The dangers in the online gaming sector were there for all to see if you bothered to look close enough.
My colleague Maynard Paton and I had a fallout over the collapse of the online poker sector this week. I said that risky Internet poker companies should never have been allowed to float on the London market. I also believed that bankers who brought companies such as PartyGaming
(LSE: PRTY)
and 888 Holdings
(LSE: 888)
to market should have done more to protect unsuspecting private investors. But Maynard reckons that stock market investors should always be allowed to make their own choices.
After much arm wresting with him over our Bloomberg terminal, I eventually agreed with him that caveat emptor, or buyer beware, should rule. After all, the warning signs were plain for all to see -- if you just bothered to look.
Firstly, PartyGaming did point out that Internet gambling is illegal in America. It even went to great lengths to highlight this in its flotation prospectus. It said its operations might violate state law, and that violation of these laws could serve as a predicate offence for liability under federal statutes. Now, you may think that online gaming should be legalised in the US, but that's irrelevant. What matters is that online gaming companies which service US customers are acting illegally.
Another thing to note is the eagerness of directors to sell shares shortly after the lock-up ended. A lock-up is a contract between an underwriter and insiders of a company that prohibit them from selling shares for a specified period. In the case of PartyGaming, the founders of the company sold 200m shares as soon as the lock-up period expired in June 2006 -- they had wanted to sell as many as 350m shares. Significantly, the share sale took place a week before key debates in the US House of Representatives which could have stopped online gambling from operating.
It is also worth noting that PartyGaming chairman Michael Jackson was paid a hefty sum to head the company. His "Golden Hello" amounted to some £1.5m, which was payable once the company's shares were admitted to the stock exchange. "Golden Hellos" were also extended to several other non-executive directors including Brian Larcombe, who pocketed £1m.
Meanwhile, eagle-eyed investors may also have noticed unusually hefty dividend payments at FireOne
(LSE: FPA)
. In March the online gaming payment processor announced a dividend payment that equated to over 50% of group profits. Then at the half year stage, the company had upped its payout to 75% of group profits. Significantly, the main beneficiary was parent company OGI, which owned 80% of the shares.
In my view, online gamers carried untold risks, which in my view made them smell bad -- I highlighted their dangers here, here, here and here. But my colleague Maynard is absolutely right. It is not for the London Stock Exchange or the banks that brought them to market to decide what is right for investors. We have to make those choices ourselves, and if we get it wrong then we deserve our losses.
> Cashing In On Poker Mania | PartyGaming: Growth, Value Or Income?
