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February-15-2007,
NETeller's Actions Have Been Deplorable...By Hartley Henderson

The original intention of this article was to give people an update on the NETeller situation, to hopefully address everyone's concerns and to inform the American public who have funds tied up at NETeller exactly what the company was doing to ensure players' money was not compromised. Instead, I am forced to write a totally different article. I held off writing the article hoping, in vain, for some explanation from NETeller describing what was happening. I attempted to ensure them that we were all in this mess together, but instead the only thing NETeller provided me over 3 weeks of e-mails, phone calls and live chats was the brush off. At first I was told to email compliance@neteller.com, but an email to that address (I assume) ended up in their junk bin. Subsequently, I was able to find out the person responsible for accounts and obtained his email address and phone number. An email and phone call to him, however, was forwarded to their public relations company who kindly told me that anything they were prepared to say would be on their web site. A follow up phone call ended with someone stating that if I bothered them any more they would sue me for harassment! Still, I tried to give NETeller some leeway and attempted to find out something, anything, but it became clear that they weren't prepared to talk.

My next option was to contact people in the industry who are well versed in all online gambling matters and who NETeller has always had a good relationship with. Certainly they could give me an update, but their response to me was that NETeller wouldn't tell them anything either. Consequently, I am at a point now where I can no longer justify any reason to give the company the benefit of the doubt. One thing must be made clear: NETeller cannot be blamed for the situation it has found itself in. The arrests of its former managers, the citations issued against it by the U.S. Department of Justice and the decisions by U.S. banks to stop dealing with them was no fault of their own. However, the actions and attitude of the company following the arrests of Lefevre and Lawrence has been inexcusable. Companies often find themselves in difficult spots but usually try and do what they can to ensure that the best interests of all parties that deal with the company are met. Unfortunately, NETeller's actions following the arrests have been all self centered, made worse by their uncooperative customer service and public relation's people.

In October of 2006, after the UIGEA was passed, NETeller made the following statements:

As stated in an announcement of 2 October 2006, the Company, in conjunction with its advisers, continues to monitor the progress of the Act and likely resultant regulations. The Company expects to have a clearer view of how financial services companies can comply and any possible resulting impact on its business as the regulations are drafted in the 270 days following the signing of the Act. In the meantime, the Company will continue to operate its business to minimise any potential adverse impact, maintaining existing customer and merchant support across all the markets it currently serves.

It further stated:

The impact of the recently passed Unlawful Internet Gambling Enforcement Act in the US is likely to change the future direction and nature of our business fundamentally. While we have continued to see strong sign ups and fees during October, NETELLER is constantly re-examining its position with regard to the US market and its provision of services to that market is currently under review. As previously stated, NETELLER, a company registered outside the US , will comply with the Act and its related regulations as if it were subject to the Act's jurisdiction. We will keep our shareholders, merchants, customers and employees informed of any developments during this challenging period.

That decision seemed well thought out and reasonable. Essentially, NETeller stated that they didn't feel there was any concern in dealing with American accounts because the company was not located in the United States. However, they had until July of 2007 to determine exactly how the United States was going to proceed and would determine what route to take at that point. They knew there would likely be some fallout as a result of the act, but there was no immediate concern. The statement clearly was designed to assure customers and shareholders that the United States market which made up most of NETeller's business was not going to be brushed away like other British gambling companies had done to Americans immediately following the UIGEA's passage.

In mid January, the U.S. Department of Justice arrested NETeller founders John Lefevre and Stephen Lawrence, which certainly caught the company by surprise. Of course such issues happen to large corporations all the time, but any good company will assess the situation in times of crisis and carefully devise a plan that is in the best interests of its shareholders, customers, creditors and employees. But this is NETeller. Instead, the company issued a statement confirming the arrests of its former management, and then the Board asked that the trading of its stock be halted until more details were known. Clearly the company wanted to avoid a situation where shareholders started running for the exits, but at the very least they could have provided a detailed assessment to the general public with more details. Instead they chose to say as little as possible.

The following day the company then made what can only be called a hasty and impulsive decision to cut off the American market. That may indeed have been the best strategy for the company, but surely such an important decision would only be made after carefully considering the ramifications for all parties concerned, which clearly NETeller didn't bother doing. To make matters worse, in typical NETeller fashion, the company in stating that it would no longer do business with American citizens, left them hanging in the wind. It was unclear to American customers what their options were, but one thing which was confirmed was their inability to transfer their funds to online gaming sites. Most American customers thus opted to withdraw money by EFT only to discover their ETFs declined by U.S. banks who had decided to stop partnering with NETeller.

