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It was getting late on Oct. 12, the night before a sweeping anti-Internet gambling bill would be signed into law. Paul McGuire was at his computer, enjoying one last hurrah on PartyPoker, a site that had pledged to kick off all U.S. users as soon as the law left

President Bush's desk. "It was kind of like that last party before summer ends when you've got to go back to school," says McGuire, a 34-year-old New Yorker and author of the popular "Tao of Poker" blog. "They were playing loose because it was the last night." Maybe for some.

Not McGuire, whose online handle is "Dr. Pauly." At 11 p.m., he simply closed down his PartyPoker account, withdrawing thousands of dollars in winnings accumulated in recent weeks. He later wired the funds to an offshore account with NETeller, an Internet bank registered in the Isle of Man, and opened new accounts with two other poker sites -- both of them privately owned.

So much for the U.S. crackdown on Internet gambling. The Unlawful Internet Gambling Enforcement Act is designed to halt the flow of the roughly $6 billion that flows each year from U.S. gamblers to foreign Internet casinos by officially barring credit card companies and other U.S. financial institutions from processing illegal wagers. The Justice Dept. has long maintained that online poker gambling, like sports betting, violates terms of the 1961 Wire Act.

But within hours of the new bill's signing, McGuire was back online, betting on hands of Texas Hold 'Em -- and he was not alone. He's now wagering through PokerStars.com and FullTiltPoker.com, both licensed by the Canadian Mohawk territory of Kahnawake and happily taking U.S. customers. (PokerStars also has a license with the government of the Isle of Man, where it is headquartered.) Both sites saw record numbers of players the weekend following the law's adoption, according to Louisiana's Casino City, which monitors traffic on online poker sites in its trade journals.

Indeed, the new law will do little to stop online gambling, say gamblers, betting companies, and industry analysts alike. Instead, the law will drive out regulated, publicly traded companies like PartyGaming, the Gibraltar-based parent of PartyPoker, and make way for private gambling companies and banks based in nations where such industries are loosely policed at best. As a result, the new law could ultimately make billions of dollars in U.S. online gambling transactions more difficult to trace, and increase the likelihood that funds end up in criminal hands. "It leaves an opening for some of the more unscrupulous companies coming in from unregulated places," says Frank Catania, past director of New Jersey's Division of Gaming Enforcement and president of Catania Consulting Group (see BusinessWeek.com, 7/12/06, "Betting Against Online Gambling").

The exodus is under way -- and the companies that are on the way out are those with the most financial transparency. PartyGaming, 888Holdings, and SportingBet, all of which are traded on the London Stock Exchange, have said they're exiting the U.S. market. Roughly 70% of PartyGaming's $319 million in second-quarter sales and 50% of 888 Holdings' revenue came from the U.S (see BusinessWeek.com, 10/2/06, "Party's Over for Online Gambling").

Private online gambling companies, on the other hand, have been defiant in the face of the new law, arguing it does not apply to them and cannot be enforced. Bodog Entertainment Group, which operates a Costa Rican online gambling site, has no plans to bar U.S. customers. "We've structured our business in such a way that we'll have no problems adapting to any changes in the online gaming environment," says Bodog founder Calvin Ayre. Similarly, PokerStars released a statement saying its lawyers had "concluded that these provisions do not alter the U.S. legal situation with respect to our offering of online poker games."

The private companies maintain that Internet gambling regulations in the final version of the law, unlike those in the earlier version that was passed by the House of Representatives, do not explicitly ban casino-style games. As a result, they say they are still in a legal gray area that has existed since November, 2002, when the U.S. 5th Circuit Court of Appeals ruled the 1961 Wire Act only applied to "sporting events or contests" and not wagers in general (see BusinessWeek.com, 10/3/06, "Online Gambling Still in the Cards?").

Whatever the legal grounds, private companies are benefiting from the role played by so-called e-wallets, which for years have been processing gambling payments credit card companies won't touch. Although the largest e-wallet, eBay's (NASDAQ:EBAY - News) PayPal, does block gambling transactions, NETeller -- the e-wallet of choice for PokerStars and other sites -- has adopted a wait-and-see policy with regard to the law. In an Oct. 12 statement, the company said it will monitor how the U.S. government implements the act over the next 270 days. Other e-wallets include CentralCoin and Click2Pay.

As a publicly traded company on the London stock exchange, NETeller faces pressures that many other e-wallets don't. Of the $7.3 billion in transactions it processed in 2005, many were for nongambling-related purchases. NETeller does not want to lose that business or spook investors. If NETeller does block U.S. customers, however, plenty of other private e-wallets will gladly take the millions in processing fees, typically a percentage of each transaction.

Many third-party processors do not reveal how much they take in or what they do with the money. Christopher Costigan, president of Gambling911.com, a trade publication for the online betting industry, expects the withdrawal of public companies will mean more loosely regulated, foreign-based e-wallets will enter the market. "There are always third-party processors popping up that are really fly-by-nights these are small companies in Central America, Latin America, and even the Middle East." In several cases, e-wallets have operated for a few months and suddenly disappeared with the casinos' and players' money, says Costigan.

The relative secrecy within which many private e-wallets operate has made them targets for money laundering and the transfer of funds to illegal organizations, says Molly Millerwise, director of public affairs at the Treasury Dept. "When such service providers are located in the U.S., they are subject to both state and federal controls that help against money laundering and terrorist financing. Overseas outfits, however, are not subject to U.S. laws and thus are very much on our radar screen as emerging trends that are vulnerable to financial crime," says Millerwise. The government's Financial Action Task Force will address the issue in a paper in the coming days.

Tracking who is supporting e-wallets and what they do with the money could be cost-prohibitive, if not near-impossible, for banks. Pamela Johnston, a partner with Foley & Lardner and an expert in white-collar crime, says blocking e-wallet transactions is not as simple as refusing to process payments marked "7995" -- the code for online gambling transactions. Many e-wallets process a mix of gambling and other transactions, making it difficult to indiscriminately block payments. In addition, some e-wallets use foreign banks to process transactions. CentralCoin, for example, is registered in the British West Indies and handles transactions through Gateway Financial Services. Thus, the U.S. bank does not even see the name of the e-wallet when money is wired, and instead sees the name of another bank. The foreign headquarters of many e-wallets also makes it difficult for banks to demand the nature of transactions. "I think it is going to be costly to enforce," says Johnston. "This is no t like terrorism where you can police it with a list of names and organizations you need to watch for. You can write a computer program figuring that out. This is more multifaceted and complicated."

