Investing: How the U.S. Is Getting Beat in Online Gambling

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Lawyers for online firms, especially those seeking to reassure potential investors before an IPO, cite such cases as critical precedents. Not all are convinced: one of Wall Street's leading law firms, Skadden, Arps, Slate, Meagher & Flom, recently warned investment-banking clients to steer clear of online-gaming companies because of concerns about their legality in the U.S. Should the DOJ decide to crack down, the gaming firms, at least, have an exit. PartyGaming's prospectus takes pains to point out that the company has no tangible assets or physical presence in the U.S. Indeed, one reason co-founder Parasol plays no official role at the firm other than shareholder and keeps a very low public profile--she refuses all interview requests--is that as a U.S. citizen, she's potentially at risk and doesn't want to harm the company, according to lawyers who know her.

This odd legal standoff in the all-important U.S. market shows little sign of ending, as neither Republican efforts to stiffen the laws nor Democratic efforts to loosen them are getting anywhere in Congress. In the face of such inertia, gaming firms are getting brazen. One British outfit, Sportingbet, runs ads on ESPN for its Sportsbook.com site and recently put up a huge billboard in New York City's Times Square featuring a pretty model and the slogan EVERYBODY BETS. PartyGaming CEO Segal says big American media groups seem less reluctant to air gaming ads than they were. "The U.S. is a clear example of prohibition not working," says Peter Collins, an expert on gaming regulation at Britain's Salford University, who advised the British government on its new gaming legislation.

The headache for regulators may be just beginning: the next big thing in the industry is gambling on mobile phones. In the past few months, PartyGaming and several other companies, including land-based British bookmakers such as Ladbrokes, have launched pilot wireless-gambling projects; in PartyGaming's offering, mobile-phone users can download the software free by sending a text message and then play roulette or slot machines for fun or money.

For PartyGaming's Bhargava, the world could hardly look more different from six years ago, when he took a blind leap and joined the company. After his studies in Delhi in the early 1990s, and business school, he worked at Bank of America and British Gas before heading to Mexico for a change of scenery. On a whim, he e-mailed his former college friend Dikshit, who, it turned out, had just set up a software company and was trying to develop a gaming start-up for Parasol, a lawyer by training. Parasol's history has filled the pages of British tabloid newspapers this year largely because of her involvement in online pornography and her investment in a company that made adult videos--activities that, ironically, have fewer legal encumbrances than gambling. But by the time she joined up with Dikshit and Bhargava, she had severed those ties. "She's not a porn queen. She's an entrepreneur," Bhargava told TIME.