David Carruthers, the CEO of BetOnSports was arrested while changing planes in Dallas on Sunday afternoon. Carruthers, a British citizen, was on his way back to BOS’s office in Costa Rica following the company’s annual meeting in the UK, where they are listed on the London Stock Exchange (symbol BSS.L). Even after nose-diving over 16% on Monday, the current market capitalization of the company is nearly $200 million US. Trading in BSS.L stock has been halted at the request of the company following the arrest of Carruthers. After a 20-year career with Ladbrokes in London, Carruthers took the BOS job and reportedly splits his time between London and Costa Rica. He reportedly has never lived in nor kept an office in the United States.

A grand jury indictment against 11 people, including Carruthers, was issued on June 1st and unsealed after Carruthers’ arrest. The main charge against Carruthers and the ten other individuals (and four corporate entities) indicted is a “conspiracy” to take bets on sporting events. In the indictment much detail is provided on how BOS takes bets from the United States and promotes their business in the US. The promotion of the business seems to be seen as further support for the conspiracy charges.

A temporary restraining order, now being appealed, has ordered this British company with offices in Costa Rica to cease operations to American customers. BOS has done that as of now. The court has also ordered them to return money to customers, which they are not currently doing. Customers of over 15 sports books that are now owned by the British conglomerate have been unable to either bet or get to their money for the past 48 hours. The books include BetOnSports, Jaguar, Millennium, Gibraltar, Easybets, Bettorstrust, Infinity, Rock Island, and some others.

Whether they have shut down for a couple of days while the company issues an appeal, for a longer period of time, or forever remains to be seen. London outlets are reporting that while BOS has taken down their “US-facing” web sites, indicating they are still operating for European and Asian customers.

Mainstream Marketing Builds A Huge Business: BOS is a very significant organization. The company has been enormously successful and according to court documents they have over 100,000 currently active customers in the US. This customer base has been attracted by some world-class marketing efforts, mostly built upon relationships in the sports media world.

The list of media outlets that have participated in advertising, endorsement, and sponsorship relationships with BOS or companies who are now under the BOS umbrella is a long one. In broadcasting they include 75% or more of the major market sports talk radio stations across the country, many regional sports network (Fox Sports Net, Comcast Sports, etc.), Fox Sports Radio, Clear Channel Radio, various ESPN radio affiliates, various regional sports channels around the country, the Howard Stern radio show, etc. etc. etc. Millions of visitors to the BOS web site have been greeted by a video of BOS endorser Tom Arnold, the TV host and actor.

In addition to their media presence, BOS has business relationships in various ventures with many sports celebrities. They have auto racing sponsorships with NASCAR teams, including a racing team owned by NBAer Dale Davis & former NFL receiver Terence Mathis. They have racing sponsorships in the US and abroad. Mike Skinner, Al Unser III, Jimmy Spencer, Kevin LePage, and others all drive/have driven BOS sponsored cars. Numerous former NFL players and other athletes, both present and former, have endorsed BOS and their affiliated sports books.

Anyone that has sampled preseason football annuals knows that various BOS books have had sponsorship relationships with just about every publisher in the business. Athlon, Pro Football Weekly, Football News, Phil Steele, Game Plan and other annuals and weeklies have received enormous amounts of advertising cash from these books, especially Bet on Sports and Millennium. Some of those publications probably would no longer exist without the support of the BOS organization. Most public handicappers have had sponsorship relationships with various BOS books at some point, with many a direct mail campaign paid for in full over the years.

Government Motivation: The Feds seem to be after Gary Kaplan, who started BOS and whose colorful past is detailed in the court papers. Kaplan had a string of books and along the way developed partial ownership in a number of other books. BOS never has had a particularly good reputation for customer service, but some of the other associated books had better reputations and more responsive customer service. These books, already having significant mutual ownership, were finally put together into one big bundle of ownership and floated on the London Stock Exchange, creating a huge cash out opportunity for Kaplan and others who picked up ownership shares along the way. In recent months European ownership has consolidated the management of the various books and there has been significant turnover in the new company’s Costa Rican offices.

As Paul Leyland, an analyst at Arbuthnot Securities in London, pointed out to a London newspaper "Gary Kaplan has had run-ins with the US authorities before, who could be using BetonSports' public profile to settle an old score with an old enemy."

