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Jay Cohen and WSEX
In 1995, Jay Cohen and Steve Schillinger were employed as market makers working on the trading floor at the Pacific Stock Exchange. As a sideline, Steve operated a series of betting pools for the other traders. Bets were referred to as ‘futures options’, based on sports results. The pools became very popular and profitable.
It was also illegal. To remedy this small issue, and continue the business, Jay came up with the idea of setting up a website to run the business online and offshore.
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Jay and Steve set up a betting business in Antigua called World Sports Exchange – WSEX.com.
Their website came online around January 1997. Payments were by credit cards, cashier checks, and wire transfers, all offline. You had to deposit $300 to open an account.
They did well, becoming a well known and respected operator in the nascent online sports betting world.
First Conviction
WSEX and all other online gambling operators, suddenly faced their first real threat.
In March, 1998, federal prosecutors in New York charged 14 individuals for operating six illegal offshore online gambling services, marking the first federal action against this segment of internet commerce.
Attorney Mary Jo White said that a 37-year-old federal law, banning the use of US telephone lines for interstate or foreign gambling, makes these online services illegal, describing the charges as ‘a clear application of the law’.
But Benjamin Brafman, a New York lawyer for one of the defendants, Jay Cohen, said federal prosecutors don’t have jurisdiction over operations based in countries where sports betting is legal. “Simply because a computer Web site makes this available to people in the US does not give the US jurisdiction over them,” he said. Adding that Mr. Cohen intends to surrender next week and will plead not guilty.
Jay Cohen Interview
Ms. White announced that two of the defendants had been arrested in Texas and Florida, with two more expected to surrender today. The Federal Bureau of Investigation was notifying the other defendants of the charges against them.
Prosecutors said that Ms. White has also asked telephone carriers to shut down any US phone service to the gambling sites.
Cohen returned to the US to face charges, after being indicted for violating the Wire Act of 1961. Despite operating from Antigua, Cohen and other WSEX executives were charged for accepting bets from US customers.
In 2000, after a high-profile trial, Jay Cohen was convicted of violating the Wire Act. He argued that WSEX was legal under Antigua’s laws. However, the court ruled that the company was still subject to US laws, because it took bets from US residents.
The court ultimately ruled against Cohen, rejecting the argument that operating legally in Antigua exempted him from US law.
It determined that because WSEX accepted bets from US customers, using US telecommunications infrastructure (phones and the internet), Cohen was in violation of the Wire Act.
In 2001, the Second Circuit upheld Cohen’s conviction. The court found that the Wire Act was applicable to online transactions, making it illegal to take sports bets from Americans, even if the company was based offshore.
Precedent Set
This ruling set a significant legal precedent, affirming the US government’s authority to prosecute individuals and companies involved in online gambling, that served US customers, regardless of where the business was located.
Prison Sentence
Cohen was sentenced to 21 months in federal prison, making him one of the first individuals to be imprisoned for online gambling-related offenses in the US. He served his time and was released in 2004.
Cohen’s case set a precedent for how the US would handle online gambling, particularly operations based offshore but serving US customers.
US citizens who owned offshore gambling operators were now in deep trouble. Many other indictments for violation of the Wire Act would follow.
Many of the cases involved arguments concerning whether the US had jurisdiction to prosecute operators based offshore in countries where online gambling was legal. The courts consistently ruled that: if the operators accepted bets from US residents, they were subject to US law.
The indictments usually involved some jail time and huge fines. The websites closed their doors to US customers but usually continued to operate for other customers.