But even if the U.S. cracks down on e-wallets, other payment options could be used. Catania says some e-wallets have begun accepting payments from phone cards. The users just load the card with money, open an e-wallet account with the funds, and then start gambling. When they want to cash out, they have the e-wallet send a check from a recognized financial institution that is then deposited in their account. "The easiest way to track money is to allow the credit card companies to take the bets online -- this only makes it more anonymous" says Catania. Keith Furlong, deputy director of the Interactive Gaming Council, says he sees other shadier organizations getting into the act as well. "It will go a step further so that there will be some kind of e-cash product that will not be auditable, harder to trace, and make the movement of money much more difficult to follow."

U.S. politicians say they are aware that the act won't stop the gamblers determined to bet. But they are hopeful that it could deter those only now getting involved because it is so easy to "click a mouse, bet the house." Without more casual gamblers, less money will go to offshore accounts in general. Congressman Bob Goodlatte, the Virginia Republican who initially sponsored the legislation, says the bill adds a necessary hurdle to sending money to foreign casinos. "It will make it harder to get the money out of the country, but not impossible," he says.

However, depending on how the bill is implemented, it may not be that much more difficult. After all, online gamblers already had to have e-wallet accounts set up in order to gamble. "Dr. Pauly," for one, is betting that the law won't stop many. "It will be a nuisance, but if one site goes down a new one will pop up," says McGuire. He compares it to the illegal poker clubs in Manhattan that are closed down by police just to reopen in a new apartment building several weeks later. The night before PartyPoker stopped accepting U.S. bets; McGuire received an e-mail about a new New York club willing to take in some of the ousted players on an invitation-only basis. "One of the poker clubs goes down, another one will come up," says McGuire. "I have no intentions of stopping."

A group representing 5,000 small banks is opposing a tool lawmakers hope to use to stop illegal online gambling, posing a challenge to what is widely seen as the government's best shot at cracking down on the activity.

The Independent Community Bankers of America, whose members range from New York's Metropolitan National Bank to Colorado's First National Bank of Las Animas, is objecting to a proposal winding its way through Congress that would require financial institutions to block payments between U.S. residents and online casinos. The group fears enforcement would be burdensome – if not impossible – given the way the transactions are processed.

At issue are the electronic transfers that many gamblers use to move money between their bank accounts and offshore casinos. Such transfers, which often go through a third-party payment company, are the lifeblood of the online gambling industry. (Another aspect of the legislation, which the banking group doesn't oppose, would formalize a ban on using credit cards to fund accounts. Many banks began voluntarily blocking such transactions five years ago, at the request of regulators.)

"It's very tempting to think the banking industry can stop this kind of stuff because people pay for it through banks, but the fact is the system just wasn't really designed to do it," says Steve Verdier, a lobbyist for the ICBA, based in Washington. The group is asking the Senate, which will return from recess next week, to revise a House of Representatives version of the bill that passed in July.

The group says that, unlike credit-card payments, the electronic transfers aren't coded to show what type of business is on the receiving end. They argue the existing system used to process such payments would require a massive – and costly – overhaul to allow banks to identify transactions with online casinos amid the flood of other electronic payments that banks handle each day. The system used by the casinos is the same one used for a multitude of transactions, including direct deposits of paychecks and automated payments to utility companies.

What's more, some gamblers use physical checks to move money into gambling accounts or receive winnings. The proposed law could require banks to block those transactions, too, though banks say they have no system in place to do so.

Lawmakers have been debating for years about how to rein in offshore Internet casinos, which generated about $12 billion in revenue last year, with about half coming from Americans, according to gambling-industry research firm Christiansen Capital Advisors. Those efforts have gained momentum in recent months. In July, federal authorities arrested the chief executive of Costa Rica-based BetOnSports Plc as he changed planes in Texas during an international flight, and charged him and 10 others involved with the company with racketeering and fraud for taking bets from Americans.

The Justice Department contends the 1961 Wire Act and other federal laws make it illegal for businesses to take bets over the Web from U.S. residents. Previous congressional efforts to pass an explicit ban of online gambling have stalled, in part, because of questions about enforcement. The new measure gained steam this year, in part, as Republicans sought to distance themselves from the scandal surrounding Jack Abramoff, the lobbyist who helped kill an Internet gambling ban in 2000.

"It's the only approach I know of that has a hope of making a significant dent in Internet gambling," Rep. Jim Leach (R., Iowa), co-sponsor of the proposed Internet Gambling Prohibition and Enforcement Act, says of the effort to block money transfers. He acknowledges that the law would require greater regulation of the banking industry, but points to a provision that directs the Federal Reserve and the Treasury to come up with an implementation plan that wouldn't be overly burdensome for banks.

Sen. Jon Kyl (R., Ariz.), who has led several failed efforts in recent years to crack down on online gambling, is expected to introduce a version of the bill in the Senate. A spokesman declined to comment on the opposition from the banking group.

The American Bankers Association, which represents the nation's biggest banks, such as Wells Fargo and Bank of America, has not voiced the same level of concern that has come from the organization representing smaller banks. But Laura Fisher, a spokeswoman for the larger Washington-based group, says any decision to require the blocking of electronic payments and checks would be onerous. "You are talking about manually checking 40 billion checks a year for the payee and making an assessment of whether it's for an Internet gambling site or restaurant," she says. The U.S. Chamber of Commerce, in a recent letter to U.S. senators, said it is concerned about deputizing banks "to enforce social policy."

"This would be a huge blow" to banks, says Ellen Zimiles, chief executive of New York-based Daylight Forensic & Advisory, which advises banks on regulatory compliance. "It would be extremely challenging, and it would take their efforts away from all the other things they're trying to do right now," such as helping authorities flag terrorist financing.

Ms. Zimiles, a former assistant U.S. attorney in New York, says it is already difficult for banks to identify electronic transfers involving people and groups that are on government lists of known terrorists and drug dealers. Besides overhauling their systems to block online gambling payments, the banks would need constantly updated lists of names of known online casino operations. "If they're not given exact names to look for, it's a needle in a haystack."

