New York AG: Daily Fantasy Sports Is Gambling
By Burt Carey
Daily fantasy sports operators are fighting for their lives following a finding this week by the New York attorney general that their business model constitutes illegal gambling and must stop taking wagers from New York residents.
New York attorney general Eric Schneiderman dealt a substantial blow to the industry by sending cease-and-desist notices to daily fantasy sports giants DraftKings and FanDuel. Both companies say they have large numbers of clients in New York, including business deals with the National Football League, Major League Baseball, the National Basketball Association and other professional sports that are headquartered in the state.
The Nevada attorney general’s office and Gaming Control Board announced a similar finding in October, stating that daily fantasy sports companies need a license to conduct business there. Both companies immediately ceased business operations in Nevada.
It doesn’t appear that either FanDuel or DraftKings will cave so easily this time. FanDuel’s headquarters are in New York, and DraftKings, based in Boston, recently opened an office in Manhattan. Schneiderman’s cease-and-desist orders so far apply only to the taking of wagers from New York residents. It does not prohibit either company from operating their businesses in New York.
Fantasy sports players act as online owners who build a team of players in a given sport. They accumulate points based on each player’s statistical performance in a given day, week or season. Traditional fantasy sports leagues stretched over a sport’s entire season. That’s where daily fantasy sports differs. Players at DraftKings and FanDuel pay an entry fee to build a team of professional athletes for a particular day or week. Entry fees range from 25 cents to $1,000. Those who accumulate the most points win money from that day’s entries.
The Fair Trade Sports Association estimates there are 42 million players in the United States and Canada. On average, they spend about $465 per year. FanDuel and DraftKings reportedly spent $100 million on advertising in September alone, attempting to capitalize on the new NFL season and bolster the number of people playing their games. Combined, the companies claim they will pay out some $3 billion to winners this year.
Daily fantasy sports companies say their operations are legal under the Unlawful Internet Gambling Enforcement Act of 2006, and that their players win based on skill. Schneiderman, however, called their operations a “‘contest of chance’ where winning or losing depends on numerous elements of chance to a ‘material degree.’”
“Our investigation has found that, unlike traditional fantasy sports, daily fantasy sports companies are engaged in illegal gambling under New York law,” Schneiderman said. “Daily fantasy sports is neither victimless nor harmless, and it is clear that DraftKings and FanDuel are the leaders of a massive, multi-billion-dollar scheme intended to evade the law and fleece sports fans across the country. Today we have sent a clear message: not in New York and not on my watch.”
Lawmakers, state attorneys general and others have been giving the daily fantasy sports industry extra scrutiny following its rather loud and unprecedented advertising campaign in 2015, and following revelations that DraftKings employee Ethan Haskell won $350,000 on rival site FanDuel during week No. 3 of the NFL season. That same week DraftKings executives confirmed that Haskell inadvertently released player ownership data for its Millionaire Maker contest before some NFL games had been played, showing that he had what amounted to inside information that could be used to leverage an owner’s chances of winning.
DraftKings and FanDuel denied that their employees had compromised their systems. Both companies say their employees are now prohibited from playing daily fantasy sports.
New Jersey Congressman Frank Pallone (D-3rd District) has called for a congressional review of the industry for its exemption from gambling laws. “It’s clear now, with million dollar jackpots and the advertising that goes on, that this is straight-out gambling,” Pallone said.
“To date, our investigation has shown that the top 1 percent of [DraftKings and FanDuel] winners receive the majority of the winnings,” Schneiderman stated. “Typically, participants in traditional fantasy sports conduct a competitive draft, compete over the course of a long season, and repeatedly adjust their teams. They play for bragging rights or side wagers, and the Internet sites that host traditional fantasy sports receive most of their revenue from administrative fees and advertising, rather than profiting principally from gambling.”
Research released in July by Sports Business Daily showed that over a three-month period 91 percent of profits collected by players at DraftKings and FanDuel were won by just 1.3 percent of the players. FanDuel claims to have paid out more than $2 billion in winnings; about $6 million of that went to DraftKings employees.
New York and Nevada have become the sixth and seventh states to prohibit fantasy sports leagues from operating for money. Arizona, Iowa, Louisiana, Montana and Washington ban fantasy sports play for money.
Since Haskell’s NFL week No. 3 winnings were discovered, the companies have endured a blistering litany of legal actions, including more than a dozen lawsuits. Washington Redskins wide receiver Pierre Garcón filed class-action suit on behalf of all NFL players against the fantasy football site FanDuel for improperly exploiting the players’ popularity and performance. DraftKings has a business deal with the NFL. FanDuel does not.