Empire 'was aware of threat from PartyGaming'

The legal battle between internet poker rivals Empire Online and PartyGaming over a contract disagreement intensified yesterday when a previously undisclosed letter surfaced indicating that Empire knew its vital relationship with the fellow gaming group could be terminated.

Empire did not tell investors it had received the written warning a month before its June flotation on the Alternative Investment Market when it published its prospectus. And as late as 10 October, it lauded changes initiated by PartyGaming to the online platforms as "enhancements" in a trading update.

A letter, sent by PartyGaming to Empire's chief executive Noam Lanir on 4 May, suggests he knew that the platform arrangement could change. It said: "We would like to inform you that, as part of our considerations with regard to the system and our business operations generally, we are considering whether to move the PartyPoker site to a separate system so that the Custom Brand Label shall remain operating on the system as described and defined in the agreement but without sharing the same with the players on the PartyPoker site."

In its IPO prospectus, Empire raised the possibility of the separation of the two systems, but said it "will not materially affect the revenues of the group". However, when PartyGaming informed the City that it was distancing itself from Empire and other affiliate websites, known as "skins", on 10 October, Empire Online's shares fell 34 per cent.

Empire, which sent punters to gambling operations run by its partners such as PartyGaming and shared revenues, was worth more than £500m when it floated on AIM in June during the online poker craze. Since then, its value has crashed to £208m. Empire is furious that in October PartyGaming moved overnight, as it sees it, to end the partnership agreement that enabled Empire's poker players to bet against those registered with PartyGaming.

Sources close to Empire point out that the damage was caused not simply by the platform changes, but by PartyGaming's removal of a technical block to allow Empire's players to move across to its site.

Insiders also say that Empire responded to the letter with a telephone call to discuss it and that PartyGaming backtracked during the call. "It was never mentioned again," a source said.

Empire said yesterday that it had initiated legal proceedings against PartyGaming in the High Court of Gibraltar, and was confident that it had a strong legal case. The company is thought to be suing for several hundred millions of pounds in damages.

PartyGaming said it was confident of a "highly successful outcome" to the legal battle, but did not rule out an out-of-court settlement.