It doesn't have any ritzy Vegas-style casinos -- at least not yet. But Britain has gone mad for betting. Newsstands are crammed with glossy gambling magazines and a national daily newspaper devoted entirely to games of chance launched last month. Some cable and satellite channels air nothing but poker and casino games. This year Britain even opened the world's first casino college, where croupier trainees learn the tricks of the trade. Now, the government hopes to make Britain the global hub of online gambling.

Britain has already laid out the welcome mat for online betting firms which allow customers to wager electronically on everything from horses and soccer matches to the winners of reality TV shows and the Oscars. Such Web sites are operated legally by traditional street-corner bookies like Ladbrokes and William Hill, as well as by Web upstarts such as Sportingbet, UKbetting, and Betfair. They pay 15% of their gross profits in tax. So far, that's been a pretty good bet for the government: Tax proceeds have topped $2.5 billion for the Treasury since 2004.

Now Britain is set to increase the stakes. Parliament has enacted sweeping new legislation that will open up the online market, starting next year, to traditional casino games such as poker, blackjack, and roulette. Britons already play such games by the millions, but the companies offering them are based in offshore tax havens such as Gibraltar, the Channel Islands, and Costa Rica. The government hopes that by becoming the first country in the developed world to legalize online gambling, it can lure offshore outfits to locate on British soil and pump even more revenues into public coffers.

Betting Leader. It's a huge opportunity. Bookmaking has been legal in Britain for nearly 50 years, and the British are notorious for their love of betting. But the Internet has drawn in millions of new punters who never would have set foot in the betting shops found in every British town. From the privacy of their own homes, Brits wagered an astonishing $40 billion last year alone, according to Christiansen Capital Advisors, a New York-based consultancy which tracks the gambling industry.

British investors also are playing the game. Attracted by the more favorable regulatory environment, three of the world's biggest Internet betting outfits, including Partygaming, went public on the London Stock Exchange last year in multi-billion dollar listings. "Britain is already the global leader in betting and now it looks likely to become the world capital of Internet gambling as well," says Professor Leighton Vaughan Williams, director of the betting research unit at Nottingham Trent University.

That's unleashing dot com-like wealth creation. Partygaming's flotation last year made billionaires of its four founders. One of them, former electrical engineer Vikrant Bhargava had never played poker or seen the inside of a casino until he joined the Gibraltar-based company in 2000. Back then, he says it was "a bit of garage operation" with 40 employees. No longer. Thanks to aggressive marketing and the explosive growth of poker, Partygaming's revenues hit $978 million last year, up from $30 million in 2002, and earnings climbed from $4.7 million to $293 million over the same period.

Tougher Laws? It's an entirely different story in the U.S. Americans are by far the biggest online gamblers, betting a massive $145 billion over the Internet in 2005 -- nearly half the global total. But neither the government nor the stock exchanges are profiting from the business. The U.S. Justice Department says that online gambling is illegal under the 1961 Wire Act, which prohibits using telephone transmissions to bet across state lines. As a result, none of the big online gambling companies currently has operations in the U.S.

Now, a strange-bedfellows coalition of conservative and casino interests is pushing for even tougher laws. Congress is debating two new bills that would further restrict online gambling in the U.S. One aims to starve offshore outfits by making it illegal for credit cards, checks, or electronic funds transfers to be used for online gambling transactions. The other is aimed at updating the Wire Act to ban gambling over the Internet. Observers say momentum to get a bill through Congress is building, though it's too early to handicap the odds.

Online gambling outfits worry because for many, the U.S. is by far their biggest market. British heavyweight Sportingbet took out full page ads in U.S. newspapers last year directed at the U.S. government saying, "Please, sir, can we pay tax?" The company's CEO, Nigel Payne, calculates that if Internet gambling were legal in the U.S., it would have generated $1.2 billion in tax revenues in 2004. "If the U.S. regulates this industry, we will set up there and gladly pay tax," he says.

Slipping Away. In the meanwhile, online gambling firms are lowering their U.S. exposure by taking aim at the rest of the world. As recently as 2005, American players made up nearly 90% of PartyGaming's customer base, says marketing director Bhargava. But with the regulatory situation in the U.S. so unclear, the company is now turning elsewhere. Bhargava says that 40% of all new players on the site now come from outside the U.S. "Slowly but steadily we are decreasing our dependency on the U.S. market," he says.

If a Congressional online gambling ban goes through, the U.S. loss will likely be Britain's gain. "If legislation passes, the U.S. has wiped out any chance of capitalizing on what is becoming one of the world's fastest growing and most lucrative businesses," says Nottingham Trent's Vaughan Williams.

Britain has no intention of letting that chance slip away. Internet gambling companies wishing to set up in Britain will pay a yet-to-be-determined fee for a gambling license. In exchange, they will be regulated by the newly created Gambling Commission and permitted to advertise in Britain. The government has yet to decide at what level Internet gambling companies should be taxed. "The real question is whether it will be low enough to be attractive," says Karen Potts, a partner in tourism, hospitality, and leisure at Deloitte & Touche in London.

Extra Credibility. Why would online gaming sites choose to be regulated and taxed when they can operate offshore? Some well-established players such as PartyGaming may well decide to remain in places like Gibraltar. But experts reckon that newer, smaller outfits eager to build reputation in a crowded industry could get an edge from the government's seal of approval.

In an industry where anyone with a server can set up a gambling site, British regulation will offer extra credibility for investors and customers. Another attraction to a British home base: greater access to software programmers and other talent than in small places such as the Channel Islands or Gibraltrar.

The global Internet gambling industry, currently valued at $12 billion, is set to double in five years, according to Christiansen Capital Advisors. "Britain is ahead of the rest of the world when it comes to regulating online gambling," says Deloitte's Potts. "Instead of pretending it can be banned, the government is regulating the industry and protecting its citizens." With those kinds of stakes, the odds are rising that Britain just might win the jackpot.

The way we see it is that BETonSPORTS Plc was incorporated in the UK with the sole purpose of buying specific assets including the business betonsports.com

Licensed in Antigua, and traded in London, it is a legal entity carrying out business according to WTO trade rules and regulations.

