Intrade.com, the beleaguered betting website that in March halted trading and froze member accounts amid a probe into financial irregularities, has discovered a shortfall of $700,000 in client funds. The discrepancy bolsters a widespread theory that the Dublin-based company dipped into client accounts. “If member and company accounts were kept separate, it would be impossible to have a shortfall,” says Barnard College economics professor Rajiv Sethi. “This is not just a case of someone walking away with company funds.”
So what exactly transpired? In the somewhat cryptic announcement made to customers last Friday, Intrade director Ronald Bernstein wrote that the company is “very confident” as to what caused the shortfall—but that, for legal reasons, he could divulge no more. In what may or may not be a related piece of information, Bernstein also confirmed that “the Company, if it is able, intends to vigorously pursue two distinct parties for an aggregate amount greater than $3,500,000.”
Intrade, which once facilitated wagers on everything from political outcomes to the price of gold, first ran into major trouble last fall when the Commodity Futures Trading Commission sued the site for running an unauthorized and unregulated exchange. As a result, Intrade lost its U.S. customers, and therefore the bulk of its business. By January, site traffic was too low to measure. “When they paid out all the U.S. customers, and lost all those membership fees, that may have put a strain on company funds,” says Sethi.
To top it off, an Irish accounting firm in February raised concerns about $1.5 million in payments that had gone to parties including Intrade founder John Delaney, who died in 2011 while climbing Mt. Everest.
While he has no proof, Sethi suspects that such financial woes may have led someone at Intrade to divert member funds as a stop-gap measure. He adds: “Someone very senior must have been involved.”
Offshore gambling sites are often harassed by hackers and even elements of organized crime. Although in this case, it’s not likely the funds were stolen by outside groups since the money was held in Irish bank accounts.
As for the $3.5 million, Sethi doubts that sum is directly related to Intrade’s commingling of member and company accounts. “That could have been a company employee embezzling company funds,” he says, noting that legal claims may be related to a much earlier incident. “Of course, if they were to get this back, they could then repay their members.”
As it stands, Bernstein is asking Intrade’s customers to throw his company a lifeline so it can remain solvent and resume limited operations. Specifically, he’s asking members to accept immediate repayment of half the funds in their frozen accounts and to waive claims to the rest on the “solemn promise” that Intrade will try to refund them later, according to Bloomberg News.
That’s a big request from Bernstein, but members have little choice. Nearly 40 account holders with large balances have already agreed to support the proposal. “Members are scattered all over the world, and they’re not really in a position to litigate,” says Sethi, who provides further analysis here. “They may as well accept whatever is imposed on them.”