July 12, 2002 1:20 PM PDT

N.Y. subpoenas PayPal over gambling

PayPal is facing another legal challenge, this time over online gambling.

Earlier this week, the online payments company received a subpoena from the attorney general of New York asking the company for documents related to its processing of online gambling transactions, PayPal said Friday in a filing with the Securities and Exchange Commission. The attorney general has not filed any legal action against PayPal, but the subpoena will be used to determine whether New York should take action against the company, PayPal said in the filing.

"PayPal intends to cooperate fully with the attorney general in this matter," the company said.

A spokesperson in the attorney general's office would not confirm or deny whether a subpoena was issued.

On Monday, PayPal announced that it was being acquired by eBay for about $1.5 billion in stock. eBay said that after the acquisition, PayPal will exit the online gaming business.

"We are making preparations in order to be able to fulfill the announcement that we will cease those transactions in connection with closure (of the deal)," PayPal spokesman Vince Sollitto said.

eBay spokesman Kevin Pursglove declined to comment on the subpoena.

Transactions with a higher risk of charge-backs, primarily those related to online gambling, accounted for about 8 percent, or about $116.8 million, of the money processed by PayPal in the first quarter. That's up considerably from the full-year total last year, when such transactions accounted for about 3.9 percent, or $137.28 million, of the money sent through PayPal during the entire year.

Online gambling has been in murky legal waters for years. A bill that would ban online gaming is before the Congress, but its odds of passing are slim. Meanwhile, some states such as New York have moved to crack down on Internet gaming. Last month, under pressure from New York Attorney General Eliot Spitzer, Citibank, the biggest issuer of credit cards, agreed to block the use of those cards on online gaming sites.

The subpoena over online gambling is only the latest of a myriad of legal problems with which PayPal has had to contend. Immediately following its announced acquisition by eBay, PayPal shareholders filed two suits against the prospective partners in Delaware court trying to block the deal. On Wednesday, shareholders filed two more suits, one in the same Delaware court and another in California Superior Court in Santa Clara County, PayPal said in its filing. All the suits charge that the merger agreement is a breach of the fiduciary responsibility that the companies have to PayPal shareholders.

Meanwhile, PayPal is also facing a patent infringement suit filed by Tumbleweed Communications and several class action suits filed by customers who charge that the company illegitimately froze their accounts. Additionally, the company has drawn scrutiny from state banking and financial services regulators who have questioned whether it is running an illegal bank or unlicensed money transmitter service. PayPal has since received or applied for money transmitter licenses in a number of states.

News.com's Margaret Kane contributed to this report.

 

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