Unless you live under a rock, chances are that you have seen (several) commercials for the fantasy sports operators FanDuel and DraftKings. The ads feature testimonials from “real” players who happily report that they have won money week after week playing fantasy sports after only paying minimal fees. Some say they have won hundreds of thousands of dollars. And, in tiny print at the bottom of the television screen is a statement that the average player wins about $20 a week. It is simply astonishing how much marketing both companies are promoting, especially this football season.
When something appears too good to be true, it usually is. That is what the U.S. Justice Department, Federal Bureau of Investigation and some states’ Attorneys General are trying to find out. Specifically, the agencies are trying to determine if the business models of the companies violate federal law. The probe is now in the preliminary stages.
Basically, the model is as follows: customers pay an entry fee and then draft virtual sports teams that compete against other customers for money based on the actual performances of athletes.
In 2006, Congress passed legislation that prohibited financial institutions like banks or credit card companies from transferring consumers’ money to online gambling sites. Several sites thereafter shut down. However – “games of skill” were exempted from the law. Fantasy sports site operate under that exemption.
The essential question the Justice Department is trying to answer is whether these games are in fact gambling and should therefore not enjoy the benefit of the exemption. No decision has yet been made.
Hundreds of millions of dollars have flowed into the booming industry with major players such as Google, Comcast, 21st Century Fox and News Corp investing huge amounts of money. It is estimated that FanDuel and DraftKings are presently valued at more than $1 billion each.
The latest investigation was prompted when a DraftKings employee admitted on a message board that he released sensitive data prematurely. Interestingly, that same week, he won $350,000 on FanDuel. DraftKings claims the incident was an accident and both companies claim that the employee did not benefit from “insider” information.
A DraftKings spokeswoman said in a statement that, “It is entirely predictable that the government would follow up on the misleading reports about our industry. We have no knowledge of the specifics of any federal investigation but strongly disagree with any notion that our company has engaged in any illegal activities.”
Both companies adamantly maintain that fantasy sports are games of skill and not luck and should therefore be exempted from the 2006 legislation.
In the meantime, the New York and Massachusetts Attorneys General are requesting droves of internal information from the companies on how they price their athletes, win/loss records of players and details on their policies for preventing fraud.
The companies have until Thursday to respond.
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