Carruthers may have become an attractive target by a series of public pronouncements welcoming the regulation and taxation of BOS by the US government. He engaged in a Wall Street Journal debate with Representative Jim Leach, a US Congressman in favor of legislation against internet gambling. The fact that BOS is a public company provides the DOJ with a significant amount of data on them that is used in the indictment, including wagering volume and the percentage of their handle that comes from the US.

This Department of Justice action has been initiated in the Eastern District of Missouri, which has been at the forefront of anti-gambling actions, with a penchant for deep-pocketed targets. The Sporting News, owned by Microsoft co-founder and Seattle Seahawks owner Paul Allen, agreed to pay over $7 million in fines in a settlement regarding their advertising of sports books. After being purchased by Ebay, the PayPal payment processors coughed up $10 million for facilitating payments to sports books. The Eastern District of Missouri also squeezed some radio stations for over $150,000 for running sports book advertising. BOS has some resources and big money behind them, which makes a healthy settlement figure a possibility. It is also worth noting that they likely wouldn’t have been in a position to get these settlements without some agreeable judges in the district.

Will account holders get paid? The big question for over 100,000 customers is “will account holders have access to their money?” BOS likely has a lot of cash on hand. On April 7, the CBS Evening News reported that Fidelity Investments, Morgan Stanley, Goldman Sachs are among the biggest investors in BOS. If these three invested in a business without the funds to cover customer accounts, they would have a lot of explaining to do.

Principals in World Sports Exchange, WWTS and several other books were indicted in 1998 and were never down for a moment, which is why the BOS books being down right now is a concern. But don’t be surprised if they’re just doing it to play ball with prosecutors while they mount an appeal and are up again soon.

A case can be made that this company is too deep pocketed, too successful, and too well backed to just go away. Carruthers is the only one indicted who is currently involved in the management of the company. Their complex and public ownership makes it unlikely that current ownership is just going to disappear with players’ money, but this situation is clearly uncharted territory and a great many things could happen. Meanwhile, BOS books have a curt message on all web sites and phone calls to them are reportedly not very helpful. The company is doing next to nothing to ease the fears of customers.

BOS’s future: BOS founder Gary Kaplan, who is not involved in the current management of the company and had widely been reported to be out of the company entirely (though court papers say he still owes 15% of the firm), has been a target of American law enforcement for quite some time. The indictment suggests that following a bookmaking arrest in New York he left New York for Florida and then Florida for Antigua where he started his offshore empire. Kaplan lives in Costa Rica, though he has reportedly traveled extensively in the United States over the years without any interference from law enforcement. Despite two of his now-stateside siblings indicted for their roles in the operation, industry observers do not expect him to cooperate with US authorities in any form or fashion. But BOS management and their institutional investors will certainly want to continue the process they had already begun of putting any association with Kaplan behind them and rebuilding the company. Whatever plans they have right now are not being communicated at all.

The desire of US authorities to bring in Kaplan is understandable. But to be prosecuting a British citizen of a company listed on the London Stock Exchange on his way to his office in Costa Rica seems to be a stretch. BOS’ sports books operate within the law in the UK, in Costa Rica, and in all other locales where operate. This Eastern District of Missouri has seemed to be most interested in large cash settlements, but will likely demand some concessions from BOS, though the company seems unlikely to agree to stay out of the “US-facing” market.

No matter the result, it will be interesting to see what happens. And it will be of particular interest to those 100,000 American customers whose account money is at risk, a risk that wouldn’t currently exist if not for to the actions of their own government. Nearly 2,000 BOS employees in Costa Rica (most of them bilingual and well educated) are on pins and needles as well.
Meanwhile, BOS could be doing a much better job of communicating their intentions to their customer base and to the market in general.

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Sources:

Indictment:
http://www.telegraph.co.uk/money/graphics/2006/07/18/ubeton17pdf.pdf

Temporary Restraining Order:
http://www.usdoj.gov/usao/moe/press%20releases/archived%20press%20releases/
2006_press_releases/july/betonsports_Temp_Restraining_Order.pdf

Other resources:

http://biz.yahoo.com/prnews/060720/dath054.html?.v=27

http://www.cbsnews.com/stories/2006/04/07/eveningnews/main1481934.shtml

http://www.timesonline.co.uk/article/0,,29390-2277629,00.html

http://www.denverpost.com/sports/ci_4067215

http://uk.finance.yahoo.com/q?s=BSS.L

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