The two leading companies in the exponentially growing daily fantasy sports market are now facing a barrage of accusations of insider trading. This is after it was discovered that employees from one company were using insider information to play and win on the opposing site. Employees of these companies had the ability to access the accounts of users they knew to be “professional” daily sports gamers. They then used those picks as their own on the other website.
Additionally, FanDuel and DraftKings employees had the ability to know ahead of time the percentage of ownership of the available players and seek out inefficiencies in the market.
It has been reported that employees from FanDuel and DraftKings have accumulated over 6 million dollars in winnings.
FanDuel and DraftKings make their profits by placing entry fees on their contests. They return 90% of these fees in the form of prize money. In 2014, FanDuel and DraftKings combined for nearly 1 billion dollars in revenue, quadrupling their earnings since 2013. Suspicion about the level of cooperation between the two companies existed before this scandal erupted. As neither company sought to cut down their 10% rake in order to win customers from the other company.
Both companies spent tens of millions of dollars on advertising during the beginning of the 2015 NFL season, gaining more and more of the daily fantasy market share. Then, in October 2015, a class action lawsuit against FanDuel and DraftKings was made. This was after a DraftKings employee bragged on social media about making 350k in one week on FanDuel.
At the time the post was published, each company only banned their employees from playing on their own site, not the other. This policy has been changed by both companies now to not allow employees to play on any other competing site.
This first lawsuit filed (Johnson v. FanDuel) alleges that both companies violated Kentucky (the plaintiff’s home state), Massachusetts (DraftKing headquarters), and New York (FanDuel headquarters) law. The lawsuit was filed with state law causes of action. This is because it has already been determined that daily fantasy sports are not covered by the Unlawful Internet Gambling Enforcement Act of 2006. However, the state law claims included those of fraud, negligence, for not preventing these actions, and false advertising.
These accusations mostly stem from the fact that these companies made it appear that a user only had to be smarter than an average fan to win. When really they were going against insiders with advanced analytics. In reality, just over 1 percent of daily fantasy players earned 91 percent of all winnings in the first half of 2015.
The suggested class member in this case is anyone who put money in a DraftKings account before October 6, 2015. They also had to compete in a contest where employees of other daily fantasy companies participated. Given that millions of people play on DraftKings each week, this class size may be significant.
Ten days after the Johnson lawsuit was filed, suits were filed in other states alleging violations of fraud laws and consumer protection laws in Massachusetts, Louisiana, Illinois, and New York. These suits seek restitution of entry fees, interest on that money, and punitive damages as well. The case filed in Louisiana also accuses DraftKings and FanDuel for violating the Racketeering Influenced and Corrupt Organizations act (RICO). This would triple any damages awarded.
These is not DraftKings first lawsuit. Another one was filed in April, 2015, by a Massachusetts resident James Gardner. He claimed DraftKings falsely advertised in saying it would match his first deposit with a “100% First Time Deposit Bonus”. DraftKings slow releases its bonus. So in actuality the plaintiff would have to spend $250 in entry fees to obtain his full $10 bonus. He sued DraftKings for 5 million dollars. This case is still pending. Daily fantasy sites are also facing a cease and desist order in New York that may lead to litigation. As well as possible future Congressional hearings and Federal Trade Commission probes.