Los Angeles police and other local authorities raided the offices of an Internet gambling company Thursday as part of an investigation of one of the most high-profile operators in a legally dubious industry.
The raid targeted Youbet.com Inc., a West Los Angeles company that claims to be the nation's "first interactive online horse-racing service." The company says it allows its 12,000 paying subscribers to place wagers and view races at more than 30 racetracks across the country.
The investigation, which is spearheaded by the Los Angeles County district attorney's office, centers on whether Youbet.com is violating California's anti-bookmaking laws. Company officials said they do not believe they are, adding that they are cooperating with the inquiry.
"We believe that this investigation will show that we are operating very much within the law," said Robert Fell, chief executive of Youbet.com. Nevertheless, the company's stock tumbled $1.50 to close at $5 a share on the Nasdaq stock market Friday.
Prosecutors declined to comment on the case, saying that the investigation is continuing. Loren Naiman, deputy district attorney in charge of the inquiry, said authorities are examining evidence gathered by 20 agents representing the Los Angeles police and sheriff's departments, as well as the Orange County Sheriff's Department.
The investigation appears to be the first of its kind in California, but it is part of an expanding nationwide effort by law enforcement agencies eager to determine their jurisdiction in a fast-growing but legally murky area of cyberspace.
A recent FBI survey found more than 300 Internet sites offering gambling services. And a federal commission that studied the issue recently reported that online gambling revenue surged from $300 million in 1997 to $651 million in 1998.
Authorities have struggled to clamp down on this industry because anti-gambling laws have failed to keep pace with rapid changes in technology that now enable Internet users to place bets anonymously with online casinos and other operations that can be located anywhere around the world.
The issue of whether Internet gambling is legal "is a terrible mess," said I. Nelson Rose, a professor at Whittier Law School in Costa Mesa who has studied the topic. "Technology is outstripping the law to such an extent that many legislators don't have any idea what's going on."
Federal law makes it illegal to place interstate bets on sports "by phone or wire," which some interpret to include the Internet. The Justice Department has brought charges against more than 20 online gambling operators over the last two years. But while some defendants have reached plea agreements, others have proclaimed their operations perfectly legal and plan to go to trial.
A bill proposed by Sen. Jon Kyl (R-Ariz.) would update federal law specifically to prohibit all forms of gambling on the Internet.
In California, it is illegal to place bets on sporting events except at licensed horse-racing facilities. But that law is 90 years old, and Rose and other legal experts say its applicability to online betting is largely untested.
Youbet.com's legal strategy hinges on its relationships with licensed horse-racing betting facilities around the country. The company claims it does not actually accept or place any wagers, but is merely a conduit for information flowing between bettors and these licensed tracks.
The company charges subscribers $5.95 a month for the ability to watch live racing broadcasts and transmit betting information via Youbet.com's Web site. Youbet.com collects a percentage of each wager, but the company said the bets are actually processed by Ladbroke U.S.A., a Pennsylvania company licensed in that state to accept horse-racing wagers.
In a business largely occupied by shadowy overseas operations, Youbet.com has made its home in Los Angeles and is one of the few publicly traded companies in online gambling. It reported revenue of $733,262 for the quarter ended June 30, up from $20,170 in the comparable quarter a year earlier.
According to information on the company's Web site, Fell is a former top executive with media company Archon Communications Inc.
Youbet.com is one of several local online gambling operations raided by authorities in recent weeks. Last month, state and federal investigators served a search warrant on the offices of World Wide Web Casinos Inc. But the Garden Grove company was accused not of Internet gambling violations, but of selling stock to the public in violation of securities laws.