Is too much risk piling up in daily fantasy sports?
DraftKings and FanDuel have a decision to make. As legal thunderclouds continue to darken the skies of daily fantasy sports, should these companies continue to conduct business as usual?
Or should they change direction and reduce their risks, including potential prosecution?
Their answer so far is to stay the course and insist that they are a legal business in 44 states. But a smaller competitor — StarsDraft — sees it much differently. In light of recent developments, StarsDraft has pulled out of all but four U.S. states where it believes the law is firmly on its side: Kansas, Maryland, Massachusetts and New Jersey.
The company’s owner, Amaya, Inc., issued a statement Wednesday to USA TODAY Sports but declined further comment.
“We believe that the regulation of daily fantasy sports in America is inevitable because it is the right model to protect consumers, create a viable, long-term marketplace and provide appropriate oversight and taxation,” said Eric Hollreiser, Amaya’s vice president of corporate communications. “Those who oppose this regulation and are not willing to submit to the government oversight must have their motives called into question.”
Amaya is a large international gaming company that has a much different risk calculus than FanDuel or DraftKings. For example, it might not notice any negative financial impact from this decision because its daily fantasy site is much smaller and only generates a tiny portion of its revenue.
DraftKings, FanDuel among daily fantasy sites ruled gambling by Nevada
But Amaya also had reason to worry based on history. The company owns online poker sites that were shut down in 2011 when the federal government cracked down on online gambling and seized their assets.
By pulling up stakes in other states now, it’s hoping to avoid the risk of bigger losses later — a risk that could increase for those who stay the course as investigations gather steam.
“The law (with daily fantasy sports) is unsettled, and we don’t know if there’s going to be federal regulations, or 50 different states with 50 different regulations,” said Nellie Drew, a sports law expert at the University at Buffalo.
The downside in the meantime remains uncertain, though it could include criminal penalties. Among other investigations, a federal grand jury in Florida has been looking into whether the industry is violating the Illegal Gambling Business Act, according to Daniel Wallach, sports and gambling attorney at the firm Becker & Poliakoff in Florida. Other companies already have backed away from Florida, but not the two biggest: DraftKings and FanDuel.
“That level of uncertainly creates great risk for the industry because of the prospect of seizure of assets,” Wallach told USA TODAY Sports. “It could be game-changing development for a defendant that is convicted of a violation of (the federal law). There’s a lot of risk here, but it’s far from certain.”
To avoid this uncertainty, Amaya wants regulation for paid daily fantasy sports, unlike competitors who have tried to avoid it.
But legal lightning is in the air, indicating big changes. Last week, Nevada declared daily fantasy sports to be gambling operations and banished them unless they got licenses to operate there. The FBI also is looking into these companies. And that’s just the tip of it. More states are considering action, and more than a dozen federal lawsuits have been filed against the companies in the last few weeks with claims that include fraud and racketeering.
Sports leagues also at risk as fantasy sports faces increased scrutiny
“We strongly believe the games on our site — and daily fantasy sports in general — are legal,” DraftKings said in a statement.
The companies believe they are legal under a federal law from 2006 that cracked down on online gambling, including internet poker, but which exempted paid fantasy sports under certain conditions.
One of those conditions is that that the games should be based on skill and not chance or luck like traditional gambling. DraftKings and FanDuel even set up shop based on this exemption and grew to become $1 billion startup companies in a largely unregulated field.
Amaya, by contrast, describes itself as the most licensed online gaming operator in the world and just recently entered the U.S. daily fantasy market.
“Amaya is in a unique position among daily fantasy sports operators,” said Chris Grove, an industry consultant and publisher of the LegalSportsReport.com. “The company is arguably the only major operator in the U.S. that also operates regulated online gambling products such as poker and casino.”
This perspective makes the company appropriately prudent or overly cautious, depending on the viewpoint.
Until recently, the coast had seemed mostly clear for daily fantasy sports. But an onslaught of recent television advertisements dramatically gassed up their public profile with boasts about the cash prizes they had paid to customers who risked money on sports.
To some lawmakers who were watching, it sounded like sports gambling, which is largely illegal outside of Nevada. A recent data breach involving a DraftKings employee then struck a match to that fuel, bringing more attention from authorities. The employee, Ethan Haskell, had won $350,000 in a contest on FanDuel, the same week that he had mistakenly leaked valuable insider data on player ownership. DraftKings said an investigation found no wrongdoing or insider trading, but the damage was done to the industry’s image. Now it’s open season.
These companies “should be talking to their lawyers,” Drew said. “And it better be good lawyers.”
FantasyScore, another daily fantasy sports site, is a partnership between USA TODAY Sports Media Group and RT Sports.
Follow sports reporter Brent Schrotenboer on Twitter @Schrotenboer. E-mail: bschrotenb@usatoday.com