How Online Gamblers Unmasked Cheaters

60 Minutes/Washington Post Joint Investigation Questions Honesty, Security Of Gambling Sites

Steve Kroft and Gilbert Gaul report.

(CBS) This story was first published on Nov. 30, 2008. It was updated on June 25, 2009.

In the wild, wild west, when a poker player was caught cheating it was a capital offense, with the punishment quickly dispensed right across the card table. But today if you're caught cheating in the popular and lucrative world of Internet poker, you may get away scot-free.

At least that's what seems to be happening in the biggest scandal in the history of online gambling.

As 60 Minutes correspondent Steve Kroft first reported last November, a small group of people managed to cheat players out of more than $20 million.

And it would have gone undetected if it hadn't been for the players themselves, who used the Internet to root out the corruption. As a joint investigation by 60 Minutes and The Washington Post revealed, it raises new questions about the integrity and security of the shadowy and highly profitable industry that operates outside U.S. Law.

If you had to pick the moment that the poker boom began, it was probably the day an unknown accountant named Chris Moneymaker won $2.5 million at the 2003 World Series of Poker.

Suddenly every amateur with a hat, sunglasses and a stack of chips saw themselves as the next big money maker. Nearly 7,000 competed in last year's tournament for $180 million in prize money. But the fever has spread far beyond Las Vegas.

It is the richest sporting competition in the world. And yet all this pales in comparison to the half million people who are playing on the Internet right now in the unregulated world of online poker.

As we learned in a tutorial, all you have to do to play is log on to the Web, click your way to an online gambling site, open an account with your credit card, choose your game and pull up a seat at a virtual table.

"These people could be playing from anywhere in the world. They could be here in the United States. They could be, you know, in India. They could be in South Africa," Australian computer security expert Michael Josem tells Kroft.

We should tell you that this $18 billion industry is illegal in the U.S., but the ban is almost impossible to enforce since the Internet sites and the computers that randomly deal the cards and keep track of the bets are located offshore, beyond the jurisdiction of U.S. Law enforcement.

And unlike land-based casinos, there is almost no official regulation, enforcement or supervision. But it hasn't stopped thousands of mostly young men from making this their livelihood. Todd Witteles, a former computer scientist-turned-poker pro, says you no longer have to go to Vegas to find a high stakes game.

"You could do it from your own living room," he says. "You don't have to get dressed. You don't have to anything. It's right there on your computer."

Witteles says online poker is much different - faster, more aggressive and less personal.

"You're not lookin' at somebody sittin' across the table. You're just playing the cards that tumble out of the computer," Kroft remarks.

"Not only are you not looking at your opponents, you're not looking at the cards being dealt, you're not looking at who's dealing them to you. So, you don't know if the whole thing is legitimate, even if all the players sitting with you are just as legitimate as you are. Maybe the whole game isn't," Witteles says.

And as Witteles found out, it wasn't, at least on a popular Internet site called "Absolute Poker." His suspicions were first aroused in a high stakes game of Texas Hold 'Em, against what he thought was an incompetent, and lucky, amateur using the screen name "Grey Cat."

"This Grey Cat person was new. And at first, he seemed like a live one. He seemed terrible," Witteles remembers. "He seemed to play crazy. It seemed like he was giving his money away. Except the only thing was, he wasn't losing. He was playing in a style that was sure to lose, but he was killing the game day after day."

While Witteles was losing $15,000 to the apparent novice, other high stakes players began to notice improbable and endless winning streaks on Absolute Poker's sister site, "Ultimate Bet."

David Paredes, a Harvard grad who has made enough money playing poker to pay off his law school loan and live in an expensive New York apartment, got fleeced by a player called "Nio Nio."

Asked how much he lost, Paredes tells Kroft, "I'm probably down somewhere in the range of $70,000 to that particular player."

Paredes says there were other players who lost higher sums. "In the range of $250,000, $90,000, $70,000, $210,000."

(CBS) Serge Ravitch, another lawyer-turned-poker pro, began using a software program called "Poker Tracker" to review thousands of old hands.

"What I saw did not make any sense," he remembers. "This account was simply winning too much money for the type of game that he was playing. And he was doing it by never having the worst hand. When the other person was bluffing, he would always go all in. When the other person had some kind of made hand, he would always fold."

Ravitch says it was like he knew what everybody's cards were.

"If you can see everybody's cards in poker, you could be the worst poker player in the world, up against the best poker player in the world, and you're gonna beat him just about every time," Witteles says.

Soon, the Internet poker forums, chat rooms and blogs were atwitter with fresh reports about suspect players. And when Absolute Poker and Ultimate Bet failed to respond to complaints, the online poker community undertook its own investigation.

"We knew for sure there was cheating going on. We just didn't know who was responsible yet," Witteles says.

The most likely explanation seemed to be that someone had gotten access to an administrative or security account at Absolute Poker and Ultimate Bet that would have allowed them to see all of the cards in the game as they were being played.

"Somebody with access to a server, a computer server that would give that information to them in real time?" Kroft asks.

"Yes," Ravitch says.

"So either a really good hacker or somebody on the inside?" Kroft asks.

"Exactly," he replies.

In late 2007, the poker sleuths got lucky. When one of the players requested the hand histories of a suspected cheater known as "Potripper," someone at Absolute Poker inadvertently sent them an Excel spreadsheet with 65,000 lines of data that include all of the cards that had been played in thousands of games against hundreds of Potripper's opponents.

It allowed Michael Josem to recreate some of the hands, as the cheater would have seen them, in and turn them into a video that he posted online, along with a statistical analysis of the cheater's win rate.

