How a U.S. prosecutor's probe could spell doom for daily fantasy sports

Editor’s note: FanDuel is a sponsor of Sports Illustrated. This piece was pursued and executed independent of that business relationship. Sports Illustrated also has a partnership with DailyMVP, another daily fantasy sports provider.

In what may be the most troubling legal development yet for the Daily Fantasy Sports industry, The Wall Street Journalreported on Wednesday that the office of Preet Bharara, the U.S. Attorney for the Southern District of New York, has launched a probe into whether certain aspects of DFS violate federal law. Bharara is a truly feared figure in the gaming industry. On Friday, Apr. 15, 2011, in what became known as “Black Friday” to gamblers, Bharara unsealed indictments against three major operators of online poker websites for assorted criminal violations. The indictments included charges for conspiracy to violate the Unlawful Internet Gambling Enforcement Act of 2006 (UIGEA), operation of an illegal gambling business and money laundering. Black Friday would eventually lead to government shutdowns of several poker websites and several poker companies were forced to pay hundreds of millions of dollars in government settlements that were overseen by Bharara. Online poker players were also impacted: they saw their accounts suddenly frozen by court injunctions.

Is the ‘independent’ DraftKings investigation truly independent?

​Bharara turning his attention to the DFS industry could motivate DraftKings, FanDuel and other DFS companies to rethink their legal strategies. It has been rough waters for DFS companies since DraftKings employee Ethan Haskell now infamously turned a $25 entry fee on FanDuel into a $350,000 prize. As explained on SI.com, Haskell’s alleged “insider trading,” coupled with increased attention paid to DFS in light of DraftKings and FanDuel’ relentless advertising campaigns, has spawned an expanded FBI probe into DFS, a criminal investigation by the U.S. Attorney for the Middle District of Florida, more than two dozen lawsuits filed against DraftKings and FanDuel, and several states reclassifying or contemplating reclassification of DFS as gambling. DraftKings commissioning an “independent investigation” that cleared DraftKings and by extension cleared DraftKings likely won’t put out the fire.

Bharara’s involvement could prove to be most ominous sign yet for the DFS industry. He has an intimidating track record of successful prosecutions against gaming companies and against well-financed businesses on Wall Street. As gaming attorney Daniel Wallach tells SI.com, “Bharara is the biggest threat to the [DFS] industry to date . . . he has a near-perfect record in obtaining convictions in high-profile cases.” As an additional concern for DFS companies, if DFS “falls” in New York, it could force the NFL, NBA and other leagues that have partnered with DFS companies to reconsider their collaborations. Bharara’s entry into the DFS legal controversy might also give New Yorkers pause before playing DFS games.

How the New York legal process could unfold

The Wall Street Journal cautions that Bharara’s probe is at an early stage, meaning it could be months before any additional information emerges. The initiation of a probe also does not mean that it will conclude with indictments or findings of fault. Many probes that are launched by prosecutors are eventually dropped or lead to grand jury hearings where the grand jurors decline to indict. The initiation of a probe is not the same as an allegation or condemnation.

What a federal grand jury could mean for daily fantasy sports companies

Still, there is a fairly clear roadmap for how DFS companies could eventually face legal problems in New York. Two federal laws that are likely to play an important role in Bharara’s probe are the UIGEA and the Illegal Gambling Business Act of 1970 (“IGBA”). The UIGEA makes certain types of fantasy sports games legal, particularly those that reflect the skill and knowledge of fantasy players rather than randomness or luck. The UIGEA also allows states to restrict fantasy games and of potential concern to DFS companies, violators of state laws restricting fantasy games can be prosecuted under the UIGEA.

For its part, the IGBA became law with the primary goal of preventing mafia families from funding illegal gambling operations. Provided there is a violation of a state gambling law, the IGBA authorizes federal prosecutions and potential prison sentences for those who own, finance or manage illegal gambling operations. These laws could lead to DFS websites being shutdown via permanent injunctions and DFS players becoming unable to access their accounts and possibly winnings.

A federal prosecution by Bharara of DFS companies under the UIGEA or IGBA would first involve a finding that a business or person involved with DFS violated a relevant New York law. The most likely law is New York Penal Law 225.00, which makes gaming contests unlawful when chance is a so-called “material” (essentially, meaningful or substantial) element. To date, DFS games have not been found to violate 225.00 but as Wallach stresses, this law makes it conceivable that DFS games could be in violation: “Even if skill is predominant in a particular DFS game,” Wallach tells SI.com, “it could still violate Section 225.00 if an element of chance is also present in that game to a material degree.”

As a consequence, a DFS game that mixes elements of knowledge, skill and chance could plausibly be found in violation of 225.00 and thus subject DFS owners and operators to penalties under federal law. This is a very troubling possibility for DFS companies, which highlight the skill and knowledge of DFS participants but also recognize that chance is a part of DFS games. For instance, a DFS participant could draft an NFL player who unexpectedly gets hurt, or draft another player who unexpectedly plays due to another’s injuries.

Impact on the DFS industry

Legal analysis of the risks facing the daily fantasy sports industry

It will be interesting to monitor how news of Bharara launching a probe impacts the DFS industry in New York and nationwide. It is possible that some DFS websites and financial companies that work with those websites will no longer accept transactions involving New York residents. Sports leagues might also more closely study whether funding and facilitating DFS games could expose them to any legal risk in New York. New Yorkers who play DFS games might also worry the experience of online poker players who suddenly couldn’t access their winnings after Bharara went after online poker companies. To be sure, this “parade of horribles” might never materialize, but it is also not farfetched.

What is certain is that the tenor of the DFS legal crisis has changed and become more worrisome for the DFS industry.

Michael McCann is a Massachusetts attorney and the founding director of the Sports and Entertainment Law Institute at the University of New Hampshire School of Law. This fall he is teaching an undergraduate course at UNH titled “Deflategate.” McCann is also the distinguished visiting Hall of Fame Professor of Law at Mississippi College School of Law and he teaches “Intellectual Property Law in Sports” in the Oregon Law Sports Law Institute. As a disclosure, one of McCann’s family members is represented in a personal matter by an attorney who represents a plaintiff in John Weaver v. FanDuel and DraftKings.