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DraftKings scandal: Claims of insider trading erupts in unregulated world of online fantasy sports (w/video)

A major scandal is erupting in the multibillion-dollar industry of fantasy sports, the online and unregulated business in which players assemble fantasy teams with real athletes. On Monday, the two major fantasy companies were forced to release statements defending their businesses' integrity after what amounted to allegations of insider trading, that employees were placing bets on information not generally available to the public.

The statements were released after an employee at the fantasy betting site DraftKings, one of the two major companies, last week admitted to inadvertently releasing data before the start of the third week of NFL games. The employee — a midlevel content manager — won $350,000 at a rival site, FanDuel, that same week.

"It is absolutely akin to insider trading," said Daniel Wallach, a sports and gambling lawyer at Becker & Poliakoff in Fort Lauderdale. "It gives that person a distinct edge in a contest."

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The episode has raised questions about who at daily fantasy companies has access to valuable data, such as which players a majority of the money is being bet on; how it is protected; and whether the industry can — or wants — to police itself.

The leagues have been swelling in popularity, their advertisements blanketing football game broadcasts.

The industry has its roots in informal fantasy games that began years ago with groups of fans playing against each other for fun over the course of a season. They assembled hypothetical teams and scored points based on how players did in actual games.

But in recent years, companies, led by DraftKings and FanDuel, have set up online daily and weekly games based on a similar concept in which fans pay an entry fee to a website — anywhere from 25 cents to $1,000 — to play dozens if not hundreds of opponents, with prize pools that can pay $2 million to the winner. Critics have complained that the setup is hardly different from Las Vegas-style gambling that is normally banned in the sports world.

On Monday, DraftKings and FanDuel released a joint statement that said that "nothing is more important" than the "integrity of the games we offer," but offered few specifics about how they keep contests on the level.

A spokesman for DraftKings acknowledged that employees of both companies have won big jackpots playing at other daily fantasy sites. Late Monday, the two companies temporarily barred their employees from playing games or taking part in tournaments at any other site; they already had prohibited their employees from playing on their own company sites.

"Both companies have strong policies in place to ensure that employees do not misuse any information at their disposal and strictly limit access to company data to only those employees who require it to do their jobs," the statement said. "Employees with access to this data are rigorously monitored by internal fraud control teams, and we have no evidence that anyone has misused it."

Industry analysts said the episode could leave the leagues open to further criticism that they are too loosely regulated.

"The single greatest threat to the daily fantasy sports industry is the misuse of insider information," said Wallach. "It could imperil this nascent industry unless real, immediate and meaningful safeguards are put in place. If the industry is unwilling to undertake these reforms voluntarily, it will be imposed on them involuntarily as part of a regulatory framework."

Already, there has been intensifying discussion on social media and among lawmakers over whether daily fantasy games are pushing the boundaries of an exemption in a 2006 federal law that has allowed them to operate. The law prohibited games like online poker but permitted fantasy play — deemed games of skill and not chance — under lobbying from professional sports leagues. The games are legal in all but five states.

But because Congress did not foresee how fantasy sports would explode, one member, Rep. Frank Pallone Jr., D-N.J., recently requested a hearing to explore the relationship between fantasy sports and gambling.

"I really think if they had to justify themselves at a hearing they wouldn't be able to," Pallone said in a recent interview.

The data that DraftKings acknowledged was released by its employee, Ethan Haskell, showed which particular players were most used in all lineups submitted to the site's Millionaire Maker contests. Usually, that data is not released until the lineups for all games are finalized. Getting it early, however, is of great advantage in making tactical decisions about which players to choose, especially when your opponents do not have the information at all.

A spokeswoman for DraftKings said that Haskell simply made a mistake and that the company was certain that he did not use the information improperly. She declined to go into specifics about the safeguards or the company's auditing policies.

Representative of both companies acknowledged that many employees of daily fantasy companies were players first and continued to compete on other sites.

Ben Brown, a co-founder of Daily Fantasy Sports Report, was first to disclose that Haskell had posted the information. Brown also said a FanDuel employee with access to its internal data, Matthew Boccio, had played on DraftKings; a FanDuel spokeswoman confirmed that.

"There's a significant amount of crossover," said Chris Grove, an industry analyst and editor of legalsportsreport.com. "The nature of the industry is so specialized and so new that at the speed which they grew they relied heavily on the player population."

Many of these employees set the prices of players and the algorithms for scoring. In short, they make the market.

As daily fantasy sports has blossomed into a multibillion-dollar industry in the past year, DraftKings and FanDuel have become cherished sponsors of Major League Baseball and NFL franchises.

Eilers Research, which studies the industry, estimates that daily games will generate around $2.6 billion in entry fees this year and grow 41 percent annually, reaching $14.4 billion in 2020.

So high are the potential financial rewards that DraftKings and FanDuel have found eager partners in NFL teams, even as league executives remain staunch opponents of sports betting.

Jerry Jones of the Dallas Cowboys and Robert K. Kraft of the New England Patriots have stakes in DraftKings, which recently struck a three-year deal with the NFL to become a partner of the league's International Series in Great Britain, where sports betting is legal. In addition, DraftKings has tapped hundreds of millions of dollars from Fox Sports, and FanDuel has raised similar amounts from investors like Comcast, NBC and KKR.

Adam Krejcik, a managing director at Eilers Research, said early missteps are often part of booming growth in a new and often misunderstood sector like daily fantasy sports. He said whether Haskell, the DraftKings employee, made an innocent mistake or not, the damage was done.

"Certainly does not look good from an optics standpoint and it strengthens the case for additional oversight and regulation," he said.

Grove, of legalsportsreport.com, said this may be a watershed moment for a sector that has resisted regulation but now may need it to prove its legitimacy.

"You have information that is valuable and should be tightly restricted," Grove said. "There are people outside of the company that place value on that information. Is there any internal controls? Any audit process? The inability of the industry to produce and clear and compelling answer to these questions to anyone's satisfaction is why it needs to be regulated."

DraftKings scandal: Claims of insider trading erupts in unregulated world of online fantasy sports (w/video) 10/06/15 [Last modified: Tuesday, October 6, 2015 12:43pm]
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