Here's Why The DOJ Has An 'Uphill Battle' To Defend New Online Gambling Stance

The Justice Department could struggle to defend a new opinion that threatens the legality of online gambling, an analyst has said.

The DOJ now says the federal Wire Act, which prohibits interstate wagering, applies to any gambling that crosses state lines. That revises a 2011 stance taken by the Obama-era Justice that only interstate online gambling on sporting events violates federal law. It also comes after a 2018 Supreme Court ruling that essentially legalized sports betting across the country.

Gaming stocks were mixed, even within the broader stock marketWynn Resorts (WYNN) edged down 0.3%, Las Vegas Sands (LVS) climbed 1.4%, MGM Resorts (MGM) dipped 0.2%. Those casino giants generate most of their business in Macau and overseas. They also may benefit from people visiting their gauzy Las Vegas resorts rather than betting online.

Among domestic-focused casino operators, which have a relatively bigger stake in online gambling, Penn National Gaming (PENN) eased 0.5% in Tuesday's stock market tradingBoyd Gaming (BYD) fell 0.4%. Caesars Entertainment (CZR) ended flat after rising for the prior seven sessions.

Online Gambling 'Genie' Out The Bottle

However Deutsche Bank managing director Carlo Santarelli believes the new interpretation will be hard to justify.

"Given the genie has left the bottle, we think the DOJ will have a somewhat uphill battle to successfully defend its new position which, in a sense, hinges on the original ruling being misinterpreted due to grammatical issues which misconstrued context," the analyst said in a research note.

Courts have already heard federal cases involving major companies with the understanding that the Wire Act applied only to sports betting, he noted.

"We think it will require considerable leg work to undo what's been done, and we think the process will take an extended period of time," Santarelli said.

The analyst said equipment manufacturers Scientific Games (SGMS) and International Game Technology (IGT) are the most likely to be adversely affected. Both stocks have poor IBD Composite Ratings of 3 and 17 respectively. Scientific Games stock and International Game Technology stock fell 2%.

So far only New Jersey, Nevada, and Delaware have legalized online gaming. The three states let poker players from across the country compete online, but the legality of this is now in question. Pennsylvania is trying to roll out internet gaming, however Santarelli believes the new DOJ position will delay this process.

Online gambling has been seen as a potential growth area since the Supreme Court struck down a law largely banning sports betting as unconstitutional last year. Betting via the internet is seen as potentially the most important market, leading to deals such as online gambling giant The Stars Group (TSG) agreeing to buy U.K. firm Sky Betting & Gaming for $4.7 billion.

DOJ Changes Online Gambling Stance

The DOJ adopted its new internet gambling position in November, but it was only made public Monday. It claims the 2011 opinion misinterpreted the Wire Act, enacted in 1961 to crack down on the mob.

"Based upon the plain language of the statute, however, we reach a different result," DOJ attorneys wrote in the Nov. 2 opinion. "While the Wire Act is not a model of artful drafting, we conclude that the words of the statute are sufficiently clear and that all but one of its prohibitions sweep beyond sports gambling."

Las Vegas Sands CEO Sheldon Adelson had been backing the Coalition to Stop Internet Gambling, which lobbied to have the 2011 opinion reversed. Former U.S. Sen. Blanche Lincoln, who advocates for the group, said in a press release the new DOJ stance is a "win for parents, children and other vulnerable populations."

The American Gaming Association told IBD it is reviewing the opinion and its implications for consumers and the industry.

Deputy Attorney General Rod Rosenstein is expected to issue a memo Tuesday instructing prosecutors to delay implementing the new opinion for 90 days so companies and individuals can adjust to the change.