Insider Trading?

Fantasy Sports Exec: DraftKings and FanDuel Scandal Shows We Need Regulation

With employees of the biggest sites accused of using proprietary information for profit, a rival exec says the industry ‘clearly’ needs oversight.

New York’s attorney general has opened an investigation and two U.S. lawmakers are reapplying pressure for a federal inquiry amid widespread allegations of insider trading between FanDuel and DraftKings, the two largest fantasy sports websites in the world.

And now one fantasy sports site COO tells The Daily Beast he’d welcome some regulation to make sure the “watershed moment” that happened this week—when one DraftKings employee won $350,000 on rival site FanDuel, potentially using information not available to the public—can’t happen again.

“Clearly this shows a need for some sort of oversight, whether it’s governmental or nongovernmental, as long as it’s not onerous and imposed on the industry by people who don't understand it,” Star Fantasy Leagues COO Seth Young told The Daily Beast.

Rep. Frank Pallone (D-NJ) and Sen. Bob Menendez (D-NJ) implored the Federal Trade Commission on Tuesday to investigate whether these companies are participating in “unfair or deceptive practices.

“These reports raise serious questions about the integrity of these online fantasy sports websites, and it raises the question of whether there are sufficient consumer and competition safeguards to protect the integrity of these online games,” they said in a statement provided to The Daily Beast.

Earlier this month, Pallone called for a congressional hearing on the burgeoning billion-dollar industry and questioned why it wasn’t considered gambling.

Fantasy sports sites such as DraftKings and FanDuel charge participants a fee to build virtual teams of professional players and score points against other online competitors—and win money—if the real professional players perform well in real games.

“Fans are currently allowed to risk money on the performance of an individual player,” Pallone said. “How is that different than wagering money on the outcome of a game?”

In their letter Tuesday, the congressmen note the specific insider trading allegations that had been speculated upon for months—but did not become a public relations crisis until Tuesday.

“According to one industry employee quoted by Legal Sports Report, many of the top moneymaking players at these sites ‘are employees—often executives—of other sites,’” they wrote.

The editor of Legal Sports Review, which published that report, said he agrees with Pallone that something needs to be done to stop, or at least investigate, what appears to be flagrant abuses of the system.

“I think that it’s clear that some sort of external oversight body needs to be introduced and it has to have both complete visibility into the inner workings of all of these operators and some sort of punitive levers that can be pulled on to ensure liability,” Legal Sports Review editor Chris Grove told The Daily Beast.

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At issue is a data breach that showed DraftKings and FanDuel employees had access to proprietary information—specifically how many teams “owned” which specific players each week—and that those employees potentially could have used that information to win big where others couldn’t.

“When people think about this information and sports and wagering, they always want to point to match fixing, but it’s not like that,” Grove said. “You put yourself in a better position to have better results over the long run. It doesn't guarantee you a win. But if you imagine a paramutual wagering pool, it logically follows that if some participants have perfect or near perfect info, there will become systems he will be able to exploit. It gives you power within the system.”

It’s information that would likely help the richest players get richer and limit the number of random, one-off winners so often portrayed in DraftKings and FanDuel advertising. Some of those ads are then written into news stories with headlines like “Guy with One Tooth & Broken Back Wins $2 Million.”

In reality, according to RotoGrindrs and Bloomberg, the top 100 players win 330 times a day. The top 10 win 873 times a day. The remaining 20,000 people, like the guy with one tooth and a broken back, win 13 times in the same timeframe.

According to Bloomberg, that is due to players stacking the deck by fielding every possible desirable lineup and sometimes running scripts to automatically update their teams by taking injured players out of sometimes hundreds of entries at once.

“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,” DraftKings and FanDuel said Monday in a statement posted on their websites. “Employees with access to this data are rigorously monitored by internal fraud control teams, and we have no evidence that anyone has misused it. However, we continue to review our internal controls to ensure they are as strong as they can be.”

Young, the Star Fantasy Leagues executive, said stacking the deck is the sort of thing his company was built to stop and may have prevented Star Fantasy from developing a foothold in the industry.

“There’s a reason you don’t see this coming out of our camp. We chose to walk before we ran. Some of our competitors decided to run,” he said.

Young believes that’s why his company was forced to change its business strategy to compete.

“We started as a customer-facing business. We pivoted out of necessity because we didn't raise hundreds of millions of dollars,” Young said. “We wanted to be transparent and have everything be traceable to stomp out data breaches.”

Until this week’s scandal, he said he thought the industry had “done a great job of self-regulating.” But now he realizes there will likely be changes.

“I’m quite interested at this point in providing that transparency. We've been working really hard to make sure these don't happen with these systems,” he said. “It’s a shame that this is a black mark on all of it.”

Grove, for one, said regulation is necessary—and fast. And with DraftKings spending more ad money than any company in the United States over the past week—one ad every 90 seconds on television—he thinks the industry may have brought the scandal down on itself.

“They cranked up a megawatt spotlight on the industry and didn’t consider, after they turned it on, that they weren’t going to be the ones who got to decide how it turned off,” he said.