What the company did before being bought by the Plc have no bearing on the current operations.

If laws were broken prior to the assets being bought by the Plc, then the Plc is not responsible for those actions nor is it responsible for prior officers and directors of the private company betonsports.com.

Ergo, the US has no claim to charge the Plc nor its current officers and directors except whereby a situation occurs of common management.

So, what I think we’ll see is that BETonSPORTS Plc will be cleared of any wrong-doing and will be excluded from the charges.

In any case, Internet Gaming is here to stay and in 2007 will be regulated in the United Kingdom (UK). What remains to be seen is how the UK Foreign Department reacts to one of its own being arrested and charged.

And what is the point of having a license in Antigua? They haven't been very vocal about defending the Licensee that had paid them hundreds of thousands of dollars?

MORE than 150 mutual funds call themselves socially responsible, investing only in companies that meet a series of ethical standards set by their fund managers. Then there's the Vice Fund.

Its prospectus says it favors "products or services often considered socially irresponsible." The fund has fulfilled that promise under several different fund managers, investing mainly in companies involved with alcohol, tobacco, gambling and military contracting. This politically incorrect approach has helped the Vice Fund outperform the Standard & Poor's 500-stock index from its inception in 2002. But the fund has had more than its share of management turmoil.

In 2003 and 2004, civil and criminal charges were brought against three executives of the fund's former adviser, Mutuals.com, in connection with market timing. One of the executives, Eric McDonald, was also the co-manager of the Vice Fund. All of those charges are still pending, including civil charges against Mutuals.com and two broker-dealers affiliated with it, Connely Dowd Management and MTT Fundcorp.

A special monitor appointed by a federal court remains in place for Mutuals.com and all its affiliates, including the Vice Fund, to ensure compliance with securities laws.

When Mr. McDonald stepped down from the Vice Fund, he left Dan S. Ahrens as its sole manager. Then, in August 2005, Mr. Ahrens left the fund because of disagreements stemming from the charges against the other executives, he said. In March, he started the Gaming and Casino fund, which has a more narrow focus, concentrating on gambling, casino and lottery companies — politically incorrect territory it shares with the Vice Fund.

The Vice Fund, now managed by Charles L. Norton, 32, and Michael J. Henry, 26, has stuck to its knitting. Both funds depend on the insight that stocks that exploit the dark side of human nature are a natural for Wall Street, particularly during economic downturns. This philosophy is articulated in Mr. Ahrens's book, "Investing in Vice," (St. Martin's Press, 2004).

"Certain habits, even during bad economic times, don't change," Mr. Ahrens wrote. "No matter what the stock market is doing, people still indulge in what are known as vices: smoking, drinking and gambling." Mr. Ahrens added war to the list, calling these sectors good long-term bets.

Lately, the approach has again been paying off. Gambling and hotel casino stocks returned 25.3 percent this year through Thursday and 28.9 percent, annualized, in the last five years , according to Morningstar. The S.& P. 1500 Casino and Gaming Index, which tracks 10 stocks from the 1500 index, was up 10.1 percent through Thursday and 21.4 percent, annualized, over the last five years.

Tobacco stocks posted annualized five-year gains of 20 percent, while those for alcoholic beverages gained 12 percent a year and the aerospace and defense sector, including military contractors, climbed 11.8 percent, according to Morningstar.

The Vice Fund returned 9.2 percent this year through Thursday, compared with 3.1 percent for the S.& P. 500. Over the last three years, the fund's return has been 20.6 percent, annualized, outpacing the 10.9 percent of the S.& P. 500. The fund has no load, or sales charge, and has an expense ratio of 1.75 percent. Its allocations as of May 31 included roughly 27 percent to casinos, gambling and lotteries; 24 percent to aerospace and defense; 24 percent to alcohol; and 21 percent to tobacco.

From inception in March, the Gaming and Casino fund gained 0.8 percent through Thursday.

Funds that call themselves socially responsible take a very different approach, of course. "We have a zero tolerance for weapons, alcohol, tobacco, gambling," said Christopher H. Brown, portfolio manager of the Pax World Balanced fund, which has more than $2 billion under management, roughly 40 times as much as the Vice Fund. Pax World Balanced returned 2.8 percent this year through Thursday; 10.2 percent, annualized, over the last three years; and 5.1 percent over the last five.

The Vice Fund has not experienced a "full business cycle," Mr. Brown said, so "it remains to be seen how they do in the long run."

The Vice Fund's aerospace and military portfolio includes some companies that have had financial windfalls because of the war in Iraq, said David Strauss, an equity analyst at UBS Investment Research. General Dynamics, which manufactures armored vehicles, is a case in point, he said. "Historically, the defense company stocks have performed fairly well in a period of weak economic growth," he said.

Of course, scores of mutual funds have big dollops of certain holdings of the Vice Fund in their own portfolios. "I think what they've done is taken a good marketing spin to the consumer discretionary sector," said Philip Edwards, S.& P.'s managing director of fund research.

Mr. Norton, one of the current co-managers of the Vice Fund, says he favors quantitative analysis in evaluating companies for its portfolio. He is married and has two children, and says he may be at a bit of a disadvantage when it comes to hands-on research for the fund.

"I drink socially, but not regularly," he said. "I don't smoke. I only gamble when I go to Vegas." But he said he had a more rollicking lifestyle as a student at Tulane University in New Orleans. "I do have some experience in the sector," he said.

Jeff Tjornehoj, an analyst for Lipper, credits the Vice Fund for not focusing "entirely on household names, which tend to be large companies." Some of its more off-the-radar investments include the Central European Distribution Corporation, a Polish importer of alcoholic beverages; CryptoLogic, which supplies Internet gambling software; and Viisage Technology, which provides facial recognition security technology.

The Gaming and Casino fund, which has an expense ratio of 1.7 percent and no load, according to its prospectus, does not have much of a track record yet, but Mr. Ahrens says its portfolio includes a variety of casino, gambling and lottery stocks, including Las Vegas Sands, Penn National Gaming, Scientific Games and Shuffle Master.

