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Fantasy Sports Employees Bet at Rival Sites Using Inside Information

The New York Times logo The New York Times 10/5/2015 By JACQUELINE WILLIAMS and JOE DRAPE

An employee in the DraftKings offices last month. DraftKings and FanDuel said "both companies have strong policies in place to ensure that employees do not misuse any information at their disposal." © Stephan Savoia/Associated Press An employee in the DraftKings offices last month. DraftKings and FanDuel said "both companies have strong policies in place to ensure that employees do not misuse any information at their disposal." A major scandal is erupting in the multibillion dollar industry of fantasy sports, the online and unregulated business in which players assemble their fantasy teams with real athletes. On Monday, the two major fantasy companies were forced to release statements defending their businesses’ integrity after what amounted to allegations of insider trading, that employees were placing bets on information not available to the public.

Last week, a DraftKings employee admitted to inadvertently releasing data before the start of the third week of N.F.L. games, a move akin to insider trading in the stock market. The employee – a midlevel content manager — won $350,000 at rival site FanDuel that same week.

The incident has raised questions about who at daily fantasy companies has access to valuable data, how it is protected and whether the industry can — or wants — to police itself.

The leagues have been swelling in popularity, their advertisements blanketing football game broadcasts.

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The industry has its roots in informal fantasy games that began years ago with groups of fans playing against each other for fun over the course of a season. They assembled hypothetical teams and scored points based on how players did in actual games.

But in recent years, companies, led by DraftKings and FanDuel, have set up online daily and weekly games in which fans pay an entry fee to a website — anywhere from 25 cents to $1,000 — to play dozens if not hundreds of opponents, with prize pools that can pay $2 million to the winner. Critics have complained that the setup is hardly different from Las Vegas-style gambling that is normally banned in the sports world.

On MondayDraftKings and FanDuel, released a joint statement that said that “nothing is more important” than the “integrity of the games we offer,” but offered few specifics about how they keep their contests on the level.

A spokesman for DraftKings acknowledged that employees of both companies have won big jackpots playing at other daily fantasy sites. Late Monday, the two companies temporarily banned their employees from playing games or in tournaments at any other site.

“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,” the statement said. “Employees with access to this data are rigorously monitored by internal fraud control teams, and we have no evidence that anyone has misused it.”

This response did little to quell the discussion on social media or satisfy analysts and observers who wonder if daily fantasy games are pushing the boundaries of the exemption it received through a 2006 federal law that prohibited games like online poker but permitted fantasy play under lobbying from professional sports leagues. The games are legal in all but five states.

But because Congress did not foresee how fantasy sports would evolve, one member, Representative Frank Pallone Jr., Democrat of New Jersey, recently requested a hearing to explore the relationship between fantasy sports and gambling. “I really think if they had to justify themselves at a hearing they wouldn’t be able to,” Mr. Pallone said in a recent interview.

The data that was leaked by the DraftKings employee, Ethan Haskell, showed what particular players were most used in all submitted lineups of one of the site’s Millionaire Maker contests. Usually, that data is not released until the lineups for all games are finalized. Getting it early, however, is of great advantage to make tactical decisions, especially when your opponents do not have the information at all.

“The single greatest threat to the daily fantasy sports industry is the misuse of insider information,” said Daniel Wallach, a sports and gambling lawyer at Becker & Poliakoff in Fort Lauderdale, Fla. “It could imperil this nascent industry unless real, immediate and meaningful safeguards are put in place. If the industry is unwilling to undertake these reforms voluntarily, it will be imposed on them involuntarily as part of a regulatory framework.”

A spokeswoman from DraftKings said Haskell simply made a mistake and that the company was certain that he did not use the information improperly. She declined to go into specifics about the safeguards or the company’s auditing policies.

Both DraftKings and FanDuel had prohibited their employees from playing on their own company sites, but they do not restrict them from playing elsewhere. In fact, representative of both companies, acknowledged that many employees of daily fantasy companies were players first and had continued to compete on other sites. Ben Brown, a co-founder of Daily Fantasy Sports Report, was first to disclose that Haskell had posted the information.

“There’s a significant amount of crossover,” said Chris Grove, an industry analyst and editor of legalsportsreport.com. “The nature of the industry is so specialized and so new that at the speed which they grew they relied heavily on the player population.”

Many of these employers set the prices of players and the algorithms for scoring. In short, they make the market.

“It is absolutely akin to ‘insider trading” if anybody with access to non-public information is using access to that information to help them build successful lineups on other sites,” said Wallach. “It gives that person a distinct edge in a contest. There is a reason why operators prohibit their own employees from playing “real-money” contests on their own sites.”

In a little over a year, daily fantasy sports has blossomed into a multibillion dollar industry as its two main players, DraftKings and FanDuel, have become a cherished sponsor of M.L.B. and N.F.L franchises. They have dominated the airways with multimillion advertising campaigns as well as the national conversation over what exactly constitutes legal sports betting.

Eilers Research, which studies the industry, estimates that daily games will generate around $2.6 billion in entry fees this year and grow 41 percent annually, reaching $14.4 billion in 2020. So high are the potential financial rewards that DraftKings and FanDuel have found eager partners in N.F.L. teams, even as the league remains a staunch opponent of sports betting.

Jerry Jones of the Cowboys and Robert K. Kraft of the New England Patriots have stakes in DraftKings and the company recently struck a three-year deal with the N.F.L. to become a partner of the American football league’s International Series in Great Britain, where sports betting is legal. In addition, DraftKings has tapped hundreds of millions from Fox Sports and FanDuel has raised hundreds of millions of dollars from investors like Comcast, NBC and KKR.

Adam Krejcik, a managing director at Eilers Research, said early missteps are often part of booming growth in a new and often misunderstood sector like daily fantasy sports. He said whether Haskell, the DraftKings employee, made an innocent mistake or not the damage is done.

“Certainly does not look good from an optics standpoint and it strengthen the case for additional oversight and regulation,” he said.

Grove, of legalsportsreport.com, said this may be a watershed moment for a sector that has resisted regulation but now may need it to prove its legitimacy.

“You have information that is valuable and should be tightly restricted,” said Grove. “There are people outside of the company that place value on that information. Is there any internal controls? Any audit process? The inability of the industry to produce and clear and compelling answer to these questions to anyone’s satisfaction is why it needs to be regulated.”

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