the bottom, which he lobbed toward Lederer. No one could accuse him of not paying his debts on time.

“You know what, Huck? I feel guilty. For the sake of fairness, I’m gonna give you a chance to get unstuck. I know how much you hate olives …”

Lederer pointed to the two olives on the cocktail stick resting atop his martini: “Eat these two right here and we’ll call it quits.”

“For ten thousand? Not a chance. I’d be sick.”

“The only thing that’s sick is you won’t eat two olives for ten grand.”

“Everything has a price! Make it twenty …”

“Nope, but consider ten an open-ended offer.”

“If I ever go broke, I’ll know where to come.”

Lederer’s BlackBerry vibrated. He ignored it but it vibrated again. Message after message was now rolling in. He looked down. One in block capitals stood out. It was from Ian J. Imrich, Full Tilt’s head legal counsel: “CALL URGENTLY. SITE DOWN.”

“Huck, pass me your laptop.”

Huck pulled his MacBook out of his backpack.

Lederer scrambled to log on to the restaurant’s guest Wi-Fi and double-clicked the Full Tilt icon in the center of the home screen. Instead of the usual player lobby, offering a selection of tables to join, he was greeted by:

Poker had always been a gray area in the eyes U.S. law and Lederer had understood the risks when he got involved with Full Tilt — A potential five-year jail sentence and a modest fine had always seemed worth the upside. But this couldn’t have come at a more inopportune moment. With the site shut down, why would customers keep their money on deposit with no games to play in? There was about to be a run on the bank.

The burger started to turn in his stomach.

Note: High stakes pro David Grey, not Huck Seed, bet Lederer $10,000 to eat a cheeseburger.