At the Vice Fund, the run of frequent management changes isn't over yet, Mr. Norton said. The fund's current adviser, Mutuals Advisors, plans to outsource management of the fund to GNI Capital, an investment adviser based in Greenville, S.C., he said. A second fund, Generation Wave Growth, of which he and Mr. Henry are co-managers, will also shift to GNI Capital, he said. Mr. Norton said he planned to remain a co-manager of both funds. Allen R. Gillespie, a principal at GNI, will replace Mr. Henry at both of them, he said.

THE civil and criminal charges against the former executives of Mutuals.com were filed by the S.E.C. and the United States attorney for the Southern District of New York. In addition to Mr. McDonald, Richard A. Sapio and Michele Leftwich were charged.

In December 2003, the S.E.C. filed a civil complaint accusing them of market timing and defrauding investors. In March 2004, the United States attorney charged the three with conspiracy to commit securities fraud. Later, in August, those charges were expanded to include wire and mail fraud.

None of the charges involve the Vice Fund directly. According to the Vice Fund's prospectus, Mr. Sapio controls Mutual Capital Alliance, the parent company of Mutuals Advisors.

"We are negotiating with both the Department of Justice and the Securities and Exchange Commission," said William M. Ravkind, Mr. Sapio's lawyer. "The judge has been allowing us time to see if we can have some agreement."

It's hard to imagine Goldman Sachs or Merrill Lynch investing in a company that grows marijuana or scalps concert tickets. Yet the two firms, along with such houses as Morgan Stanley, JPMorgan and Fidelity, have invested hundreds of millions of dollars in shares of online casinos, even though those companies may be breaking US laws.

Most of these companies trade on the London Stock Exchange and are licensed in remote locations like Malta and Antigua, all of which deem Internet gambling to be perfectly legal. But the problem is, the users are largely Americans, who are placing bets on poker, blackjack or sporting events online from their homes. And as far as the US Department of Justice is concerned, in America, online gambling is illegal.

But that hasn't stopped Merrill Lynch Asset Management, Goldman Sachs Group, Fidelity Management and Blue Ridge Capital from taking stakes in Sportingbet, which, as the name suggests, allows people to bet on sporting events. Nor has it stopped Goldman and Morgan Stanley Securities from having sizable holdings in Betonsports.com. And several hold shares in the long-established, UK-listed bookmaking firms William Hill and Ladbrokes.

"Morgan Stanley, Fidelity, Goldman Sachs, JPMorgan, they're all major investors in the gambling industry," says Warwick Bartlett, lead partner at Global Betting & Gaming Consultants in the UK.

It's not hard to see why the gambling ban is ignored. The online gaming industry is going gangbusters. It has already grown from $3 billion in 2001 to $12 billion at the end of last year, and that figure is expected to rise to $24.5 billion by 2010, according to Christiansen Capital Advisors, a Maine firm that analyzes the gambling industry.

It's potentially also a lucrative source of investment banking and underwriting fees. Some $54.1 billion worth of M&A involving companies in the casino and gaming industry have been announced or completed since 2000. About $9 billion worth of deals have been announced this year alone. That's equal to the amount done for all of last year.

On the capital markets side, a little more than $40.3 billion in debt and equity transactions have been done by gaming companies since 2000. One of the most notable was PartyGaming's $1.6 billion IPO last year--underwritten by Dresdner Kleinwort Wasserstein, Calyon Securities, BBVA Securities and Mediobanca- which was the London Stock Exchange's biggest IPO in five years. About two months after flotation, the gaming group was included in the FTSE 100 Index of leading companies by market value. Last week, the founders sold an additional GBP232 million in shares.

"Anyone looking to invest in stocks would be well advised to consider gambling stocks, as they are one of the hottest stocks on the market globally," says Robert Winslow, an analyst with Wellington West Capital Markets.

And despite the prohibition, US consumers represent about 50% of the market. Indeed, the American Gaming Association recently released a report showing that US residents spent more than $4 billion last year on Internet gambling. And that segment is growing at a rate of 20% a year, the association says.

But for the US investment banks, Internet gambling is the investment that dare not speak its name. None of those contacted would respond to a request to be interviewed. Even analysts who wrote reports on the sector declined to speak on the record.

Wall Street is treading delicately because, while the US federal government has yet to prosecute anyone for investing in online gambling, it might be able do so under existing laws. The most relevant is the 1961 Wire Act, which prohibits the transfer of betting information across state lines using wire communications, such as the telephone.

It remains unclear whether the Wire Act applies to nonsports gambling or to the Internet, which was obviously not around when the legislation passed. The apparent intent of the law was to suppress organized crime by regulating gambling activities. Still, the Justice Department maintains that all Internet gambling is illegal, though it's unlikely that sites hosted and managed overseas by non-US citizens would fall within the reach of US law enforcement.

"The complicating factor is that US players engage in this activity," says Lawrence Walters, a partner with San Diego law firm Weston, Garrou, DeWitt & Walters who specializes in online gaming. "If the online gambling site was 100% Maltese players, licensed in Malta, and US investors decided to invest in that entity, I don't think there would be a question of whether that was legal."

Cory Aronovitz, founder of the Casino Law Group, which specializes in gambling-related issues, says a lot of gambling operators go public based on US investor interest, and yet they still have to list on the London Stock Exchange, beyond US regulators' radar. When PartyGaming went public in June of 2005, its offering statement expressly prohibited US investment.

"It was very difficult even to get your hands on a prospectus over here," Aronovitz says. "I had two clients that began the process for going public, and instead of talking to the houses here, they're looking offshore."

Aronovitz says he is constantly being asked by clients who want to launch Internet gambling businesses whether they can invest in existing operations. He tells them they can, provided the company engages only in casino-type games and does not take bets on sporting events. "I think I have a good-faith argument to tell the client that the Department of Justice would be hard pressed to go after them. However, if they want to be in Internet sportsbook, they could reasonably be served an indictment," says Aronovitz.

Jay Cohen found out the hard way just what the legal limits are in this arena. An American citizen, Cohen set up an offshore gambling enterprise that was licensed and based in Antigua, where such gambling is legal, but he solicited bets from people in the US. He was convicted of violating US law and sent to prison.

"The court says Jay Cohen was soliciting bets from individuals in New York, and that's where he ran afoul of US law," says Weston's Walters. "If that company had focused on customers in Antigua, what could US authorities have said? Not much."

