Social gaming juggernaut Virtual Gaming Worlds to pay nearly $20m to settle US ‘illegal gambling’ lawsuit

WA-founded social gaming juggernaut Virtual Gaming Worlds has denied any wrongdoing after agreeing to pay nearly $20 million to settle a class action alleging it engaged in illegal gambling in its major market of the US. The settlement, which will go before a US court in January for ratification, is open to potentially tens of thousands of people in the US state of Kentucky who spent $US5 or more playing VGW’s flagship games Chumbo Casino and Luckyland Slots over the past five years. The $US11.75m to be paid by VGW into the settlement fund represents less than 5 per cent of the fast-growing company’s latest annual profit of $454m. However, the lawsuit could potentially unnerve investors as VGW eyes a listing on North American equity markets. VGW uses a sweepstakes model to comply with laws banning Internet gambling in most US States. Under its system, customers buy virtual gold coins that allow them to play VGW’s games, but have no outside value. However, buyers of most gold coin packages also get bonus “sweeps coins”, which as well as being used to play the games are redeemable for cash in most of the US and Canada. The lawsuit alleged the gold coins breached Kentucky’s gambling laws because they generated financial benefits. VGW earlier this year told its investors it had operated in the US for eight years “without any legal challenges or regulatory non-compliance”. But its investor presentations regularly acknowledge that any changes to the regulatory environment or the interpretation of social gaming in the US States where it operates as a major risk to its business model. VGW, which operates in Kentucky via two offshore subsidiaries, did not immediately respond to enquiries on Friday. But in the settlement agreement, disclosed in VGW’s annual accounts and filed in the Commonwealth of Kentucky’s Henderson County Circuit Court five weeks ago, the company said it “at all times ... denied and continues to deny any wrongdoing and liability and denies all material allegations in the (lawsuit) action”. “Specifically, VGW denies that the games constitute or constituted illegal gambling,” the agreement says. However, the company had opted to settle, citing the uncertainty and financial cost of a trial. “The agreement is a compromise ... and any negotiations resulting in it shall not be construed as or deemed to be evidence or an admission of liability of wrongdoing on the part of VGW,” the settlement says. The lawsuit was launched in May on behalf of a Henderson, Kentucky resident, Amy Jo Armstead, who is said to have “gambled and lost” about $US7000 after making multiple purchases of gold coins to play both Chumba Casino and Luckyland. The action alleged the games, which generated more than $3b of revenue for VGW last financial year alone, constituted illegal gambling in Kentucky because “the players provide consideration and by an element of chance create a right to credits and/or other things of value”. “As such, (the) plaintiff and (others in the class action) gambled when they purchased coins to wager at (the) defendants’ games”, the action alleged. The extraordinary take-up of VGW’s games, particularly during COVID-19 lockdowns, has made the company Australia’s most profitable unicorn and propelled founder, executive chairman and 66 per cent owner Laurence Escalante into the ranks of the country’s billionaires. The group has racked up a string of record financial results, with the 2021-22 profit up 54 per cent on the year earlier. Revenue soared 55 per cent to a new peak of $3.45b. VGW has now paid more than $750m in dividends since making its first payout just two years ago. The spectacular results have likely increased VGW’s value to at least $5.5b.