Hedging their bets

Had BetonSports founder Gary Kaplan not walked into the federal courthouse in St. Louis 10 days ago in his orange jail jumpsuit, Steve Holtshouser would have spent his summer very differently.

Instead of wrapping up work on a high-profile investigation into Kaplan’s offshore gambling organization, Holtshouser, an assistant U.S. Attorney, would be jetting off to South America and Europe for depositions.

He would be prepping for a four-month criminal trial and protracted overseas litigation over millions in profits Kaplan tucked away in foreign trusts.

Assistant U.S. Attorneys Steven Muchnick, Steve Holtshouser and Charles Birmingham speak at their office in downtown St. Louis about their eight-year investigation of BetonSports. Founder Gary Kaplan negotiated a plea to pay more than $43.6 million to the federal government, the largest single asset forfeiture for the Eastern District of Missouri. Photo by Peter Newcomb

But after Kaplan pleaded guilty Aug. 14 to three federal charges of racketeering and violating the Wire Wager Act, Holtshouser and his colleagues at the U.S. Attorney’s Office breathed a sigh of relief.

They avoided a costly trial, and Kaplan forked over $43.65 million to the federal government, the largest single asset forfeiture for the Eastern District of Missouri, the attorneys said. The plea winds down an eight-year investigation where federal prosecutors untangled a complex gambling scheme that stretched from Miami to London.

The government expects to keep most of the forfeiture, although portions of it will be paid to governments in Switzerland and the Isle of Jersey, which assisted the office in its prosecution of the company. The U.S. Department of Justice has yet to determine how much each country will get.

Missouri bettors and former creditors hoping to recoup any money from BetonSports must file claims with an English company that’s liquidating what remains of the offshore sportsbook.

U.S. District Judge Carol Jackson will sentence Kaplan on Oct. 27. His plea deal calls for a sentence of up to 51 months in prison, although Kaplan will seek credit for the 30 months he has spent in St. Louis and St. Charles county jails since his arrest.

“Kaplan did the right thing,” Holtshouser said. “It could have been better. We could have gotten more money had it gone to trial, possibly.”

Connecting the dots

Before it closed its U.S. businesses in 2006, BetonSports was a leader in offshore sports gambling, raking in more than $1 billion in sports wagers during fiscal 2005, according to the U.S. Attorney’s Office. Its headquarters were in Costa Rica.

The St. Louis office started an investigation into BetonSports in 2001 after an Internal Revenue Service agent saw a chance to tamp down a growing illegal industry and secure millions in forfeiture funds, Holtshouser said.

With the blessing of then-U.S. Attorney Ray Gruender, former Assistant U.S. Attorney Michael Fagan took up the prosecution of the case and began unraveling the company’s complex business operation. Fagan retired from the U.S. Attorney’s Office in 2008.

Specially trained assistant U.S. Attorneys monitored the Web sites of various BetonSports subsidiaries and tried to figure out how the company accepted bets and got paid.

“It had to have tentacles in the U.S. to reach U.S. customers,” said Holtshouser.

Investigators discovered Kaplan created a complex network of toll-free numbers and satellite transmissions to take telephone and online wagers from American bettors.

Here’s how it worked: A football fan would pick up the phone in St. Louis and dial one of the company’s dozens of toll-free numbers. BetonSports would route the call through Houston or Miami. Then the company would digitized the call and transfer it to a BetonSports employee in Costa Rica.

Holtshouser said he never considered BetonSports an “offshore” gambling enterprise. “Houston and Miami are certainly onshore,” he said.

Follow the money

Kaplan’s goal was to take his company public, Holtshouser said, and he succeeded in 2004 when he made a public offering in London. Kaplan, a New York native, held his stock in trusts in the Isle of Jersey, a British island off the northern coast of France. He then sold large chunks of the stock and invested the cash in Swiss bank accounts.

After Kaplan learned he was indicted, he tried to move the trusts to Lichtenstein, where it would be harder for the U.S. government to seize his assets, Holtshouser said.

These complex foreign trusts proved to be one of the most difficult parts of the government’s case against Kaplan. What’s more, Swiss banks are notoriously reluctant to turn over financial information about their accounts, especially in tax cases, Holtshouser said.

The U.S. government’s first indictment against Kaplan included a tax evasion charge, but prosecutors later dropped it.

Had the government kept the tax charge, “I doubt the Swiss would have given it up,” Holtshouser said.

With the help of a U.S. Department of Justice liaison in Geneva, the Swiss government agreed in February 2008 to freeze Kaplan’s bank accounts.

“If those funds were not frozen, it’s likely those funds would not be there anymore,” Holtshouser said.

Holtshouser and Charles Birmingham, special assistant U.S. Attorney, traveled to London and the Isle of Jersey for hearings related to their case against Kaplan.

But day-to-day, federal prosecutors said they pursued the case by pushing paper – a lot of paper. The government collected 600,000 pages of documents through discovery; 60 file boxes housed documents related to the structure of the foreign trusts.

When prosecutors investigate fraud or racketeering cases, “there’s usually a moment when you say, ‘There’s the fraud,'” said Steven Muchnick, another assistant U.S. Attorney. That moment never really came in the BetonSports case, Muchnick said.

BetonSports behaved like a normal company, he said. Executives bought advertising in American media outlets, wrote up contracts with vendors and sent e-mails.

The only difference was that the very existence of an international sports betting business operating in the U.S. violated federal law, Muchnick said.

Plea negotiations

Kaplan’s guilty plea was preceded by a number of guilty pleas from other defendants named in the government’s 2006 indictment, including Kaplan’s brother and sister and David Carruthers, the onetime CEO of BetonSports.

But plea negotiations for Kaplan dragged on for nine months.

Holtshouser compared the negotiation to a hostage situation where both sides vie for protection before handing over their goods. “There were times I didn’t think it would happen,” he said.

Negotiations picked up July 31 after a Swiss bank transferred $43 million in forfeiture funds to a Bank of America account managed by the U.S. District Court in St. Louis.

Holtshouser said Kaplan still has many millions more than the $43 million he turned over, but after weighing the risks associated with a trial and any subsequent appeals, the government decided the guilty plea was a good result.

Even had the case gone to trial and a jury ordered Kaplan to pay more, it would have been tough for prosecutors to wrest the assets from foreign accounts in Switzerland and Lichtenstein, “anywhere the tentacles of the trust reached out to,” Birmingham said.

“A Swiss court or a [Isle of] Jersey court could have ruled those funds properly belonged in the trust,” Holtshouser said. “That would have left us with nothing.”

As part of the deal, federal prosecutors agreed not to go after any more of Kaplan’s assets or pursue criminal tax charges against him over his BetonSports income.

“The government gets a very substantial sum and the government succeeds in having him serve a fairly lengthy prison sentence,” said Art S. Margulis, another defense attorney for Kaplan.