FBI and Justice Department Investigating Fantasy Sports

Football, Computer, and NotebookThe Wall Street Journal reports that the FBI and the US Justice Department are investigating the business model of daily fantasy-sports operators to determine whether they violate federal laws.

The Journal reports that FBI agents have contacted customers of DraftKings Inc.

With daily fantasy sports games, players pay entry fees in order to draft “virtual teams” based on the statistics of real players. These virtual teams them compete against each other for cash prizes from $22 to $2 million.

In 2014, 1.5 million Americans spent more than $1 billion on entry fees.

Online Gambling

The Unlawful Internet Gambling Enforcement Act of 2006 outlawed online poker and sports betting. Despite the law, online gambling is thriving thanks to offshore virtual casinos.

Under the law,

“The term ‘bet’ or ‘wager’ … does not include …participation in any fantasy or simulation sports game or educational game or contest in which (if the game or contest involves a team or teams) no fantasy or simulation sports team is based on the current membership of an actual team that is a member of an amateur or professional sports organization...”

Games of Skill?

Fantasy sports have been considered games of skill and thus exempt from gambling laws. However, the investigators are looking into whether the games should actually be considered gambling.

Recently, an employee of DraftKings admitted on a message board that he’d prematurely released sensitive information about one of the company’s contests. The same week, the employee won $350,000 on another fantasy gaming site, FanDuel.

DraftKings and FanDuel are the leading daily fantasy sports game operators and each company is valued at more than $1 billion.

Company employees often rank among the biggest winners of the games, according to the New York Times.

Sports Business Daily reported that during the first half of the past year’s Major League Baseball season, 1.3% of the players won 91% of the prizes.

On average, the top 1.3% of players earned a profit of $2,400 (27%) as well as recovering their investment of $9,100.

The top 11 players on average paid $2 million each in entry fees and earned profits of $117,000. Many professionals use automated systems that let them change hundreds or thousands of lineups in seconds.

Amateur players can’t easily compete and most players lose. 80% of players lost $25 on their entry fees of $49, on average. 5% of players lose more than $4,000 per year.

According to another article in the Journal, both Yahoo Inc. (which runs its own fantasy sports games) and the National Hockey League have banned their employees from playing fantasy sports games.

Gambling Problems

The New York Times reports that Nevada regulators have ruled that daily fantasy sports games should be considered gambling rather than games of skill. The state ordered DraftKings, FanDuel, and similar sites to stop operating in the state until they receive state gambling licenses.

The Times has launched a major investigation of online fantasy sports games, noting:

Today, young men, the most susceptible to becoming problem gamblers, are using the Internet to risk thousands of dollars daily on sports without the legally mandated safeguards that casinos and regulated sports books must follow.

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