SACRAMENTO, CA—Capital Sweepstakes Systems Inc., a corporation headquartered in Loomis, and Kevin Freels, 41, of Loomis, pleaded guilty today to conducting an illegal gambling business related to Internet sweepstakes cafés, United States Attorney Benjamin B. Wagner announced. As part of its plea agreement, Capital Sweepstakes agreed to forfeit over $1.5 million in profits generated through its illegal gambling business. These funds were previously seized by the United States in a related proceeding.

“California and the federal government have enacted laws intended to regulate the gambling industry and protect the public,” said U.S. Attorney Wagner. “Today’s pleas are the result of Capital Sweepstakes’ attempt to avoid those laws while building a sprawling and lucrative enterprise based upon a purported sweepstakes game that was in fact the functional equivalent of a slot machine.”

“As exemplified by the elaborate and illegal fictions used by Capital Sweepstakes Systems, the FBI will investigate efforts to subvert lawful gambling regulations,” said Special Agent in Charge Monica Miller of the FBI’s Sacramento field office. “Thanks to a strong partnership between the FBI, the Internal Revenue Service—Criminal Investigation, and the California Bureau of Gambling Control, we were able to stop this criminal activity and deter others from circumventing the law.”

“Capital Sweepstakes profited by targeting low-income communities, misrepresenting their unregulated slot-machine style operations as legal enterprises and creating magnets for crime,” said Attorney General Kamala D. Harris. “My office is dedicated to combatting and dismantling illegal gambling operations statewide. I thank our Gambling Task Force and the Bureau of Gambling Control for their investigative work.”

According to court documents, from January 2013 to September 2014, Capital Sweepstakes provided software and hardware systems for Internet sweepstakes cafés throughout California. Freels had an office at the Capital Sweepstakes headquarters, was the president of the software company that provided the sweepstakes software, and received a significant portion of the revenues generated by Capital Sweepstakes. Freels assisted in overseeing operations and financial dealings at Capital Sweepstakes.

At Internet sweepstakes cafés, customers purchased sweepstakes entries, which were often loaded onto plastic cards with magnetic strips. The customers could then swipe the cards at specially programmed computer terminals inside the cafes and play a variety of gambling-themed games, with names such as Hot Luck Keno, Tropical Treasures, Dreamcatcher, Lucky Puppy, and Luck of the Irish. These games looked and sounded like casino-styled slot machines, and the results of the games revealed whether or not the customer “won” the sweepstakes. Customers were eligible to win cash prizes from the sweepstakes, which were paid at the location of play. The sweepstakes results were not actually dependent upon the outcome of the games, but were predetermined through the Capital Sweepstakes software. Capital Sweepstakes would later send an invoice to the location to receive a previously agreed upon percentage of its profits. Capital Sweepstakes was able to do this because it tracked the sweepstakes activity on its servers remotely. This type of online gaming was conducted entirely outside the state gambling regulatory scheme. In a decision issued last month, the California Supreme Court confirmed that such games are illegal.[2]

Many Internet sweepstakes cafés in Sacramento, West Sacramento, and Stockton used Capital Sweepstakes software. Based on bank records, Capital Sweepstakes also had operations in other states, including Hawaii and Texas.

This case is the product of an investigation by the Federal Bureau of Investigation and the Internal Revenue Service, Criminal Investigation. Agents from the California Bureau of Gambling Control also provided assistance. Assistant United States Attorneys Jared Dolan, Christopher Hales, and Kevin Khasigian are prosecuting the case.

As part of a parallel civil settlement with the California Attorney General’s Office, Capital Sweepstakes Systems entered into a stipulated judgment of $700,000.

Kevin Freels and Capital Sweepstakes Systems Inc. are scheduled to be sentenced by Chief United States District Judge Morrison C. England Jr. on November 5, 2015. Capital Sweepstakes faces a maximum statutory penalty of five years’ probation and a $500,000 fine. Freels faces a maximum statutory penalty of five years in prison and a $250,000 fine. The actual sentences, however, will be determined at the discretion of the court after consideration of any applicable statutory factors and the Federal Sentencing Guidelines, which take into account a number of variables.