In another case worrisome to Wall Street, the Department of Justice went after several media companies that had been accepting ads from sports betting companies and told them they were "aiding and abetting" criminal activity. Some investment banks fear a similar logic will be used for firms that are investing in, financing or even taking on these companies as clients. That's what happened to PayPal, which agreed to pay a $10 million fine in 2003 after regulators claimed the Internet banker aided offshore sports books and online casinos, which did business in violation of US law. PayPal also agreed to cease providing financial transfer services to such offshore entities.

In an effort to close any remaining loopholes, several gambling opponents in Congress have sponsored new legislation aimed at stamping out the online gambling industry altogether. Rep. Bob Goodlatte (R-Va.) and Rick Boucher (D-Va.) sponsored the Internet Gambling Prohibition Act in February, which targets providers of online gambling services. The bill seeks to update the Wire Act by clarifying that prohibition relates to remote gambling over various communications media, and covers sports betting as well as lottery and games of chance.

The bill also seeks to prohibit a gambling business from accepting various forms of noncash payment, which could derail offshore operators with US-based bank accounts. Lastly, the bill allows law enforcement agencies to seek injunctions against any party to prevent violations of the act. That means Internet service providers could be forced to block access to certain Web sites.

Another piece of legislation introduced is the Unlawful Internet Gambling Enforcement Act, which was sponsored by Rep. James Leach (R-Iowa) last November. The bill seeks to prevent the use of credit cards and fund transfers for unlawful Internet gambling and would allow such transactions to be blocked. The bill is similar to one sponsored by Sen. Jon Kyl (R-Ariz.) in the Senate.

Both bills recently passed the House Judiciary Committee and are on their way to the full House for a vote. Although versions of the ban have been introduced in both houses of Congress for the past 10 years, and none has passed, some believe this year may be different. Some 131 members of Congress signed onto the Goodlatte bill as co-sponsors-about four times as many as previous antigambling bills-a sign of the political pressure currently being exerted in the House. But in the end, many believe it will stall in the Senate, given the competing gaming interests, conflicting regulations and shortened congressional calendar.

Many gambling proponents say the prohibition of online gambling would do more harm than good. As it is, Wall Street is losing investment-banking business as all the lucrative IPOs are listed in London, and with the industry offshore, Americans lose out on potential jobs and tax revenues.

"It's a matter of the extreme Christian conservative groups pushing their morals on the rest of the country when it comes to gaming. And because they think it's wrong, we all should think it's wrong. That's not the way this country is supposed to operate," says Frank Catania, president of North Haledon, NJ-based Catania Con- sulting Group and former direct- or of the New Jersey division of gaming enforcement.

Rather than an all-out prohibition, industry observers anticipate regulation, which is the "if you can't beat 'em, join 'em" route authorities in the UK have taken. While the country already allowed sports betting, it will now allow online casino games like poker, blackjack and roulette. British lawmakers passed the UK Gambling Act in April 2005, which established a Gaming Commission that could license and regulate online gambling operations. The first licenses are expected to be issued in 2007.

"The industry has grown and matured. With the UK choosing the regulation route and with many e-gaming companies having gone public in the UK, there is a much greater sense of legitimacy to the space, a far cry from the early days," says Spencer Churchill, an analyst with Clarus Securities in Toronto. "Overall, I would say there's a 25% chance legislation passes."

Despite the legal uncertainty in the US markets for M&A and investment in online gaming, deals continue to get done, says Weston's Walters. "The profit potential is overshadowing most of those concerns," he explains. "When you look at how sure a bet these companies are, from a financial perspective, a lot of these academic and theoretical concerns go out the window."

Catania, whose consulting firm has considerable experience with gaming issues, pooh-poohs the notion that the investment banks are in any jeopardy by holding shares in these companies. "It's a passive investment. They're not operators. If I own shares in AT&T, and they're wiretapping or doing something wrong, does it mean I'm liable? No," he says.

But the problematic regulatory environment is shaping where those investments go. A stock like PartyGaming, for instance, whose customer base is about 80% American, is owned predominantly by individuals and hedge funds, according to Global Betting's Bartlett. But online gaming companies, such as William Hill and Ladbrokes, which have few--if any--US customers, have more mainstream investor support, Bartlett says.

"It's argued there's more quality to William Hill's and Ladbrokes' earnings because they don't trade in places where it's illegal to do so, like the US and Holland," he says. "A lot of William Hill's financing comes from the US, and there could be actions against those banks and financial institutions were William Hill to take bets from the US."

In general, investment banks have confined most of their investments to listed companies, even though many of the industry's operators are based in offshore jurisdictions, such as Antigua and the Netherlands Antilles, that have been more open to granting licenses to online gaming providers and that offer attractive tax schemes.

Weston's Walters says there's a lot more US investment than what shows up in the public filings of listed companies. Groups of investors are setting up online gambling companies in jurisdictions like Antigua that will offer gambling, poker and casino. They usually avoid sports betting, as that definitely sets off a violation of the Wire Act, Walters says. "That's where a lot of the private investment actions is," he says.

If the US antigambling legislation does pass, Clarus's Churchill says the sector would take a considerable hit, particularly in the capital markets. But the impact would be somewhat limited. Growth in the industry outside the US has been at a much faster pace, and most operators have succeeded in reducing their US exposure significantly-though it still remains at more than 50%, he says.

"Longer term, growth will continue. International market growth will be unaffected and strong, and the US player base will find ways to continue gambling online, just as they did when major credit cards companies stopped e-gaming transactions," Churchill says.

Wellington's Winslow agrees that the industry will only continue to grow, whether the US is on board or not. "The next legs of growth will be geographies like Asia and Eastern Europe," he says. "There's a propensity to gamble in many of those cultures."

Certainly, companies like Bodog.com, an online sports book and casino operator based in Costa Rica, aren't too worried. "As far as I'm concerned, the biggest challenge our industry faces is our ability to manage our own growth," says Calvin Ayre, the company's founder and CEO. "The online gambling market has grown at an exponential rate, and there's no sign of a slowdown."

Tiny Macau has not only become Asia's casino capital, but gaming experts say it could soon replace the Las Vegas Strip as the world's largest gambling market in terms of revenue.

