By Rodney F. Tonkovic, J.D.
A sports betting operation and the SEC argue whether or not pooled sports bets are subject to the securities laws.
Defendants charged by the SEC with operating a fraudulent sports betting scheme denied the accusations, arguing that betting pools are not securities. The motion to dismiss says that gambling contracts rest on the outcome of a game and are not based on any concrete asset and that to hold otherwise would disrupt the legal gambling industry in Nevada. The Commission counters that established precedent conclusively shows that the contracts are securities (SEC v. Thomas, November 19, 2019).
The scheme. The Commission filed a complaint in August 2019 alleging that two convicted felons, John F. Thomas and Thomas Becker, engaged in a $29 million sports betting investment scheme impacting over 600 investors from more than 40 states. Thomas and Becker raised funds by offering investments in six entities founded by them offering pooled investment contracts promising shares in profits generated from a proprietary sports betting system. The majority of the investors' money, however, went to fund Thomas and Becker's lifestyles, pay commissions to brokers and agents, or make Ponzi-like payments to other investors. The Commission alleged that the defendants violated the antifraud provisions of the securities laws (Claims 1 and 2), the registration provisions of Securities Act Section 5 (Claim 3), and the broker-dealer registration provisions (Claim 4).
Motion to dismiss. One of the six entities, Wellington Sports Club, LLC moved to dismiss the first three claims for relief. The crux of the motion's argument is that the sports betting contracts at issue are not securities. The defendants assert that district courts in Nevada and in the rest of the Ninth Circuit have consistently held that sports gambling and other wagers are not within the scope of the securities laws. The investor in a gambling contract, the motion says, never gains an interest in an underlying asset because these contracts rest on the outcome of a game and have no tie to established financial markets.
The defendants also declare that pooling funds for gaming purposes is "omnipresent in and essential to the economy of Nevada" and eliminating such betting would "fundamentally alter legalized sports gambling." Gambling coincidentally resembles securities in that chance has a role in financial gain, but to conclude that it is thus a security would grant the SEC carte blanche to regulate activities having no connection to the securities markets and would render meaningless provisions of the U.S. Code that govern legal gambling.
The motion argues further that the complaint fails to identify any specific misrepresentations and never identifies a client (out of 600), date, or amount with enough specificity for the defendants to ascertain on what the Commission's case will be based. According to the motion, the complaint points generally to over four years of financial records and concludes that only a portion of the funds received went to sports betting. In the alternative, the motion asks that the court order the Commission to amend the complaint to identify specific misrepresentations, parties, and transactions.
The SEC's answer. In response, the Commission maintains that the investment contracts in this case are securities. Arguing that the cases cited by the defendants are unrelated, the Commission says that Howey governs here: in return for an investment, investors received contracts specifying that their funds, pooled with money from other investors, would be used to place bets and that they would all share in the profits generated by the betting. The contracts are securities, the Commission flatly states, and, moreover, the defendants do not contest any of the complaint’s allegations demonstrating that they offered investment contacts that meet the Howey test.
The Commission then addresses and rejects the argument that the SEC lacks jurisdiction because gaming is a regulated industry. First, the Unlawful Internet Gambling Enforcement Act, for example, expressly states that an activity is not a bet or wager if it is governed by the securities laws. And, the fact that gambling, or any other industry, is subject to one regulatory regime does not mean that it is not subject to any others. The Commission noted here that it has brought enforcement actions against similar betting contracts.
The Commission then explains that investment contracts for sports betting are not "outside" of the reach of the securities laws, particularly the registration provisions. First, investors making a decision to pool their money with others and relying on the defendants to bet on their behalf deserve the financial data and other information that a registration statement provides. And, while the defendants argued that it would be difficult and expensive to register, that is not an excuse, the Commission said.
Finally, the complaint provides sufficient notice for the defendants to prepare an answer. The complaint alleged the specific misrepresentations and when they were made, the Commission says. Also, since the SEC does not need to show reliance, it does not need to identify specific victims in order to state a claim. The Commission concluded its opposition by reiterating its allegations and asserting that it pleaded all the elements necessary to establish violations.
The case is No. 2:19-cv-01515.
Attorneys: Lynn M. Dean for the SEC. Crane M. Pomerantz (Sklar Williams PLLC) for John F. Thomas.
Companies: Einstein Sports Advisory, LLC, QSA, LLC, Vegas Basketball Club, LLC, Vegas Football Club, LLC, Wellington Sports Club, LLC, Welscorp, Inc.; Executive Financial Services, Inc.
MainStory: TopStory FraudManipulation NevadaNews
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