About that scandal over online fantasy sports leagues: It was only a matter of time

DraftKings

I make no claim to prescience. But the scandal erupting around online fantasy sports sites operating one-day paid leagues, i.e. gambling, seemed so likely I had to ask local fantasy guru Paul Charchian about it ​in a piece here last week​.

At that moment, the nut of the story about the startling rise of DraftKings and FanDuel and literally dozens of other on­line sports betting sites was about the money and huge numbers of people involved. But that all changed this past Monday.

The ​New York Times broke the story ​of a DraftKings employee, using the kind of sophisticated analytics Wall Street traders use, playing on the FanDuel site and winning $350,000. Predictably, regulators around the country jumped in front of cameras and promised investigations and crackdowns, while politicians, ​several from New Jersey —​ which has fumed forever about Atlantic City being prohibited from sticking its snout in the sports betting buffet line the same way Las Vegas does — vowed a whole new re­look at the muddled 2006 exemption that led to the current multi­billion dollar fantasy sports industry.

Charchian, who is president of the Fantasy Sports Trade Association — which has been mentioned frequently in news reports over the past few days — says he is on “press lockdown” and unable to comment on this week’s turn of events. That’s understandable given the displays of heated zealotry by regulators and politicians, but probably counterproductive if the association’s greater goal is to avoid being re­defined as a “luck­-driven”/gambling entity, subject to vastly more restrictions than it has operated under (and flourished) to date.

Everyone may have their own idea of the key issue in this episode, but it’s difficult to see how fantasy sports, even with the enormous investment of players like Comcast, numerous NFL (and other major league) teams and ESPN can prevent a redefinition of gambling under the Unlawful Internet Gambling and Enforcement Act of 2006.

A concise breakdown of the central “misconceptions” surrounding fantasy sports betting by ​Dustin Gouker at LegalSportsReport.com ​includes this:

Federal law says daily fantasy sports is a skill game

Truth­-o­-meter:​ False.

The other legal matter that the media seems to gloss over, and that many in the DFS industry seem to rely upon, is the carveout for daily fantasy sports that exists in federal law, via the ​Unlawful Internet Gambling Enforcement Act​. We’ve seen a lot of ​references to fantasy sports being called a skill game at the federal level​.

What the UIGEA actually says is that ‘participation in any fantasy or simulation sports game’ is exempted from being called a ‘bet or wager’ as long as it ‘meets the following conditions’. One of those conditions:

(II) All winning outcomes reflect the relative knowledge and skill of the participants and are determined predominantly by accumulated statistical results of the performance of individuals (athletes in the case of sports events) in multiple real­-world sporting or other events. No reading of the UIGEA can lead one to believe that the law expressly says that ​fantasy sports are a skill game​. More simply, UIGEA speaks to the matter of ‘if’ DFS contests involve skill, not ‘because’ they involve skill. The UIGEA, in essence, ​just passes the buck to the states.​ Are DFS contests likely to be considered a skill game in a lot of states? Definitely. Federal law, however, says nothing about whether a DFS contest is actually a game of skill. It just allows them to be categorized as such by states.

Several other analyses argue the same point. Namely, that no one in 2006 had any idea how big and elaborate this industry would get and therefore made no provisions to regulate it. The consensus is clear on one thing. That will change.

As interesting to players and fantasy laity alike (I count myself among the latter) is the closer look we get into who is most likely to win, big, by playing these on­line games. Anyone who has watched the American economy over the past 10-­15 years could give you a good, survivor’s guess and say, “Uh, I’ll go with the guys and gals with the most time, devotion and computing power. They’ll grab most of dough.”

In a column in The New York​ Times’ Upshot blog​, Neil Irwin tossed $100 into fantasy “gaming” and made a couple of salient observations:

What I found is the strange hypocrisy and inconsistency around gambling that is embedded in United States law. The rules actively work against the interests of casual sports fans and low­-stakes gamblers like me who just want to make the games more interesting.

The very complexity and opacity that make daily fantasy sports legal also make it more likely that the casual fan will lose money. There is a truism in investing that complexity favors the big guy and disadvantages the little guy, and it applies here as well. If securities laws were like gambling laws, it would be illegal for people to buy shares of Google or a United States Treasury bond, because that would be gambling, but legal for them to invest in currency swaps that pay a return if the Swiss franc, Argentine peso and Vietnamese dong together outperform the Swedish krona, Mexican peso and South Korean won. …

Although daily fantasy sports advertisements target casual fans, a disproportionate share of the contest entries — and even more disproportionate share of the winnings — go to people who play the game on a scale most armchair sports fans couldn’t imagine. An​ analysis of Major League Baseball contests​ by Ed Miller and Daniel Singer published in the Sports Business Journal found that 1.3 percent of fantasy players paid $9,100 in entry fees on average, accounting for 23 percent of all entry fees and 77 percent of all profits.

You’re shocked, I know, that once again in a rapidly inflating bubble market the smart kids on the inside are picking off the choicest fruit.

The gloom that the Wild West­-style glory days will soon be over pervades even fantasy sports’ most avid devotees. On USA Today’s ​ForTheWin blog, Nate Scott ​writes: 

It’s worth taking a moment to address a specious argument and say that, unequivocally and without doubt, daily fantasy is gambling. You give someone money, and based on outcomes outside your control, you can win more money. That is gambling. …

This was bound to all come falling down eventually. DraftKings and FanDuel found a loophole in the gambling laws in this country, and that loophole will be closed. Whether or not you agree that gambling on sports should be legal, it’s not hard to see that these daily fantasy sites couldn’t go on existing with a different set of rules than everyone else. Daily fantasy will continue to exist in the future. But the world we know now, where DraftKings and FanDuel operate in world without regulation, is fast on its way out.

On the other hand, after 2008 we heard a lot of talk about getting a tight grip on Wall Street. How has that worked out?

Comments (1)

  1. Submitted by David Zeller on 10/09/2015 - 07:32 pm.

    Daily Fantasy

    Montana, outlaws Daily Fantasy sites, ya know why?

    Because they run their own Daily Fantasy site. These things are as much of a crapshoot as playing Powerball or Scratch-Off tickets!

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