Macau's gross gaming revenue is already almost on the same level as that of the famous Strip, the 6.5 kilometer string of hotels and casinos in Las Vegas. Official figures show that last year, Macau's casinos had revenue of about $5.6 billion, compared with the $6 billion the Las Vegas Strip casinos made.

Macau has some way to go before catching up to Las Vegas as a whole. The total gaming revenue for Las Vegas, including areas such as Clark County and the Boulder Strip, was $9.7 billion.

But Macau has reached its current level with less than half as many gaming tables, and only six percent of the slot machines, found in Las Vegas.

Mary Ellen Olson, an analyst in Hong Kong for credit rating agency Standard and Poor's, says Macau's high revenue is driven by its different gambling culture. In Las Vegas most of the money is made from slot machines, while in Macau, casinos focus on V.I.P., or Very Important Person, gamblers.

"One of the reasons at the moment why it has such a high revenue level compared to Las Vegas, even though it's much smaller in terms of percentage of tables, is because it has so many high-end gamblers that tend to come to Macau and spend a lot of money, so there is very high win-per-table rates," she explained.

Olson says the number of mass market gaming tables and slot machines in Macau also is growing quickly and Macau could soon overtake Las Vegas as the biggest gaming market in the world. She predicts that the city's annual gaming revenue could exceed $10 billion within the next five years.

A number of factors have led to Macau's rapid transformation from a sleepy backwater 66 kilometers southwest of Hong Kong to the gambling capital of Asia.

In 2001, two years after the former Portuguese enclave was returned to Chinese control, the Macau government opened its doors to foreign gaming operators. This ended the 40-year monopoly of Macau's casino king, Stanley Ho, who ran a string of rather unglamorous gambling halls around the city. Macau's first Las Vegas-style casino, the U.S.-owned Sands Macau, opened in 2004 and immediately became one of the city's biggest gambling centers.

David Green, director of gaming practice for the accounting firm PriceWaterhouseCoopers in Macau, says the Sands' success far exceeded expectations.

"The Sands property, which cost $330 million (U.S. dollars) paid for itself in 11 months - now that's unheard of," he said. " It just doesn't happen in any business, let alone this one."

Another major factor was that China eased travel restrictions for millions of its citizens. Casinos are illegal in mainland China, while rising incomes have helped create a demand for betting facilities. More than 10 million mainland Chinese traveled to Macau last year, about 60 percent of all visitors. Most of the rest were from nearby Hong Kong.

Mary Ellen Olson says Macau's proximity to China provides it with one of the largest bases of potential gambling customers found anywhere in the world.

"Within an hour's drive of Macau it is estimated there is 100 million people and about a billion within a three-hour flight," she said.

Kareem Jalal is editor of the Macau magazine "Inside Asian Gaming". He points out that while Macau is very successful in terms of gambling revenue, income from other sources such as hotels, dining and retail has not grown as fast.

"Even if Macau does overtake the Las Vegas Strip in terms of gambling revenue, still it will be lagging far behind in terms of entertainment, dining, other revenue," he said.

He says in Las Vegas, the casino-hotels get half of their revenue from non-gambling activities.

Visitors to Macau on average spend only one night in the city and so far, there is little entertainment available besides gambling. Las Vegas, by contrast, also offers stage acts including famous entertainers, lavish swimming pools, high-class restaurants and expensive shopping malls.

But this will soon change. A number of new upscale casino resorts are being built in downtown Macau, such as the Wynn Macau, built by Las Vegas casino king Steve Wynn. Besides gambling and accommodation, the glitzy casino palaces will also offer entertainment, dining and shopping.

The biggest change, however, is expected to come about when the first resorts on the so-called Cotai strip open for business next year. Olson says the landfill between Macau's outer islands of Coloane and Taipa will be transformed into a Las Vegas-style destination with huge casino-hotels.

"It's going to have entertainment, a food industry, convention industry as well as gambling - that's really the Las Vegas model that's being transplanted into Macau," she said. "As that takes off you should see the non-gaming revenues rise as a percentage of the gaming revenues."

But a number of pitfalls remain. David Green says one of the key issues is how well the city's infrastructure keeps pace with the new developments and the growing number of people coming to Macau.

"You are talking visitor numbers that over a three to five-year period probably going to double," he noted. "The stresses that puts on infrastructure are extraordinary, particularly transport infrastructure."

A major concern is labor. Macau has a workforce of just 260,000 people, yet each new resort needs several thousand staff. Macau's government has not enacted liberalized immigration rules that would enable casinos to hire staff from mainland China or other Asian countries. Macau needs to address that issue urgently if it is to become the world's biggest gaming market.

Legislators from around the country were urged June 2 to study existing regulations in the United States and around the world before they alter their policy statement on Internet gambling.The National Council of Legislators from Gaming States, during a meeting in Boston, took testimony during a two-hour hearing on Internet gambling. NCLGS, a pro-states' rights organization, for almost seven years has been opposed to Internet gambling on the grounds it interferes with the ability of states to regulate gaming within the borders.

Florida Sen. Steven Geller, president of NCLGS, said emerging technology and other issues have led the organization to consider re-establishing its position on Internet gambling. Congress currently is considering legislation that would stymie Internet gambling by outlawing use of credit to make bets.

Testimony taken at the hearing varied from outright opposition to Internet gambling to a call for Congress to form a commission to study the issue before it passes any laws. The pari-mutuel horse racing industry, meanwhile, has the only legal form of Internet wagering thanks to a 2000 amendment of the Interstate Horseracing Act that legalized account wagering across state lines.

The Department of Justice has argued interstate wagering on racing is prohibited under the federal Wire Act; the National Thoroughbred Racing Association and its lobbyists disagree with that assessment.

"This is not a question," said Greg Avioli, senior vice president of legislation and corporate planning for the NTRA. "It is in fact the law today. Don't be afraid of Internet gambling. The U.S. government will not be able to prohibit it or limit it to intrastate only. People would rather be legal than not be legal."

Legalization of Internet gambling has appeal in some quarters because the bets could be taxed; a member of Congress suggested such a plan during an April subcommittee hearing in Washington, D.C. Speakers noted countries such as Australia and Great Britain have had some success in legalizing the practice, and that even in the U.S., Oregon does so through its multi-jurisdictional betting hubs used by account wagering companies.