Up to that point NETeller really couldn't be blamed for any of their problems. Perhaps the company could have taken a more aggressive approach and announced that they believed they were operating legally according to the laws where they were incorporated and located and would challenge the Department of Justice. Or they could have announced that they wanted some time to evaluate the situation and determine whether they could find some other sources to fund American accounts, similar to what many online poker rooms and sportsbooks have done. Certainly shareholders understood what NETeller's primary business involved, as the uncertainty regarding the American market was written in their prospectus, and NETeller could have essentially become the Napster of payment processors. However, the decision to try and comply with the U.S. Department of Justice was the decision they chose to make as, unwise as it may have been. What the company did in the following days, however, was inexplicable and inexcusable.

Because Americans had no way to withdraw their money or transfer it to online gaming companies, citizens from other countries attempted to help their American counterparts by accepting person to person (p2p) transactions, and then either move the money to an online gaming company for them or take it as a withdrawal and wire the money to the American customers. NETeller benefited from the 1.9% p2p fee and from the exchange difference they netted when the money had to be withdrawn in a different currency since NETeller no longer had access to American funds. Clearly any company with common sense and concern for its customers would have welcomed the transactions and actually encouraged the non American customers to help out their U.S. counterparts. But this, of course, is NETeller. Instead they issued a statement that they would no longer allow any p2p transfers between American and non American customers and then had the gall to suspend accounts of any non American clients that made the transfers. If they had a problem with non American customers making these p2p transactions they certainly never stated so prior to suspending accounts. In the meantime, the company put the remaining American post up funds in trust at a British bank and somehow convinced many in the industry that the money was safe and secure from the United States Department of Justice.

All the while the company ignored phone calls, emails and live chats. Then, on February 7th, came the ultimate betrayal when NETeller allowed the U.S. goverment to seize $55 million of customer money. Instead of fighting the Department of Justice for taking money that was entrusted to them by American customers, NETeller instead decided to cooperate with the U.S. Feds. To make matters worse, any correspondence by concerned American customers was met with contempt and anger. What unbelievable gall! Let's equate what NETeller did to a different industry. Imagine you go to a car dealership, are welcomed by a salesman, taken for a test drive, put a down payment on a car and are promised delivery in a week. Then when you go to pick up the car, the salesman gets angry, calls you a criminal and tells you that you can not take delivery of the car until the government looks into your background and decides whether you can take delivery. In the meantime he keeps the down payment and kicks you out. And to add insult to injury, he gives you no reasonable explanation for his actions and won't return any phone calls or emails. This is precisely what happened with NETeller.

So why did NETeller decide to cooperate with the DOJ? We can't be sure because the company refuses to tell us anything. Speculation for the reasons, however, is rampant. Russ Fox, an analyst at Clayton Financial and Tax, cited his theory as follows at www.taxabletalk.com/posts/1170966022.shtml:

Indeed, it's clear what's likely to happen. Neteller and the DOJ will likely come to an agreement. Neteller will announce that they will no longer do business with Americans, and they may have to pay a fine; the DOJ won't indict the company, or any of its current stockholders. The DOJ might even accept some sort of plea bargain for the two founders who were arrested. It's also certain that as part of such a deal Neteller will agree to release details of all transactions between American customers and Neteller

What does the DOJ want with thousands of pieces of data? Well, NETeller required the customer's name, address, and for many accounts, their social security number. The details of those transactions could possibly be sent to a government agency that's in the revenue collection business: the IRS.

Assuming Russ Fox is accurate with his prediction, it is clear why NETeller refuses to talk to any gambling related companies from the United States or any website such as MajorWager.com that addresses the U.S. market. In an effort to save the remnants of their business, NETeller decided to sell out its loyal U.S. customer base in the hopes the DOJ would turn their focus elsewhere. Unfortunately for U.S. customers who put money into NETeller and shareholders who purchased the stock with the assumption the American market would be a staple of NETeller, they are left holding the bag. And as to why NETeller won't talk, obviously if someone becomes an informant to the FBI they aren't going to stay friendly with those that they have turned on.

Whether or not NETeller had any other options is not very clear, but one has to wonder why any person from another country that makes large transactions with NETeller would continue to do so. Only in the United States is the casual bettor obligated to report gambling income, but professional gamblers pay taxes in all jurisdictions. Furthermore, if you are concerned about your privacy it is obvious NETeller isn't as concerned about it as you are. So why wouldn't NETeller just hand over information to federal officials of other countries at the first sign of trouble? They did so with the U.S. customers, so a precedent has been set. But at the absolute least, the company should have been honest about what was happening, allowed more p2p transfers in the days following the arrests, and been open and forthright with the media. In the days following UIGEA passage, NETeller stated: "We will keep our shareholders, merchants, customers and employees informed of any developments during this challenging period." I guess they don't care about that promise either.

02-15-07
Hartley Henderson
MajorWager.com
henderson@majorwager.com



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