In all likelihood, you’ve probably been bombarded with ads for the fast-growing daily fantasy sports websites DraftKings and FanDuel. Well, new details have emerged about them in the last few weeks that should give you pause about signing up with them.
Allegations that employees at the daily fantasy sports giants use inside information to play in each other’s games have triggered investigations at the federal and state level, as well as numerous civil lawsuits. Ominously, one of those suits contends that this practice was built into the companies’ business models.
The scandal first broke earlier this month, when DraftKings content manager Ethan Haskell inadvertently released data on the NFL players used most often in DraftKings’ big-ticket contests before the lineups for Week 3 games were set. Haskell then used the information to win $350,000 on FanDuel. The two companies had long allowed their employees to play on other fantasy sports websites, but the ensuing outcry led them to order their employees to end this practice until the industry can hammer out a new policy.
Within 24 hours of Haskell’s admission, New York state Attorney General Eric Schneiderman opened an investigation into whether employees of DraftKings and FanDuel won big money by using inside information to pick their teams while playing at other websites. Several players have also been contacted by the FBI office in Boston, home to DraftKings. Reportedly, the FBI wants to know if DraftKings takes money from states where daily fantasy sports games are banned. The websites are not allowed to operate in Arizona, Iowa, Louisiana, Montana, and Washington.
Daily fantasy sports websites operate under a loophole in the Unlawful Internet Gambling Enforcement Act, which bans payments to online gaming sites. Since fantasy sports games are considered games of skill rather than chance, they are technically legal, and are allowed to operate more or less unregulated. However, the Nevada Gaming Control Board thinks otherwise. Thursday, it concluded that since daily fantasy sports games involve “wagering on the collective performance of individuals participating in sporting events,” they meet the definition of gambling. It told DraftKings and FanDuel that they had to obtain gaming licenses if they wanted to operate in the state.
Gambling and sports law expert David Gzesh told The New York Times that Nevada’s decision could take the air out of DraftKings and FanDuel, which have ballooned into billion-dollar companies with the help of investments from several major sports leagues and television networks. If Nevada considers daily fantasy sports to be the same as sports betting, Gzesh says, “no other state can offer it when it violates federal law.”
However, a lawsuit in Louisiana has the potential to be even more damaging. The plaintiff, Artem Genachock, says he was allowed to enter contests at FanDuel and DraftKings even though the websites technically can’t operate in the state. He contends that use of inside information is rampant at both FanDuel and DraftKings, and executives at both either look the other way or join in on this activity.
More seriously, Genachock claims that both companies’ recent massive advertising blitzes were a calculated effort to keep money flowing to their biggest players, or “whales” as they’re popularly called. These players account for 40 percent of FanDuel and DraftKings’ fees, even though they make up only 1 percent of the websites’ subscriber base. Many of those “whales” are also employees. Reportedly, FanDuel and DraftKings knew they had to attract more inexperienced players to ensure that more money flows to the “whales.” For that reason, Genachock filed a class-action lawsuit under the civil component of the powerful Racketeer Influenced and Corrupt Organizations Act. If he wins, he could get treble damages.
When Senator Richard Blumenthal of Connecticut learned about these and other suits, he called for a full investigation into possible fraudulent practices by daily fantasy sports operators. Blumenthal said, rightly, that even in states where the websites are legal, use of inside information to gain an “unfair advantage over others” could potentially amount to fraud.
I was actually thinking about getting an account at one of these websites. But in the last week, a number of red flags have popped up that would be enough on their own to give anyone pause about doing business with these websites. Questionable legality, the near-total lack of regulation, and, most seriously, the possibility that their wealth is fueled by fraud. All together? As much of a sports junkie as I am, I’m not touching either of these outfits with a ten-foot pole.