"We have here a whole lot of people in the middle, which is pretty normal, they lose a little, they win a bit. A few people got lucky for a bit, a few people were losing a lot of money. Right up here, in the very top right hand corner, we have the cheater," he explains. "We did the mathematical analysis to find that they were winning at about 15 standard deviations above the mean, which is approximately equivalent to winning a one-in-a-million jackpot six consecutive times."

"Now, this sort of stuff just doesn't happen in the real world," he adds.

But more importantly, the Excel spreadsheet also listed the user account and the IP address of the suspected cheater, which the sleuths traced to the computer modem of an Absolute Poker employee.

The company, which is headquartered in a shopping mall in Costa Rica, was finally forced to acknowledge that a former employee had cracked their software code and cheated online players by looking at their cards.

But what really made the victims angry was that Absolute Poker cut a deal with the cheater to protect his identity, in exchange for a full confession of how he did it.

"Here, these people stole millions of dollars from their customers, from their best customers, from the high-limit players of the site, and in the official report released about what happened, not only did nobody get into any kind of legal trouble, their names weren't even publicized," Witteles says.

CBS) But in the murky world of Internet poker there was precious little the players could do about it. The companies were located in Costa Rica, and they couldn't really complain to U.S. authorities because online gambling is illegal. The only pretense of supervision - and the players only hope - lay with a tiny nation thousands of miles to the north that hardly anyone had ever heard of.

The virtual poker games are actually run on computers servers from a Canadian Indian reservation outside of Montréal. It's all licensed by the sovereign tribe of the Mohawk nation, which has no experience in casino gambling and doesn't have to answer to Canadian authorities.

The grand chief is Mike Delisle.

Chief Delisle says Internet gambling is illegal in Canada, but tells Kroft, "We're not Canadians. We're a member of the Haudenosaunee Five Nation Confederacy. And we're Mohawk Kahnawake people. We're not Canadian."

And that legal distinction has allowed the Kahnawakes to rake in millions of dollars a year by licensing Internet gaming sites and housing their computer servers on the reservation. They now register and service more than 60 percent of the world's Internet gaming activity from a highly protected and non-descript building that used to be a mattress factory. 60 Minutes drove by the former factory with The Washington Post's Gil Gaul.

"This is nondescript," Gaul remarks.

"This takes nondescript to an entirely different level," Kroft comments.

The operation is overseen by the Kahnawake Gaming Commission, whose three commissioners meet in secret. The commission is independent of tribal leaders, including Chief Delisle, and its investigation of Absolute Poker and Ultimate Bet have been neither transparent nor particularly aggressive.

A lot of the players who were cheated suspect it's because the owner of the discredited sites is Joe Norton, a former grand chief of the Kahnawakes, who helped establish the gaming commission that cleared him of any wrongdoing in the scandal.

The commission fined the two sites a total of $2 million, ordered them to repay the losses to players who were cheated, but Absolute Poker and Ultimate Bet are still in business.

"Here you had a gaming commission. It was originally set up by Joe Norton. And his two companies come before the board and they get a slap on the wrist," Kroft tells Delisle.

"Well, I don't think it's a slap on the wrist," Delisle replies. "We are comfortable in saying that through the gaming commission, they have done the investigation, saying that he didn't have a part in the cheating scandal."

Asked why the commission didn't suspend his license, Delisle says, "Well, they were afraid that if that was happened and the rug was pulled out from under them, so to speak, that the players wouldn't be paid."

Neither the gaming commission nor Joe Norton would talk to us, but in a statement the companies said they were victimized by insiders and former employees and accepted blame for overlooking the security problems with its software.

The only clarity in the investigation was provided by Frank Catania, a former director of New Jersey's Gaming Enforcement Division, who was hired by the tribe to look into the cheating that the players themselves helped expose.

"We owe it to the players themselves for finding this out," he says.

Catania found that the scam at Ultimate Bet went on for four years, and says the mastermind appears to have been a former giant in the world of poker.

(CBS) Asked if he knows who did the cheating, Catania says, "Well, the one name has already been released by the Kahnawake Gaming Commission. That's a fellow by the name of Russ Hamilton."

Hamilton is a former champion at the World Series of Poker.

In 1994, Russ Hamilton won $1 million and his weight in silver for winning the main event at the World Series of Poker.

According to the gaming commission, Hamilton and five unnamed conspirators used multiple screen names and accounts to cheat online players out of more than $20 million. And so far they seem to be getting away with it. Because of jurisdictional issues, no criminal charges have been filed, and no one even seems to be conducting a criminal investigation.

"We're willing to work in collaboration with anyone who wants to bring these people to justice," Delisle says.

"In this case, you have somebody who you know was cheating. It's like the person's gotten away with it," Kroft says.

"I believe that anyone else, named or not, will be brought to justice," Delisle says. "If they can be found. That's really the defining factor."

But we didn't have that much trouble locating Hamilton. He seems to be holed up at his home in Las Vegas behind the security gates of an exclusive golfing community.

In November, when we called his house and were told by a woman that answered the phone that he would be back in a little while. We left a message, but he didn't return the call.

"If you hadn't investigated this on your own, you think it'd still be going on?" Kroft asks Witteles.

"I'm sure it would be going on," Witteles says. "The people who did this were very greedy and very blatant. But the scary thing is there may be other accounts out there like this, maybe even on other sites that are not being done with the same sort of recklessness. And maybe this has been going on, on more than just Absolute Poker and Ultimate Bet. Maybe it's going on in several other places. And maybe it's even still going on in these sites."

"I'm sure there're people out there right now figuring out, 'Here's a way we can do it again,'" Catania says.