The Distortion of Truth in the Lederer Files, Part IV

This is the fourth installment in a series of articles designed to bring attention to some of   the contradictions and misrepresentations contained in the Howard Lederer interviews, specifically those conducted with Pokernews.com, now dubbed the Lederer Files and a follow up interview on TwoPlusTwo’s Pokercast. The series will, in each installment, point out key comments that should be remembered. All of those comments will come together in the final chapter of the series to paint a better picture of the story that the facts really tell. The first installment can be seen here,  the second here, and the third here.

As Matt Parvis of Pokernews stated in one section of the interview, according to the indictments, there were discrepancies between reported cash held by Full Tilt Poker and the actual cash held.  

The indictment claims that this discrepancy relied on a report, in August 2010, to the AGCC showing that FTP had $ 370 million in cash held, and $ 322 million in player deposits. but  that an internal report showed only $ 122 million in cash held, leaving the company $ 200 million short. According to Lederer, no one was made aware of that report, and he doesn’t know anything about the report. Lederer also says:

“In terms of investigating what happened and what led to April 15th, I have spent “no energy” trying to answer these particular questions.” “I’m not a professional investigator, …and  I just read the Alderney report and they seemed to think the company was solvent in October of 2010, and they conducted their own investigation. It’s all a mystery to me, in terms of the actual timing…I know what hole was there in April, but I don’t know when it happened. What I can tell you is that at no time was there ever a report, like the one cited in the indictment, ever shared with any owner of the company or the board”.

Regarding the backlog itself and crediting accounts instantly, Lederer says that allowing this to happen for months into the nine figure range, should have been a board decision, but that the board was “not brought into that process at all”.

According to Lederer, what is devastating about the backlog, is that it “put the company over its edge” in terms of cash coverage.

Lederer says that according to his point of view, and from a corporate governance point of view, that the [backlog] decision being made without board approval is ” completely unacceptable”.

Parvis reminds Lederer about multiple threads on the forums from players talking about their deposits never being debited from their bank accounts, but having been credited to their player accounts nonetheless.

Parvis asked whether any of these stories were brought to Lederer’s attention. Howard’s response regarding these “anecdotes” about the deposits not being collected: “I was not really aware”. According to Lederer, since the earliest days, someone might come up to him randomly and tell him stories about weird incidents about deposits or how their deposits didn’t go through, or they made a withdrawal and the check bounced, but that they were just anecdotal stories, and could have been caused by some glitch in the system, and that he assumed there would have been more of a “groundswell of posts”  if it had been significant.   He does however confirm that approximately 130,000 people benefited from the backlog.  And clearly he was hearing of them from others too, as Andy Bloch, during his interview with Diamond Flush Poker, advised that when he had heard of these issues, he normally just forwarded those emails to Ray or Howard. While Lederer says he didn’t hear of many instances of it happening in the 2010-2011 time period, he does admit that maybe he was “just out of touch“.

When asked how distributions were still being authorized when things were so dire, Howard says “it’s horrible”.  According to Lederer, “if the Board had any inkling that there was this kind of hole in our balance sheet, there would have never been even the –we would have responded in the same way that we tried to respond after April 15. There would have been no distributions, there wouldn’t have even been the discussion, the whole discussion would have shifted to ‘We need to find an investor. We have to fix this problem, if we had been informed in February, or January or December, those distributions would not have happened. I think it’s pretty clear why the distributions continued.’”

April 7, 2011

Parvis asked “at any point before April 15, were you made aware of the company’s financial situation, the backlog, or any of these kind of pending problems that would lead to the company’s demise, post April 15?”

Howard answers, “Yes…Financial problems, no. I was never shown a balance sheet or any kind of a financial document that would have suggested that we were in a severe state of financial distress before April 15.  But, on April 7, I was in Dublin, for a board meeting there…”  He further states that the  reason he made the trip to Dublin for that board meeting was because it was “convenient for him”, that  he was headed off to a U.S.O. poker tour, due to leave on the morning of April 8, having arrived in Dublin either the 5th or 6th of April.

The board had finished their meeting, and the night of April 7, went to  Ray’s house. It was then that Lederer claims that Ray told him that there was a nine figure backlog. Howard, refuses to speculate on the exact dollar figure he was told, but claims it was  over $ 100M. Howard’s reaction:

“I was shocked. And upset. Chris was in the house at the time, and I called Chris over and I said to Ray…’can you tell Chris what you just told me?’–Chris was not happy”.

