FanDuel Turns to Ex-Attorney General in Fantasy Sports Probe

  • Former AG Mukasey is asked to conduct internal review
  • DraftKings, FanDuel staff under scrutiny over proprietary data

The multibillion dollar fantasy sports-betting business, under new law-enforcement glare, is calling in the big playmakers.

FanDuel Inc. said Wednesday it is asking former U.S. Attorney General Michael Mukasey to review of the company’s policies and standards and is creating a new internal advisory board to be led by former Manhattan U.S. Attorney Michael Garcia. Rival DraftKings Inc. said it has hired the ex-top prosecutor in Massachusetts, John Pappalardo, and lawyers from his firm to conduct an internal review.

FanDuel’s outreach to two attorneys, who were among the nation’s top prosecutors during the administration of former President George W. Bush, comes as it and DraftKings face scrutiny over a business that lets sports fans wager on athletes’ performance. New York state’s top lawyer, Attorney General Eric Schneiderman, said on Tuesday he launched a probe into allegations that employees of the two companies may have used in-house data to place personal bets.

Both companies issued statements announcing new legal help after receiving the letters from Schneiderman.

DraftKings spokeswoman Sabrina Macias said her firm “will fully cooperate” with Schneiderman’s inquiry.

FanDuel said it looks “forward to speaking with regulators across the nation about how to define the right set of rules for our industry as it continues to grow.”

A spokesman for Mukasey’s law firm, Debevoise & Plimpton, didn’t have an immediate comment. A spokeswoman for Garcia’s firm, Kirkland & Ellis, didn’t immediately respond to a request for comment. A call to Pappalardo’s firm, Greenberg Traurig, wasn’t immediately returned.

Player Roster

Schneiderman is the latest public official to take aim at daily fantasy sports sites. To play, competitors assemble a roster of real-life players; prizes are awarded based on how well that combination of real-life players perform on the field. Broadly, the daily and weekly games require an entry fee -- usually anywhere from 25 cents to $1,000 –- and prizes can reach millions.

Whether this constitutes sports betting, which is illegal in all but four states, has been a hotly contested issue. The 2006 legislation that prohibited online gambling made an exception for fantasy sports, which legislators said requires more skill than luck. That was before the advent – and massive growth – of daily fantasy sports.

“With little legal oversight and deep investments into these sites by the same professional sports leagues that oppose traditional sports wagering, these issues are ripe for congressional review,” Representative Frank Pallone Jr., a New Jersey Democrat, said in a statement.

Win Money

Schneiderman’s inquiry follows a New York Times story Tuesday that alleged a DraftKings employee may have used proprietary information to win money -- most recently, $350,000 on a $25 entry fee -- at FanDuel. The revelation unsettled other fantasy sports players, as well as investors in both companies, which are privately held and valued at more than $1 billion each.

DraftKings said in an earlier statement that it had investigated the incident with FanDuel and denied that its employee engaged in wrongdoing. FanDuel said that “at this time, there is no evidence that any employee or company has violated” rules governing sensitive data.

Still, the companies said they have decided to prohibit employees from participating in online fantasy sports contests for money while the industry develops a more detailed policy.

Major League Baseball said in a statement it was “surprised to learn that DraftKings allowed employees to participate in daily fantasy games. ” MLB officials have discussed the matter with DraftKings, pointing out that baseball players and employees are prohibited from participating in fantasy baseball games where prize money or other items of value are awarded.

Fantasy Investors

Major League Soccer, 21st Century Fox Inc. and Madison Square Garden have also invested in DraftKings, which raised $300 million in its most recent round of financing in July. FanDuel, founded in 2009, has brought in $363 million from investors including KKR & Co. LP and Comcast Corp.

The National Hockey League and National Football League team owners Jerry Jones of the Dallas Cowboys and Robert Kraft of the New England Patriots have also made investments in daily fantasy sports. The union that represents NFL players about a week ago signed a deal with DraftKings that allows its members to appear in the company’s ads.

The Fantasy Sports Trade Association also said the industry is working to develop a more detailed policy with regard to whether industry employees should be able to participate in fantasy sports contests on competitor sites.

According to the Times, DraftKings acknowledges that its employee, identified as a mid-level manager, also released data showing which players were most used in lineups submitted to the company’s Millionaire Maker competition. Having early access to such information could be a big advantage in making strategic decisions, allowing the person to take advantage of market inefficiencies such as a lower-cost player that isn’t utilized by many competitors.

‘Legal Questions’

Schneiderman gave the firms 10 days to respond to the inquiries. Although the letters do not cite specific statutes or indicate that the firms’ conduct was illegal, they state that the reports of the employee betting activity “raise legal questions relating to the fairness, transparency and security” of the firms and “the reliability of representations your company has made to customers.”

Schneiderman, who has begun consumer-focused investigations over the last two years, has the Martin Act at his disposal, an almost century-old law that gives him broad powers to target financial fraud in the state and a potent tool for targeting white-collar crime.

Mukasey worked as U.S. attorney general from November 2007 until January 2009 after serving as a federal judge in Manhattan, where he oversaw cases involving financial fraud and terrorism.

Garcia previously served as head of the investigatory arm of an independent ethics committee of FIFA, the world soccer governing body that’s now ensnared in a corruption scandal. A report by Garcia into voting on the 2018 and 2022 World Cups was released only as a summary in November, prompting him to quit in protest. He said the summary contained “materially incomplete and erroneous representations.”

Pappalardo was the U.S. attorney in Massachusetts from 1992 to 1993.

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