DraftKings and FanDuel are dealing with a scandal that is described as alleged “insider trading.”
The New York Times has the details of a controversy involving the two fast-growing daily fantasy sports companies that are both valued at more than $1 billion each.
The sites run daily fantasy sports games that allow users to win millions of dollars by compiling the best lineup of players for a given game or week. The Times reported that a DraftKings employee released internal data showing which players were being picked most frequently in lineups of a lucrative contest before the contest actually started. This information, not publicly available until games are underway, is valuable because a user could select unpopular players and have their odds of winning big increase if those players succeed.
The DraftKings employee then won $350,000 in a FanDuel contest that same week.
DraftKings CEO Jason Robins said that the employee did not do “anything ethically wrong,” according to the Wall Street Journal. However, DraftKings and FanDuel have since decided to prohibit employees from “competing in online fantasy sports contests for money.”
Here’s a joint statement released today by the two companies and the Fantasy Sports Trade Association:
The Fantasy Sports Trade Association (FSTA), DraftKings and FanDuel have always understood that nothing is more important than the integrity of the games we offer to fans. For that reason, the FSTA has included in its charter that member companies must restrict employee access to and use of competitive data for play on other sites. At this time, there is no evidence that any employee or company has violated these rules. That said, the inadvertent release of non-public data by a fantasy operator employee has sparked a conversation among fantasy sports players about the extent to which industry employees should be able participate in fantasy sports contests on competitor sites. We’ve heard from users that they would appreciate more clarity about the rules for this issue. In the interim, while the industry works to develop and release a more detailed policy, DraftKings and FanDuel have decided to prohibit employees from participating in online fantasy sports contests for money.
The scandal raises questions about whether or not the companies need more regulatory oversight. As these sites become more popular with sports fans, they are also drawing scrutiny from both traditional sports betting operators as well as those the legal side. The Washington Post noted earlier this month that a ranking member of the Energy and Commerce requested a hearing to discuss “how participation in fantasy sports differs from gambling, as well as the relationship between professional leagues, teams, and players and the fantasy leagues.”
“Anyone who watched a game this weekend was inundated by commercials for fantasy sports websites, and it’s only the first week of the NFL season,” Rep. Frank Pallone, Jr. said in a statement. “These sites are enormously popular, arguably central to the fans’ experience, and professional leagues are seeing the enormous profits as a result. Despite how mainstream these sites have become, though, the legal landscape governing these activities remains murky and should be reviewed.”
DraftKings, which inked an exclusive partnership with ESPN in June, calls itself a “U.S.-based skill games company,” and says that its contests are legally operated under U.S. and Canadian law.
“The legality of daily fantasy sports is the same as that of season long fantasy sports,” the company notes. “Federal law and 45 of the 50 U.S. states allow skill-based gaming. Daily fantasy sports is a skill game and is not considered gambling.”
Residents of Arizona, Iowa, Louisiana, Montana, or Washington cannot participate in DraftKings contests due to state-specific regulations against cash prize awards. The same goes for FanDuel users.
Both companies, which also have investments from professional sports leagues and sponsor several pro teams, have been on an all-out advertising blitz for the past few months as the 2015-16 NFL season gets going and rank among top advertisers for TV spend.
In July, FanDuel raised a $275 million round from investors like KKR, Google Capital, and Time Warner that valued it at more than $1 billion. A few weeks later, DraftKings raised a $300 million round led by Fox Sports, which valued the startup at more than $1.2 billion.
DraftKings, founded in 2011, brought in $30 million in revenue last year, the Wall Street Journal reported. FanDuel, founded in 2009 — it spun out of news startup HubDub in 2010 — made $57 million last year. The companies make money by taking a small commission from each entry fee; FanDuel said that it takes about 10 percent from each fee.