According to Lederer, the information was given not in the context that the company was in terrible financial distress, “it was just hey, there had been these deposits that we have credited to customers and we have been unable to collect. We had also been told that the number had been higher, and was coming down, which meant that the current capacity of the company to handle processing actually outstripped the demand for the deposits, I guess? So that the backlog was being cleared?  Looking back on it, I just didn’t understand what it was. It didn’t kick in that ‘Oh, this could be a serious financial problem’ yet. I hadn’t thought about it. I didn’t really understand what the backlog was.”

“The question I would have asked in that cash coverage report,” says Lederer, “is what impact has the backlog had on the cash coverage? That’s not an easy question to answer.”

When queried if he ever asked that question, Lederer replied:

 ”I don’t know that I asked that specific question right then, I was kind of shocked, but I just didn’t–I had no time to wrap my head around it, I had to fly to the Middle East in the morning, this is literally hours before I am going to leave. I just couldn’t cancel that trip. But I knew the news that Ray had given me was important, and I told him that I would be back in Dublin after my U.S.O. trip and then there was–actually I had to film a – for Poker Lounge or something, so I think I would be back in Dublin on the 19th, twelve days later.  Again I had no idea of what’s behind the backlog, in terms of that there is another big hole there…and I was just told that the backlog was getting smaller, so it didn’t seem like an emergency. It was just bad. And so I was just going to have to investigate further.”

Parvis asks, “Was there a discussion between you and Chris that evening, without Ray, or was it brought to the attention of the board about having Ray removed as CEO?” Howard answers :

“I don’t know that Chris and I spoke privately that night, I really don’t know, I don’t remember–I had just gotten news  that was potentially very big and devastating news, you have to understand it first. You just don’t go ‘Oh you didn’t tell me about that, you’re fired’ right at that moment, that’s just absurd. I was coming back to Dublin on the 19th, and I would have gotten to the bottom of the backlog. That I know. I would have understood it, being in Dublin, I think I would have started pulling up that cash coverage report…I would have wanted to understand it in terms of cash coverage, and I believe I would have found out about all of the problems.  And obviously I don’t think that Ray would have continued on as CEO of the company. Again, I’m speculating, I don’t know.”

When asked to explain what the backlog actually meant to the overall financial health [of the company] Lederer replied:

 ”It’s less than obvious. If you just say the backlog is $ 100 million, what does that mean to the cash coverage?  You don’t know, you can’t just answer that question without doing a lot of investigating.That was one of the problems I had on the 7th. I was going to be on a plane in five hours.”

Lederer then proceeds to give some sort of example in which he attempts to justify some creative accounting hypothesis of how the impact of the backlog may not have affected the cash coverage of the company. The example is clearly flawed, but he repeats, at least twice, that the person withdrawing any winnings from this hypothetical online poker site in the example would have been barred from withdrawing [and presumably from transferring player to player] until their deposit had cleared.

In truth, this is not what happened at Full Tilt. Instead, those players were permitted to transfer and/or withdraw for months, with deposits still pending. He never acknowledges this, nor is it brought to his attention, except for his earlier comments about hearing limited anecdotal stories. However, this had been public knowledge for months before Black Friday.

I can say with some authority that my questions would have been different and Howard was aware that they would be.  To begin with, my main question would have been “If I told you that I have sources confirming that you knew of the financial status of the company prior to Black Friday, including the backlog of phantom e-checks, and the shortfall of cash, would you say that that is not true?”  Instead he was able to “volunteer” some information about the April 7th happenings. I was aware of the April 7 talks, but there are sources that confirm that Howard knew about the situation before April 7th, in fact, months before. He never had to answer direct questions about that.

As was previously reported, there are indications that Howard, and others, were trying to work something out with the USAO/SDNY for many months before Black Friday. Did the Board meeting Lederer refers to on April 7, 2011 address those settlement discussions? If so, it is clear that no satisfactory settlement was reached. Regardless of whatever sticking points there may have been between SDNY and Full Tilt, one can only assume that any settlement would have included Full Tilt leaving the U.S. market in whole or in part, and would probably have including some fine, at least in the nine figure range. In any case, the financial situation of the company on April 7, 2011 would not even cover repayment to the US customers so such a settlement could not have happened at that time.

