COMPANY SCALES BACK DAILY FANTASY
StarsDraft’s profile unlike industry’s big two
DraftKings and FanDuel have a decision to make. As legal thunderclouds continue to darken the skies of daily fantasy sports, should these companies continue to conduct business as usual?
Or should they change direction and reduce their risks, including potential prosecution?
Their answer so far has been to stay the course and insist that they are a legal business in 44 states. But a smaller competitor — StarsDraft — sees it much differently. In light of recent developments, StarsDraft has pulled out of all U.S. states except four where it thinks the law is firmly on its side: Kansas, Maryland, Massachusetts and New Jersey.
The company’s owner, Amaya Inc., issued a statement Wednesday to USA TODAY Sports but declined to comment further.
“We believe that the regulation of daily fantasy sports in America is inevitable because it is the right model to protect consumers, create a viable, long-term marketplace and provide appropriate oversight and taxation,” said Eric Hollreiser, Amaya’s vice president of corporate communications. “Those who oppose this regulation and are not willing to submit to the government oversight must have their motives called into question.”
Amaya is a large international gaming company that has a much different risk calculus than FanDuel or DraftKings. For example, it might not notice any negative financial impact from this decision because its daily fantasy site is much smaller and generates only a tiny portion of its revenue.
But Amaya had reason to worry based on history. The company owns online poker sites that were shut down in 2011 when the feds cracked down on online gambling and seized their assets.
By pulling up stakes in other states now, it’s hoping to avoid the risk of bigger losses later — a risk that could increase for the rest of this unregulated industry.
“The law (with daily fantasy sports) is unsettled, and we don’t know if there’s going to be federal regulations or 50 different states with 50 different regulations,” said Nellie Drew, a sports law expert at the University at Buffalo.
The downside in the meantime remains uncertain, though it could include criminal penalties. Among other investigations, a federal grand jury in Florida has been looking into whether the industry is violating the Illegal Gambling Business Act, according to Daniel Wallach, sports and gambling attorney at the firm Becker & Poliakoff in Florida.
“That level of uncertainly creates great risk for the industry because of the prospect of seizure of assets,” Wallach said. “It could be a game-changing development for a defendant that is convicted of a violation of (federal law). There’s a lot of risk here, but it’s far from certain.”
To avoid this uncertainty, Amaya wants regulation, unlike its competitors. But legal lightning is in the air, forecasting change. Last week, Nevada declared daily fantasy sports to be gambling operations and banished them unless they got licenses to operate there. The FBI also is looking into these companies. And that’s just the tip of it. More states are considering action, and more than a dozen federal lawsuits have been filed against the companies in the last few weeks with claims that in- clude fraud and racketeering.
The companies say they are legal under a 2006 federal law that cracked down on online gambling but exempted paid fantasy sports under certain conditions.
One of those conditions is that the games should be based on skill and not chance. DraftKings and FanDuel set up shop based on this exemption and grew into $1 billion start-ups. Amaya, by contrast, says it is the world’s most licensed online gaming operator and just recently entered the U.S. daily fantasy market.
A recent onslaught of television ads raised daily fantasy sports’ public profile. To some lawmakers, it sounded like sports gambling. Then, a data breach involving a DraftKings employee brought more scrutiny. The employee, Ethan Haskell, won $350,000 on FanDuel the same week that he mistakenly leaked valuable insider data on player ownership. DraftKings said an investigation found no wrongdoing, but the damage was done.
These companies “should be talking to their lawyers,” Drew said. “And it better be good lawyers.”