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October 06, 2015

'Insider trading' allegations rock DraftKings, FanDuel sites

Within the sports world, DraftKings and FanDuel are now omnipresent. There is simply no escaping those two companies. During a game, their ads run seemingly every commercial break. A few days ago, I watched Adam Schefter and Matthew Berry argue over their DraftKings lineup on “Sunday NFL Countdown.” DraftKings even has enough scratch to pay Ed Norton to do their voiceover work! 

I have never played daily fantasy sports, but their legality has always unquestionably been a fascinating subject. Now, the industry’s two giants are forced to defend their honor after “a major scandal is erupting in the multibillion-dollar industry.” The Gray Lady’s words, not ours:

The statements were released after an employee at DraftKings, one of the two major companies, admitted last week to inadvertently releasing data before the start of the third week of N.F.L. games. The employee, a midlevel content manager, won $350,000 at a rival site, FanDuel, that same week.
The data that DraftKings acknowledged was released by its employee, Ethan Haskell, showed which particular players were most used in all lineups submitted to the site’s Millionaire Maker contests. Usually, that data is not released until the lineups for all games are finalized. Getting it early, however, is of great advantage in making tactical decisions, especially when an entrant’s opponents do not have the information at all.

Hooooooo boy. From my understanding, DraftKings and FanDuel utilize fairly similar game formats. If a DraftKings employee were to use his company’s information for personal gain on another site — a spokeswoman said the company is sure Haskell didn’t do that here, for what it’s worth — it would look a whole lot like insider trading. For example, knowing which individual players are being routinely passed over (Darren Sproles, for instance) represents a massive advantage over the general public that you are competing against. The general public is risking money under the belief that the playing field is level. 

Employees of both companies were allowed to play on other daily fantasy sites until late Monday when they were temporarily prohibited from doing so. Here is what the DraftKings/FanDuel joint statement said in response to any insider trading suspicion:

“Both companies have strong policies in place to ensure that employees do not misuse any information at their disposal and strictly limit access to company data to only those employees who require it to do their jobs,” the statement said. “Employees with access to this data are rigorously monitored by internal fraud control teams, and we have no evidence that anyone has misused it.”

If you want to read a legal expert explain the whole dynamic, I recommend Michael McCann’s piece over at Sports Illustrated:

The bottom line: DFS appears legal under federal law because it is mainly about skill, but there’s a good argument that this same logic should lead to the federal legalization of sports betting. DFS may also attract legal and political attention over insider trading allegations. So don’t place your bet—or entry fee—on laws that regulate sports betting and fantasy sports staying the same.

Stay tuned on this one.

Follow Rich on Twitter: @rich_hofmann