DFS Probes Continue to Escalate
The legality of daily fantasy sports sites remained an open question as the industry faced another week of unwanted attention from state and federal authorities, including the same U.S. Attorney who shut down illegal online poker sites in the U.S. in 2011.
The Wall Street Journal reported that U.S. Attorney Preet Bharara’s office in the Southern District of New York has launched an investigation into DFS sites. According to the report, Bharara’s office is investigating whether the business model behind daily fantasy-sports violates federal law.
This could be especially bad news for the industry as Bharara’s office was behind “Black Friday” in 2011 that shut down illegally operating online poker sites in the U.S. That investigation led to numerous indictments against executives at major sites such as PokerStars and Full Tilt Poker.
The investigation is said to be in its early stages. The Journal previously reported that the DFS industry was being investigated by the U.S. Department of Justice with the help of Federal Bureau of Investigation, but Bharara’s investigation was not previously disclosed.
The DFS industry has been under fire since it was disclosed that employees of the industry’s two biggest sites—DraftKings and FanDuel—have played DFS games and won money on their opposite rival’s sites.
A DraftKing’s employee had posted some internal site information on player drafting of NFL players—or which NFL Players were being chosen most by DFS players—on a discussion board prior to week three play in the NFL. That led to charges he had inside information, which helped him win $350,000 on rival site FanDuel.
Since news of the scandal broke, a host of investigations into DFS sports have begun, and there have been calls for hearings on the industry in Congress.
Then, the Nevada Gaming Control Board ruled that DFS sites were in fact sports betting and banned them from operating in the state unless the operators received a Nevada gaming license.
The scandal may finally be catching up with the industry, as it recorded its first drop in new players the weekend of October 18 since the NFL season began. According to SuperLobby, a U.K. research firm that tracks daily fantasy sports entries, DraftKings and FanDuel both saw tournament entries and entry fees drop from the previous Sunday.
DraftKings entries fell from 4.14 million on October 11 to 3.76 million on October 18. FanDuel entries fell from 3.38 million to 3.27 million, according to the research firm.
Both FanDuel and DraftKings have said that daily fantasy sports are legal and that it is a game of skill and not a game of chance. However, many analysts have pointed out that a similar argument by online poker sites did not keep them from getting shut down in 2011.
DraftKings also released the findings of an internal investigation into the insider information accusations. The company hired a law firm to conduct the investigation and found that it would have been impossible for the employee to use the information to win on FanDuel because he didn’t receive the data until 40 minutes after that site’s contest closed
Still, FanDuel has launched an online petition to keep fantasy sports legal.
Fantasy sports were specifically exempted from a 2006 federal law banning online gambling, but at the time, fantasy sports were largely an informal, season-long proposition played amongst a group of friends. Daily fantasy sports, with its numerous daily contests and large prize money pools, significantly changed that model.
Legal experts speaking to the Journal, said Bharara’s involvement signals a major escalation of the legal challenges confronting the DFS industry.
“Because of his past and his reputation, this is probably the most frightening development yet for the industry,” Daniel Wallach, a sports and gaming attorney in Fort Lauderdale, Fla. told the paper.
More investigations
Meanwhile, daily fantasy sports—which already is facing probes in New York and Florida—continued to draw attention from state authorities around the country.
Georgia lottery officials are now questioning the legality of daily fantasy sports operating in their state. In a letter sent last month to the CEOs of FanDuel and DraftKings, Georgia Lottery attorney Joseph Kim says the companies appear to violate Georgia law. Kim says gaming is generally banned by Georgia’s constitution, except for state lottery-run games, according to a report by the Associated Press.
Neither FanDuel of DraftKings, however, responded to the letter and the state is reviewing its next steps, state officials told the AP.
Griffin Finan, director of public affairs for DraftKings, told the AP that the company had not received any letter from Georgia’s lottery, but acknowledged that more and more states are beginning to look at the industry. .
“We are seeing a number of state regulators and other authorities taking a reasoned and measured approach to the daily fantasy sports business and hope that trend continues along with due consideration for the interests of sports fans across the country who love to play these games,” Finan said in a statement.
According to various reports, lottery and gambling officials in Illinois, Colorado, Delaware, California, Ohio, Michigan and Mississippi have all either been reviewing daily fantasy sports or will begin a review as it relates to their state laws, especially in light of Nevada’s decision to require that the sites be licensed.
Another investigation by New York State’s Attorney general has already been disclosed. The state is seeking information on internal practices by both FanDuel and DraftKings.
Meanwhile, a Federal Grand Jury in Florida that has also been examining daily fantasy sports issued a subpoena to the industry group the Fantasy Sports Trade Association, the Wall Street Journal reported. The subpoena seeks copies of board-meeting minutes.
The Florida case reportedly involves whether DFS violates the federal Illegal Gambling Business Act, a law passed to curb organized crime’s involvement in illegal betting. That law could be invoked if DFS sites are found to have violated a state’s gambling laws, which many legal analysts feel it clearly does under Florida law. Florida, for example, prohibits playing for other people’s money even in a game of skill, according to an analysis by Legal Sports Report.