There are other interesting things about the April 7th gathering at Bitar’s house that were never discussed. One topic was Phil Ivey.  Sources have confirmed that in this time frame, just shortly before Black Friday occurred, Phil Ivey went to the company looking for a large loan.  There are some reports that the request was for $ 20 million, other sources claim it was for $ 10 million. Those sources all concur that Ivey gave his reason for needing the loan as his debt to a “casino” that was due immediately. Further reports indicate that the request seemed “desperate” and the payment had to be made “immediately”.  There apparently was discussion among at least some of the board members, and at least one source says it was impossible to confirm that the “dire” casino debt really existed, or that Ivey was unable or unwilling to provide such proof as to its existence.  In the end, the decision was made not to grant the loan from the company. It is known, however, that Chris Ferguson did make a loan of at least $ 5 million from the “secret bank account” he held in Pocket Kings name[previously reported]. That money was directed to be wired to Ivey just prior to April 15. It is unclear whether there were additional loans to cover Ivey’s “need” off site.

Another interesting thing about April 7th at Bitar’s house was that there was a fourth person present.

Howard says that on Apri 7, 2011 he learned that there was an ACH backlog of more than $100m. According to sources, he also learned that Phil Ivey was looking for an eight-figure loan. He claims nothing was urgent enough for him to cancel a U.S.O. poker tour, and he did nothing with this information. What about Chris Ferguson? Sources have told me that Chris, who was not scheduled to be part of that U.S.O. tour , also left Dublin, heading home.  A reasonable person could conclude that these actions reflect what sources had previously confirmed to me: none of this information was learned for the first time on April 7th.

I have found no evidence that any of this information, settlement talks with the D.O.J., the financial situation of the company (whether it’s just the e-check backlog as Lederer claims to have found out about on April 7, or as other sources have said, the backlog and the shortfall together), or Ivey’s request for another loan from the company, was shared with the other non-Board member owners prior to Black Friday.

April 15, 2011

When asked about how he learned about Black Friday, Lederer says he was having dinner in Dubai, hanging out, late at night. That it was “a shock”. But when asked if he was in “panic mode”, and after saying he didn’t yet know at the time who was indicted, he claims to have headed back to the hotel room to wait for more information. Once the particulars of the indictment were known, he thinks “there was some sort of board call–or at the least, there was a group of… top management and [Lederer] got on that phone call as well. And there was another big– oh, the company needs to figure out a way to geo-block all the U.S. players. There were a lot of decisions that needed to be made, very quickly, that had nothing to do with whether Ray was going to stay on as CEO. At some point, I am thinking of things like that, and that there was potentially going to be a painful transition for the company.”

When asked if Lederer is then thinking about the backlog, that there could be a more serious problem for the company now that this backlog might not be resolved as quickly as anticipated, he answers, “No. There is just too much going on. I don’t even know when the backlog entered back into my mind, like the news of the indictment– there is just nothing left in your brain to think about. I’m just not connecting anything yet. That’s just going to take time, I am just going to have to come to Dublin and start connecting dots to start figuring out the impact.”

Asked about what discussions were happening among the board in the hours after Black Friday hit, Lederer replied, “I don’t know – I think it was the board, I think Chris was on that call, Rafe may have been on the call, it might have just been me and Ray on that first call that discussed it, but again, I just don’t know, I’m just speculating. I do know that general counsel was on that call, the CFO was on that call, PR [public relations] was on that call, and there must have been some more company lawyers, but I’m not sure. Again, I just don’t know.’

“I know that the purpose of the press release was very simple. It was to acknowledge that the indictments had happened, and to inform our customers that we were going to cease operations in the United States, and at the end of that statement there was some reference to the fact that everyone’s money was safe and secure. That was clearly inaccurate. I was one of many people on that call, the CFO was on that call, and I had no idea, that on April 15th, that that was not a true statement. And I am very disappointed that some people that should have known that it was not a true statement allowed it to be made.”

Howard returned to Dublin after his trip to Dubai where he was joined by the other Board members. Sources confirm that there would not be a meeting of the full membership until more than two weeks after Black Friday.

Next Installment:  Why April 20 is significant

Author’s note:  A request for interview was made to Chris Ferguson and Phil Ivey. To date, neither have accepted.