NCLGS members were particularly intrigued with testimony from Bill White of Global Cyber, a company that has developed a patented system to regulate Internet gambling. White said the protocol would establish where a gambler is located and deny access to online gaming if necessary, enable taxation of Internet gambling, help prevent problem gambling, and provide transparency for regulators.

"What's wrong with Internet gambling is the absence of regulation," White said. "What's wrong is you legislators and regulators can't get control of Internet gambling."

Judy Patterson, senior vice president and executive director of the American Gaming Association, a commercial casino trade group, said a study commissioned by the AGA suggested that a Congressional study commission is needed to tackle the issue. The AGA remains neutral on Internet gambling but does support the study, she said.

Patterson discussed the results of an AGA-commissioned survey of 552 Internet gamblers that revealed "confusion" by players. Only 19% of those surveyed realize, or are willing to admit, that online gambling is illegal in the U.S., the study showed.

In addition, the study indicated 55% of those surveyed believe online casinos find ways to cheat players, and 46% said they believe other people who bet online find ways to cheat.

Other Internet gamblers are taking a proactive approach. Testimony revealed that about 20,000 online poker players have formed an alliance to lobby Congress and protect their interests.

NCLGS will accept testimony on Internet gambling through Sept. 1. Geller said it's possible the organization could adopt a revised policy during its winter meeting in early 2007.

U.S. push to allow online gambling

WASHINGTON MGM Mirage, Harrah's Entertainment and other U.S. casino

operators are increasing pressure on Congress to consider legalizing

online gambling - at the same time that lawmakers are seeking to

tighten criminal penalties for it.

The companies are trying to take advantage of a congressional

backlash against gambling set off by the Jack Abramoff scandal,

involving his lobbying on behalf of Indian casinos. The casinos say

the best way to control the $12 billion Internet betting business -

which is based overseas while drawing more than half its revenue from

America - is to legalize, regulate and tax it.

"The argument the industry is making is, if it is being done

offshore, why not bring it in to the U.S. so it can be regulated?"

said Senator John Ensign, a Nevada Republican who has discussed the

issue with representatives of Harrah's, which is based in Las Vegas

and is the world's largest casino owner. "It doesn't look like you

can ban it."

The companies, which according to Federal Election Commission records

have so far contributed more than $900,000 to congressional

candidates in this fall's elections, are pushing lawmakers to take a

first step toward legalization by creating a commission to study it.

Ensign and the Senate minority leader, Harry Reid, a Nevada Democrat,

said the proposal has a chance of clearing the Senate this year.

Lawmakers have become wary of gambling issues since an investigation

of Abramoff uncovered a web of connections between some of them and

casinos. Abramoff pleaded guilty in January to fraud and conspiring

to corrupt public officials on behalf of clients, including Indian-

tribe casino operators and eLottery, a Stamford, Connecticut-based

online broker of state lottery tickets.

Following Abramoff's guilty plea, two Virginia representatives, Bob

Goodlatte, a Republican, and Rick Boucher, a Democrat, introduced

legislation to force U.S. financial institutions to cooperate with

law-enforcement authorities in shutting down the flow of cash to

illegal gambling sites based outside the United States.

The Judiciary Committee of the House of Representatives is scheduled

to take up the measure, which has the backing of the Bush

administration, on Wednesday, and the majority leader, John Boehner,

Republican of Ohio, said he intended to bring it to a floor vote

later this year. Abramoff in 2000 lobbied to defeat a similar measure.

Even if the measure passes the House, it would face long odds in the

Senate, said Matthew Gerard, a gaming industry analyst at Investec

Securities in London. "Ultimately, we think it will be very, very

difficult to get any prohibitive legislation through the Senate," he

said.

U.S. casino companies are "neutral" on the House measure, said Frank

Fahrenkopf Jr., chief executive of the American Gaming Association,

which represents Harrah's and MGM Mirage, the No.2 gambling company.

Right now, the online gambling industry "is just the wild, wild

West," he said. "Why not take a hard look at it?"

That's what the U.S casinos are seeking with their proposal for a

U.S. study. Fahrenkopf, a former Republican Party chairman, said the

study's purpose would be to determine if legalization, regulation and

taxation of online gambling would reduce the risk of fraud and abuse

and increase government revenue.

Fahrenkopf said the "big boys" like MGM and Harrah's wanted to get

into the online gaming business if Congress eventually decided to

legalize it. MGM and Harrah's declined requests for comment and

referred questions to him.

The gambling association projects that the global online betting

business will double to about $24 billion a year in revenue by 2010.

The association said a study it conducted showed that as many as 15

million American players logged on to more than 2,600 Web sites last

year; it said it also found that 81 percent of Americans were unaware

of the 1961 law making it illegal to use phone lines for wagers.

The U.S. Justice Department continues to investigate and prosecute

online casinos that accept funds from U.S. customers. On May 17,

prosecutors in Washington announced money-laundering charges against

two people, including an American, who operated an Internet betting

parlor in Antigua that received $250 million in bets on professional

football, baseball, hockey and college basketball from U.S. gamblers.

Antigua has filed a complaint with the World Trade Organization

against the U.S. ban on online gambling.

With U.S. companies shut out of the online market, the principal

beneficiaries are European companies and investors and unregulated

online casinos in the Caribbean.

Britain legalized online gambling a year ago. Since then, two

companies based in the British territory of Gibraltar - PartyGaming

and 888 Holdings - have sold shares to the public.

John Shepherd, a spokesman for PartyGaming in London, said the

company "advocates regulation" of online gambling and backs the

proposed U.S. study. British law recognizes "that the only difference

between gambling in a casino and gambling online is the

word 'Internet,'" he said.

In addition to making campaign contributions, the U.S. casino

operators have retained some of Washington's top lobbying firms to

promote their issues.

Gambling has long been a politically sensitive issue, and online

betting draws opposition from evangelical Christians, an important

Republican constituency. Focus on the Family and the Traditional

Values Coalition, two religious-advocacy groups, have come out in

favor of the House legislation stiffening penalties.

In the Senate, meanwhile, Reid - a former member of the Nevada Gaming

Commission who said he opposes legalization - is willing to go along

with the companies' plan for a commission to look at the issue.