Fanduel & Draft Kings Scandal Fuels Daily Fantasy 'Legality' Debate

SBR Staff

Thursday, October 8, 2015 1:22 PM GMT

The recent scandal involving insider trading at Fanduel and Draft Kings has sent shockwaves through the sports world. We review the evidence and discuss if and how this could take place at an online sportsbook.

Despite the fact that online sports gambling is currently outlawed in the United States, daily fantasy sports sites have found a way to skirt past legislation and thrive in the American market. While daily sites like DraftKings and FanDuel offer contest and payouts similar to online poker sites, it appears that they have managed to stay a few steps ahead of the legal curve and find ways to operate within the confines of the law.

The daily fantasy betting industry is reported to have brought in close to $1.3 billion in 2014, many experts are projecting that these sites could collectively pull in a handle over twice that size in 2015. While this might seem small in comparison to the $95 billion expected to be wagered online this year, this relatively young industry would be pulling in over half of what the entire NFL generated in revenue in 2014.

With legislators and government officials intensifying their focus on this expanding industry, it seemed that it was only a matter of time until someone dug up something that could bring the whole thing down just as quickly as it went up. On October 6th, in a joint statement, DraftKings and FanDuel revealed that employees had been caught using insider information from one company in order to gain an unfair advantage from the other. News broke that a midlevel content manager was granted access information that allowed him to cash in on a $350,000 prize at a competitors site. When there is smoke, there’s a fire, and if the early reports shed any light, the flames could go much higher than initial statements suggest.

 

As Defined by the Law...
The grey area between gambling, illegal sports betting and fantasy contest has led to many disputes in recent years. In a recent interview with the Huffington Post, sports and entertainment lawyer Jaia Thomas helped to clarify how courts differentiate between the two:

“The courts make a distinction between games of skill and games of chance. Under the courts and the law, games of skill are legal. Games of chance are deemed illegal. So courts have argued that fantasy leagues are games of skill -- that it requires some kind of skill, some kind of knowledge base to put these teams together and go about playing in fantasy leagues -- whereas with traditional sports betting, the courts have argued those are more games of chance that don't require any skill or knowledge base.”

We are fine with grandma spending her life savings playing bingo in a church basement just as long as she stays away from the slot machines.

 

Is Insider Trading Limited to Daily Fantasy Sites?
Let’s be honest here; sports betting is not a new industry. In fact it is a thriving business in many counties, and a well respected one at that. We must look no further than to our friends across the pond, as the United Kingdom not only allows sports betting, but also heavily regulates it to the point where those who chose to partake are guaranteed a fair chance to cash in with their wagers. Much like the US Stock Exchange, these businesses are taxed and their moves are closely monitored to ensure that no fair advantage is being gained. Online sportsbooks live and die by their reputations, and a scandal similar to the one taking place at two of the largest daily fantasy sites could easily lead to collapse.

“Online sportsbooks are better regulated, have more oversight and offer a formality that cannot be matched by daily fantasy betting sites at this point in time” stated Chris Grove, editor of Legal Sports Report. “Both sports betting and poker have deep roots, meaning that rules and regulations were placed on each even before the internet came about. Fantasy Sports are relatively new in comparison and legislators are still trying to catch up.”

It is currently estimated that 0.3% of winning payouts from FanDuel went to Draft King employees, and given their reported earnings, this could total at or near $10 million. Now unlike online sportsbooks, these fantasy sites offer cash prizes to participants who finish at a certain level in comparison to all other entrants. Not only was this money won through by employees using insider information, it also means that other paying clients were pushed out of winning brackets.

While online sportsbooks do offer prop betting odds based on player performance, most options simply require bettors to select one or two results. With a few exceptions that are normally outlines, these options are black and white. Payouts are awarded to anyone who has examined the posted line and selected the correct result.Daily fantasy contest, on the other hand, offer prizes to those who finish at a certain point or above of other paying members.

In comparison to daily fantasy sites, online sportsbooks can be more immune to both preventing and protecting clients from being cheated out of a winning result. It is possible that an employee of an online betting site might use data to project a line change, only to grab a better price at another sportsbook. This could also be seen as gaining an unfair advantage, but one that mostly aids the one committing the act. Others looking to participate will still be given the option to choose which side of an event they wish to back, and their payout is not influenced by the cheater.

 

What is Next for Daily Fantasy Sports?
When asked if he felt that this story would only speed up any possible legal action or restraints being placed on daily fantasy sites, Grove said “it will only be used as fuel for lawmakers,” but at this point it is too early for anyone to realistically predict just how either site will respond to the blow.

When asked if he would rather trust his money in a daily fantasy contest or with an online sportsbook, Grove, a Las Vegas resident, didn’t hesitate to state that he would trust the Superbook over fantasy sites any day of the week.