Stock Market Shake-Up
October 6th, 2006
A surprise move by Congress to ban online gambling in the United States caused a $7-billion US stock market to meltdown this week, dragging down Canadian gambling software company CryptoLogic Inc.
The Toronto-based CryptoLogic saw nearly 20 per cent of its share value wiped out in hours after Congress approved a bill that will end Internet gaming in the U.S. It closed at $19.84 down $4.76.
As well, Excapsa Software Inc., a Toronto-based maker of software for gambling websites, saw its shares slide 66 per cent to 15 pence in London. Chartwell Technology Inc. of Calgary, which makes gaming software systems, lost 15 per cent of its value.
Stephen Lewis, chief financial officer at CryptoLogic, said it had been preparing for the day when the U.S. would move to ban online gambling. About 70 per cent of its revenues come from outside the U.S. ‘’The day started bright and sunny,'’ he said about Congress approving the bill. ‘’Then it got dark and stormy.'’
The move by Congress would cut CryptoLogic revenues this year by $30 million and earnings by $24 million, Lewis said. The company said last week it plans to move its head office to Ireland. CryptoLogic, which sells online gambling software and support to licensees around the world, has been trying to reduce its U.S. exposure for the past four years, he said.
The House of Representatives and the Senate approved the bill to make it illegal for banks and credit-card companies to make payments to online gambling sites. U.S. President George W. Bush is expected to sign the bill, part of broader security legislation, into law in the next two weeks.
‘’We believe this will have a very material impact on the long-term prospects of online gambling, and in particular poker,'’ said Julian Easthope, an analyst at UBS.
Online gaming largely based in Costa Rica and Antigua exploded in 2005 but has since run into legal problems, including the recent arrests in the U.S. of visiting senior U.K. executives on charges of illegal gambling in individual U.S. states.
But investors remained hopeful online betting and gaming would not be banned at a federal level.
But, in an election year, Congress is anxious to look tough on illegal activity such as Internet gambling.
‘’Internet gambling has been illegal since the inception of the Internet, but there has been no way to enforce it,'’ said Representative James Leach, an Iowa Republican. By making it ‘’illegal to use a financial instrument to settle an Internet wager,'’ Congress is putting responsibility on the financial community, he said.
The legislation orders the U.S. Federal Reserve and Department of Justice to issue regulations within nine months to banks establishing ways for blocking transactions.
‘’This move will certainly have a negative impact on the future growth potential for Internet gambling even if the current level of gambling doesn’t decline a great deal,'’ said Jason Azmier, an analyst at Calgary’s Canada West Foundation who has researched Canadian gambling.
The American Gaming Association, which represents casino operators based in Las Vegas and elsewhere, had asked Congress to fund a commission that would study whether online gambling can be regulated and taxed in the U.S.
John Tuzyk, a Toronto-based lawyer with Blake Cassels & Graydon, said there is no court decision that addresses whether Internet gaming offered to Canadian residents from offshore sites would offend Criminal Code provisions.
Nevertheless, “the weight of authority would suggest that, as the ‘recipients’ of the activity are in Canada, there is a risk that the courts may find that offering Internet gaming to Canadian residents constitutes a criminal offence committed in Canada,” Tuzyk said.
Under the Criminal Code, most activities related to gambling are illegal although there are exceptions, most notably provinces’ right to operate lottery games and casinos, and horse racing. Moreover, the Criminal Code cannot be enforced outside of Canada, where most online gambling sites operate. A spokesman for Justice Minister Vic Toews said there are no plans to amend the Criminal Code’s gambling provisions.