The Biggest Bet Ever: Soros, Paulson and Cooperman Take On Adelson Over The Future Of Gambling In America

In November George Soros, John Paulson and Leon Cooperman, three of the most successful hedge fund managers ever, quietly participated in a rights offering and became major shareholders in Caesars Acquisition Co., a spinoff from casino company Caesars Entertainment that has ownership in Caesars’ online gambling assets.

Their stakes–previously unreported–are all part of an unprecedented bet on the future of the $60 billion casino business in America, as states from New Jersey to Delaware and Nevada legalize a practice that the Department of Justice said was illegal just two years ago. They were joined by billionaire private equity managers Leon Black, David Bonderman, Marc Rowan and Joshua Harris, whose two respective buyout firms are the biggest shareholders in Caesars Entertainment and doubled down by investing a combined $484 million in Caesars’ online gambling vehicle.

Already a roster of billionaires, from brothers Lorenzo and Frank Fertitta, who control the Ultimate Fighting Championship, to MGM Resorts' biggest shareholder, billionaire Kirk Kerkorian, are betting big on online gambling’s comeback.

There’s just one problem with all of this: Sheldon Adelson. The very week that Caesars’ online gambling play started trading on the Nasdaq, Adelson, the nation’s fifth-richest man–and one of the country’s biggest political donors–thanks to his vast casino holdings, unleashed an army of lawyers and lobbyists on Washington and state capitals, telling FORBES he will “spend whatever it takes” to stop online gambling in America.

His advocacy group–the Coalition to Stop Internet Gambling–is already up and running, and is working to get state attorneys general to sign a petition against online gambling. He’s hired former New York governor George Pataki, together with former Arkansas senator Blanche Lincoln and former Denver mayor Wellington Webb to lead the lobbying effort. “There is no reason to put a casino on everybody’s kitchen table, in the bed of every young person, whether they are underage or of age, or on mobile phones,” says Adelson. “I don’t want people to get addicted.”

So far the markets are betting he’ll lose. Shares of Caesars’ online gambling spinoff are up more than 30% from their rights offering price. But while Adelson’s moralistic stance may be laughable to opponents, given the potential long-term threat a shift to online gambling poses to his industry, they still take it seriously. His Las Vegas Sands, with a recent stock market valuation of $60 billion, is worth more than all the other U.S. casino companies combined. Adelson spent some $100 million unsuccessfully trying to get a Republican into the White House in 2012.

“What I have heard Adelson say is, ‘I am very rich, and I don’t like Internet gaming,’ and those things are true,” says Mitch Garber, CEO of Caesars Acquisition Co. But “Sheldon’s eyes are closed to the fact that all goods and services are ultimately going to be purchased on the Internet.”

For years online gambling in America belonged to offshore companies willing to take on the federal government, which declared all online gambling to be illegal. In 2003 online poker took off when Christopher Moneymaker, an unknown accountant from Tennessee, qualified in an online tournament for the main event at the World Series of Poker and won poker’s top prize, together with $2.5 million. Online poker companies became big sponsors of poker programming on cable outlets like the Travel Channel and ESPN. By 2005 the company that ruled the U.S. online poker market, Gibraltar-based PartyGaming, conducted an IPO on the London Stock Exchange that made its American founder, Ruth Parasol, the nation’s richest self-made woman. A year later then billionaire Calvin Ayre, who ran a sports-betting website from Costa Rica, was featured on FORBES magazine’s cover with the headline “Catch Me If You Can.”

But in the fall of 2006 Congress passed the Unlawful Internet Gambling Enforcement Act (UIGEA), strengthening the Justice Department’s tools to go after online gambling firms operating in the U.S. Some companies, like PartyGaming, quickly ceased their U.S. operations, leaving the then $1.4 billion U.S. online poker market dominated by two offshore companies, PokerStars and Full Tilt Poker, which profited immensely because of the high-margin nature of the business. But federal prosecutors and agents kept investigating the companies, seizing their funds and eventually in 2011 shutting down the websites of the major online poker companies that cater to the U.S. and indicting their founders. In the weeks that followed Full Tilt collapsed amid accusations made by the U.S. Attorney in Manhattan that it was operating a Ponzi scheme. PokerStars settled the civil charges the government filed against it by paying $731 million, but its founder, Isai Scheinberg, who is not a U.S. citizen (he’s Israeli-Canadian), has not come to the U.S. to face the criminal charges filed against him. The government also indicted Ayre, a Canadian who has also not returned to the U.S.

Not long after shutting down the offshore operators, the Department of Justice reversed its long-held opinion that all forms of online gambling are illegal, unleashing states that wanted to regulate and tax online gambling except sports betting. Sensing profits, the billionaires followed.

Why the turnaround? Expensive lobbyists and lawyers are a big part of the answer. Since 2007, for instance, former New York senator Alfonse D’Amato has been paid to be chairman of the Poker Players Alliance. That Washington lobby group received funding from the Interactive Gaming Council, a Vancouver group backed by firms including Full Tilt Poker. The American Gaming Association, the casino industry’s powerful lobby, is now backing online gambling with everything it’s got.

The stakes are huge: Private equity firms Apollo Global Management and TPG are still trying to salvage their 2008 LBO of the company that left it saddled with $28 billion in debt. They see online gambling as a way to make up for Caesars’ missing out on Macau, the biggest casino revolution in decades.

So while Adelson’s limitless money–and his willingness to spend it–may slow the momentum for online gambling by blocking its spread into big states like California and Florida, the odds of him stopping it or bullying his rivals out of the game are slim. He’s got lots of chips, but all the other players at the table do, too.

Forbes.com