Daily fantasy esports sites, ESPN, and regulators respond to the ‘insider betting’ scandal

Full disclosure: I have spent $75 on FanDuel over the last year, and I have asked for my money back as part of the site’s money-back guarantee. 

It’s starting to feel like most people who play daily fantasy sites only exist to give their money to the smartest and most informed 1 percent. And new allegations could scare away many of the casual players.

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Wednesday, The New York Times put the $3.8 billion (according to Fantasy Sports Trade Association) daily-fantasy sports industry on blast with a report on scandalous “insider betting,” and this is shining a lot of light on everyone involved with daily fantasy and daily fantasy esports. To avoid the appearance of impropriety, sites like Vulcun and Draftpot, which are both involved in running daily fantasy matches for competitive gaming, have come out explicitly stated that they do not allow its employees to play any fantasy sports if they come into contact with sensitive information. Even ESPN, the cable sports network, has had to make moves to avoid getting dragged down by this story. Earlier yesterday, the network announced it is pulling the DraftKings-sponsored segments from its shows during a broadcast of its investigative-reporting program Outside The Lines.

This scandal could have far-reaching implications. But it is unlikely to slow down investor interest in the sector, according to senior research analyst Robin Riddell of intelligence-firm Pitchbook.

“From an investor standpoint this event is unlikely to change anyone’s behavior,” Riddell said in a comment provided to GamesBeat. “It does introduce a larger regulatory risk but any investor looking at this is going to be well aware and comfortable with it.”

But if this isn’t scaring away investors, maybe it could put some fright into potential players.

“This could cause headwinds for short-term user growth and put an increased focus on regulation in the industry,” said Riddell.

That regulation could also increase the friction points for players, which could decrease revenue. Riddell, however, doesn’t think that is likely for one very big reason.

“But I don’t foresee any substantial regulatory changes due to the fact that professional sports leagues have a vested interest and will be lobbying against excessive regulation,” he said.

If you don’t understand what warrants all this talk of regulation, think of it like insider trading on Wall Street. The fundamental problem is that certain people at each site (DraftKings and FanDuel) had information that could give them a tactical advantage in daily fantasy sports play. And some of those people used that information to play certain lineups on the other site. DraftKings admitted that one of its employees won $350,000 the same week that he inadvertently released some of the proprietary data he had access to.

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This data, according to The New York Times report, is mostly about which pro players the community is playing the most. With this information, a person could avoid a situation where they can’t get ahead of the crowd because most other people have the same core lineup.

That is especially problematic for daily fantasy games because, as Bloomberg reported last month, a tiny percentage of players win the bulk of the money on these sites. These fantasy-sports 1 percenters have built advanced statistical models and bots to help them enter and manage hundreds of entries.

Here’s the most alarming stat from the Bloomberg report: Analyst firm Rotogrinders tracked thousands of daily-fantasy players, and it found that the top 10 players (that it tracked) won daily-fantasy matches 873 times every day. Meanwhile, the rest of the field — approximately 20,000 players — won only 13 times.

And now, it seems likely that some of those top players may have had more information than you did.

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With all of this in mind, the companies in this space are scattering to reaffirm their integrity in the eyes of the public.

DraftKings issued a statement yesterday that claims its aforementioned employee that won $350,000 on FanDuel could not have used its information to gain an unfair advantage. DraftKings explained that its employee “did not receive the data on player utilization until 1:40 p.m. ET on Sept. 27.” FanDuel locks its lineups at exactly 1 p.m. Eastern.

“This clearly demonstrates that this employee could not possibly have used the information in question to make decisions about his FanDuel lineup,” reads the DraftKings Statement. “Again, there is no evidence that any information was used to create an unfair advantage and any insinuations to the contrary are factually incorrect.”

But as DraftKings tries to clear one of its own of wrongdoing, FanDuel and others are coming out and banning their staffs from playing fantasy sports on competitors’ websites.

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Here’s FanDuel’s statement:

“We are temporarily restricting employees from participating in DFS contests as an interim measure while we work with the fantasy industry to develop and implement a more formal policy.”

But none of this has satisfied local governments and regulators. We asked the office of New York attorney general Eric Schneiderman for a comment on this scandal, and it pointed us to a comment he made on the National Public Radio program The Takeaway yesterday.

“It’s something we’re taking a look at,” he said. “Fraud is fraud. And, consumers of any product … whether you want to buy a car, participate in fantasy football, our laws are very strong in New York and other states that you can’t commit fraud. This is another example of the cleverness and the real, sort of, deviancy that goes into some of these fraud schemes … I don’t have comments on the specifics of that matter at this time. But fraud is fraud and we’ll investigate it wherever we find it.”

Schneiderman’s office has sent letters to both FanDuel and DraftKings asking for cooperation in an inquiry. Primarily, the AG wants a list of names of people in both companies who have access to sensitive information.

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New York isn’t the only state looking into all of this. We reached out to the Massachusetts Gaming Commission, since DraftKings is headquartered in Boston, and it provided GamesBeat with the following statement:

“Attorney General [Maura] Healey is carefully considering the legality of fantasy-sports activity. The Commission, as required by statute, is continuing to monitor federal activity regarding all Internet gaming. The Commission will coordinate with the Legislature, members of the Executive Branch, and constitutional officers to protect the interests of the Commonwealth’s citizens.”

On the daily-fantasy esports side of things, we’re seeing similar statements.

Vulcun, one of the first companies to run daily-fantasy games for League of Legends and Counter-Strike: Global Offensive, provided GamesBeat with the following comment from chief executive officer Ali Moiz:

“Insider [betting] is strictly forbidden at Vulcun. Employees are not allowed to play any Fantasy esports at Vulcun or at any other site. We also heavily restrict who has information within the company. The events happening today at Draftkings and Fanduel are unfortunate, but we are confident that they will put in better policies and controls to remedy. As an industry, we need to do a better job of not allowing any employees to play daily fantasy sports on any site.”

Draftpot, a daily-fantasy upstart that also works with League of Legends, echoed Moiz’s sentiments in a statement provided to GamesBeat from chief executive officer Joey Levy:

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“Draftpot maintains the utmost integrity of its business operations. Access to our most sensitive data is highly restricted to only those employees who must access it as part of their job, and all employees are bound by written confidentiality agreements not to disclose or use any confidential information other than as required by their job responsibilities. Furthermore, employees who have access to confidential data that could be considered advantageous to a participant in a daily fantasy sports contest are prohibited from participating in any DFS contest, and all other employees are prohibited from participating in any DFS contest except with the written permission of the CEO for job-related purposes only. Failure to comply, for whatever reason, will result in immediate dismissal from Draftpot.”

Finally, we reached out to ESPN for comment considering DraftKings has agreed to spend millions of dollars on advertising on the networks many channels. ESPN confirmed that it has pulled the DraftKings logo from its “news and info programming.”

Here is ESPN’s official comment:

“It is a standard procedure for us pull these kind of sponsorships and integrations when we are covering breaking news. We look to avoid any suggestion of influence on our coverage.”

ESPN says it will examine the situation on a day-to-day basis with the possibility of bringing back the sponsored segments.