October 6, 2015
DraftKings Inc. markets cash contests to fantasy sports enthusiasts with a grandiose invitation: “Welcome to the big time.”
Following a data leak that has fueled calls for regulation and sparked an inquiry by New York’s attorney general, the Boston company is discovering that with the big time comes intense scrutiny.
Now, the entire fantasy sports industry faces the most serious challenge of its brief existence at a time when the stakes are sky-high. As some lawmakers and regulators question why fantasy sports prize games are legal, and as DraftKings dukes it out with New York rival FanDuel Inc., some of the 57 million people who enter — and defend — the contests are suddenly wary that company insiders may have an edge.
“A perfect storm — that’s exactly what it is,” said David O. Klein, a New York attorney and member of the Fantasy Sports Trade Association. “I think that the two big players, in an effort to become number one, are shooting themselves in their collective feet. The appearance of impropriety is something you don’t want to deal with, particularly where the industry now is being questioned as to whether it’s gambling, as opposed to a game of skill.”
DraftKings did not respond to a Boston Globe request to interview its cofounders.
Instead, the company issued a statement Tuesday saying it had completed an internal investigation of events on Sept. 27 that led an employee to improperly post information about which NFL players had been selected for DraftKings’ “Millionaire Maker” contest for the third week of the season.
DraftKings regularly releases such information, but only after entrants have locked their lineups, choosing the quarterbacks, receivers, and running backs they believe will perform best while adhering to an imaginary salary cap.
In this case, the employee, Ethan Haskell, published the player selection data before rosters locked on DraftKings.
Contestants who saw the table could have used it to make more informed decisions about their own lineups — finding overlooked players who could help them rise above the crowd, for instance.
When Haskell won $350,000 playing on FanDuel the same day, online message boards lit up with suggestions that he had used that information to gain an unfair advantage. Some players said the episode raised concerns that the games could not be trusted if employees of the company were using sensitive information for their own profit.
DraftKings said its investigation showed Haskell did not have access to the player data when he submitted his own roster for the FanDuel contest. He received that information after FanDuel had closed submissions, the company said Tuesday.
“There is no evidence that any information was used to create an unfair advantage, and any insinuations to the contrary are factually incorrect,” DraftKings said.
Haskell did not respond to an interview request.
Despite the findings of its internal review, DraftKings joined FanDuel and the Fantasy Sports Trade Association in a temporary agreement to prohibit employees from entering cash contests. While employees at DraftKings and FanDuel have always been barred from entering contests run by their own companies, they were allowed to play on their rival’s site.
On Tuesday, New York Attorney General Eric Schneiderman opened an investigation into whether the employees used nonpublic information to gain an advantage.
Fantasy sports contests have enjoyed an exemption from a federal law regulating sports betting because they are considered games of skill, not chance. That has allowed the companies to essentially regulate themselves.
But lawmakers who have questioned the distinction found in the data leak another reason to push for fantasy sports to be overseen by authorities, similar to how other forms of gambling are regulated.
US Representative Frank Pallone Jr. of New Jersey, who said last month that Congress should examine the legality of fantasy sports, renewed his call for a hearing Tuesday. “With little legal oversight and deep investments into these sites by the same professional sports leagues that oppose traditional sports wagering, these issues are ripe for congressional review,” he said in a statement.
ESPN, which inked a lucrative advertising deal with DraftKings earlier this year, removed its usual fantasy sponsorship messages from on-air programming while covering the story Tuesday. Commercials remained in place for both companies, however.
Fox Sports, which led a $300 million investment in DraftKings in July, did not return messages seeking comment.
Until recently, DraftKings had enjoyed a charmed existence, raising $375 million (slightly more than FanDuel) from the likes of Major League Baseball Ventures and Patriots owner Robert Kraft while blitzing national airwaves with more commercials than Apple, Ford, and AT&T.
DraftKings cofounder Jason Robins appeared on the cover of Fortune magazine just last week.
But DraftKings suddenly looks more like a three-year-old startup run by a trio of buddies who haven’t yet turned a profit — which, behind the influential backers and piles of cash, is what the company still is.
When a business grows as quickly as DraftKings has, it’s not unusual for its executives to postpone drawing up internal policies, such as codes of conduct for employees, said Maia Heymann, senior managing director at Cambridge-based CommonAngels Ventures. (Her firm is not an investor in either fantasy sports company.)
“It’s really tempting to pursue the growth and not do the boring, internal, nuts-and-bolts stuff — especially when competition is fierce and you’re focused on the top line,” she said.
In one illustration of the industry’s hazily defined protocols, MLB said it was “surprised to learn that DraftKings allowed its employees to participate in daily fantasy games.”
Ted Clark, executive professor of entrepreneurship and innovation at Northeastern University, said the data leak at DraftKings is a wakeup call to sports fans who have entrusted their money to a fantasy system with little oversight.
“There’s so much room for questions about ethics because there’s so much money flying around,” Clark said. “It’s silly for anybody playing an unregulated game for big money to imagine there’s no advantage for the pros.”
Source: Boston Globe