DraftKings and FanDuel have both been actively supporting lobbying efforts to protect the industry’s interests in several states, including Florida.
Even in Massachusetts, where state Attorney General Maura Healey has already ruled that the sites do not violate state law, state politicians spoke of reviewing the DFS sites status.
Healey, meanwhile, said that though she feels the sites are legal under state law, they need to be regulated and the reports of insider information have concerned her office. She had previously said her office was talking with several sites—including DraftKings which is headquartered in Boston—about improving consumer safeguards.
DFS Sites Begin Pulling Out of Some States
Five states—Arizona, Iowa, Louisiana, Montana and Washington—have said DFS sites are illegal.
The Nevada Gaming Control Board concluded that “wagering on the collective performance of individuals” constitutes sports betting, Sports betting is legal in Nevada, but the board determined the DFS sites must apply for and obtain a gaming license from the state.
There has also been some negative feedback for the industry due to a passage in the Nevada decision that quoted DraftKings CEO Jason Robins—speaking on reddit.com three years ago—as saying his site operated “almost identical to a casino.”
Nevada, however, is one of only four states where a form of sports betting is legal and the only state with a true sports book, under an exemption to the federal ban on sports betting. Delaware, which also announced an investigation into daily fantasy sports offers sports parlay betting under the same exemption.
Neither DraftKings nor FanDuel have said whether they will seek Nevada licensing and both sites have reportedly stopped taking Nevada customers. However, a report in the Las Vegas Review Journal said some Nevada players were still able to play on the sites after the ban was announced.
State officials told the paper that they will continue to review whether the sites accept Nevada players and prosecute if the play persists, but also said the companies have been working with the state to block access for Nevada players.
A spokesman for DraftKings told the paper that some players who had already been entered in contests were allowed to continue play through the weekend of NFL games. DraftKings has also asked all Nevada-based players to withdraw their balances from their accounts.
Yahoo, which offers conventional fantasy sports and daily fantasy, but was not involved in the insider information scandal, has also pulled out of Nevada and announced plans to pull out of Florida. Several other smaller operators have also reportedly stopped accepting Florida players.
Smaller fantasy site Vulcan also told players they will not accept entries from players in Nevada and Florida. StarsDraft, the new DFS site from Amaya Gaming went much further, announcing it will only accept players from New Jersey, Massachusetts, Kansas and Maryland, the only states where it feels daily fantasy sports have been cleared by regulators.
Amaya said in a statement that it will closely monitor legal developments and is willing to “work with all states interested in implementing clear guidelines for the operation of daily fantasy sports.”
Pennsylvania lawmakers are also reportedly considering legislation to shut daily fantasy sites out of the state. The proposed bill—which has not been introduced—would limit daily fantasy sports to operations run through a Pennsylvania casino.
Pennsylvania casinos, however, currently do not offer online gambling, though several initiatives have been introduced to legalize online gaming in the state, but none have gained traction in the state Legislature.
The new bill would amend a previously introduced bill that allowed Pennsylvania casinos to offer fantasy sports, but did not speak to the online daily fantasy sites.
Reactions
Meanwhile, the NCAA has notified executives from DraftKings and FanDuel it will ban advertising from the two popular websites during NCAA championship events, according to the AP.
While the NCAA controls advertising for events such as the NCAA basketball championship, it does not have direct control over advertising for the NCAA football playoffs, which is run independently. Officials for the college playoffs told the news service they are still monitoring developments in the DFS industry and have not decided whether or not to ban DFS advertising.
However, the NCAA had previously requested that the two fantasy sites not run games based on NCAA contests.
Adam Silver, commissioner of the National Basketball Association also called for more regulation of DFS sites.
“There should be a regulatory framework; there should be increased transparency for consumers,” Silver told ESPN, “I think it would ultimately aid the industry. In fact, I think we’re seeing the marketplace impacted, because there’s not a clear regulatory framework right now.”
Silver said that for now, the NBA will continue its partnership with FanDuel, but also said the insider information scandal had made him “nervous” about the future of the industry.
Also, The Fantasy Sports Trade Association has pulled its winter conference from Nevada over the state’s ruling on licensing fantasy sports.
Congressional Hearings
In Washington, U.S. Congressman Jason Chaffetz, (R-Utah), chairman of the House Committee on Oversight & Government Reform is the latest politician to call for hearings on the daily fantasy sports industry. Chaffetz plans to hold hearings on fantasy sports in November, according to a report from the New York Post.
Chaffetz is an acolyte of Sheldon Adelson and the sponsor of the Restore America’s Wire Act, which seeks to outlaw online gambling of any kind in the U.S.
New Jersey Congressman Frank Pallone, the ranking Democrat on the House Energy and Commerce Committee has also called for a hearing as have several other politicians including Senator Harry Reid of Nevada.
Pallone and New Jersey Senator Robert Menendez have also asked the federal Trade Commission to look into the legality of daily fantasy sports. A similar request has also been made by from Sen. Richard Blumenthal of Connecticut.
