Jeremy Warner's Outlook: If online poker is immune to US prosecution, how come none of its players will go there?

Potent threat to City's position; The unacceptable face of stock lending

The World Series of Poker reaches a crescendo in Las Vegas next week, an event which would normally attract the masters of the virtual game, keen to market their wares, alongside their physical counterparts. This year, the online mob will be noticeably absent. Post the arrest of David Carruthers, chief executive of BetonSports, on charges of running an illegal gambling operation, flights and hotel bookings have been cancelled wholesale. Until the legal position of online betting becomes clearer, few will be prepared to risk their liberty by setting foot on American soil.

Announcing a near 50 per cent rise in second-quarter revenues yesterday, Mitch Garber, chief executive of PartyGaming, insisted that he was wholly unconcerned about the implications for PartyGaming of his rival's indictment. The BetonSports fracas was all about taking telephone bets on sports events, which is unambiguously illegal in the US, he insisted. The position of online poker and casinos is at worse a grey area and on some interpretations overtly legal. So will Mr Garber be jetting off to Las Vegas next week? Er ... as it happens it is his wife's 40th birthday and some things are sacrosanct.

American regulators do, it is true, have a bigger objection to sports betting than cards and casinos. This is because of a history of match-fixing scandals which in the past has brought many sports into disrepute. Yet there is a deeper mistrust of gambling which goes back to the puritan roots of the early settlers. I doubt very much the US Justice Department is going to stop at sports betting, and I suspect Mr Garber knows it too. That's why he's so keen to emphasise the company's expansion plans outside the US. Unfortunately, he's got some way to go in hedging his exposure. America still accounts for three-quarters of PartyGaming's revenues.

Potent threat to City's position

Here's a date to pencil into the diary - 1 October. Having withdrawn from the fray back in May, this is the first day that Nasdaq can return with a bid for the London Stock Exchange. The betting among traders is that it certainly will.

Perhaps unfortunately, it will also very likely succeed. Nasdaq already holds 25 per cent of the stock. Any offer would have to be at Nasdaq's highest buying price so far of £12.43 a share, which, with the share register now, as usually happens in bid situations, substantially owned by short-term traders, will be hard to resist.

One reason Nasdaq is thought highly likely to bid is that it needs to consolidate the LSE's cash flow in order to pay the financing costs of the money it has already splashed out on LSE stock.

The other key driver is strategic. US exchanges are in essence fleeing a regulatory environment which post the Sarbanes-Oxley act is regarded as too oppressive, cumbersome and costly to allow for further, home-grown, international growth. Time was when any big overseas IPO would automatically have sought dual listing on America's big board or, if in the technology sector, on Nasdaq. Not any more. Today these companies are much more likely to come to London or even Paris.

The regulatory costs of listing in the US have begun to outweigh the advantages of generally lower transaction costs and unrivalled levels of liquidity.

Most of those who listed in the US in the investment madness of the late 1990s would now be scarpering where it not for a bizarre Catch-22 - once listed, the US Securities & Exchange Commission makes it virtually impossible to delist, this for the reason that American investors tempted into the stock by its presence on a US exchange must have the continued protection of the SEC.

It is one thing to flee an oppressive regulatory environment, but what happens if the nightmare decides to follow? The concern in Europe over these transatlantic takeover bids is that they might become used by American legislators as a way of exporting US regulation into foreign markets. Just paranoia?

Don't you believe it. American regulators looking to bring trading by the London-based International Petroleum Exchange of a key US oil contract - West Texas Intermediate - under their own umbrella. The IPE has achieved considerable success in taking market share in this contract away from Nymex, a US exchange. US regulators may be able to interfere because the IPE is US-owned, allowing the Commodity Futures Trading Commission possibly to regulate through the American parent. Much the same thing might occur if the LSE became US-owned.

Unfortunately, there appears no obvious way of safeguarding against such concerns. Nasdaq cannot be blocked on competition grounds. Nor does the Financial Services Authority, which very much shares the City's alarm, have the power to intervene, except subsequent to a takeover to strip the LSE of its operating licence. Such action would in any case be hard to justify, even in the event of outright war with the SEC over regulatory jurisdiction.

Would the Alternative Investment Market survive the "cleansing" process of Sarbanes-Oxley, the imposition of American accounting standards, or indeed the debilitating power of the US legal system? I doubt it. Yet here we are again, with our "open doors" approach to foreign takeovers, sleep-walking into this potent threat to the City's competitiveness as a financial centre.

The unacceptable face of stock lending

Well done John Devaney, who as chairman of Telent, the remnants of the old Marconi telecommunications business, has struck a blow for shareholder rights by refusing to allow a US hedge fund to scupper a proposed £346m sale to Fortress Investment Group. The deal required a 75 per cent majority in any shareholders vote, which has in effect given Polygon, with 24 per cent of the stock, the power of veto.

Other shareholders overwhelmingly want to see the recommended bid go through. The fact that a minority shareholder is able to fly in the face of the wishes of the majority might seem bad enough. The fact that more than half the shareholding - amounting to 13.18 per cent of the company's shares - is borrowed stock in which Polygon has no economic interest, makes it seem worse still. Deprived of these borrowed shares, Polygon would be in no position to sink the deal.

The use by hedge funds of borrowed stock to interfere in bid situations in pursuit of their own narrow self interest is becoming a real cause for concern. This is only the latest instance of the practice appearing to work against the interests of shareholders as a whole.

After taking legal advice, Mr Devaney rightly adjourned the shareholders' meeting to vote on the proposal yesterday and urged investors who have lent their stock to Polygon to reflect long and hard on whether what Polygon has been doing with their shares is really in their best interests. It is impossible to believe any of them would think so.

Stock lending is an odd old business which allows the real holder of the shares to earn a small fee by lending them to someone else to use as they see fit. Strangely, it doesn't seem to occur to many of these lenders that the borrowers might use the shares in a way that runs counter to their economic interest in the stock.

Thus as the bear market gathered pace four years ago, life assurers found themselves in the cloud cuckoo land of lending stock to hedge funds to run substantial short positions, which would drive down the price and then force the life assurer to sell so as to satisfy solvency margins. The lending fee would hardly have compensated for this calamitous chain of events.

By pushing the envelope of acceptability with Telent, Polygon has almost certainly further damaged the reputation of this already questionable activity. One thing we can be sure of. With the barnhouse door banging in the wind, a posse of regulators will shortly be giving chase.

j.warner@independent.co.uk