DraftKings and FanDuel, the online fantasy sports companies at the center of a growing controversy over employees’ big winnings handicapping sports events, have been accused of racketeering in a lawsuit filed this week in Louisiana.
The suit, which was filed Tuesday and seeks national class-action status, is among at least four that have been filed in the past week amid disclosures that employees of each company have won more than $6 million playing in the other’s games, allegedly using insider information to gain an unfair advantage.
The companies operate under a provision of federal law that treats their competitions as games of skill, not chance — an argument that could be harder to make after the Nevada Gaming Control Board ruled Thursday that the games, called Daily Fantasy Sports, “constitute gambling under Nevada law” and are illegal without a state license (PDF).
Each of the four lawsuits seeks class-action status and alleges violations of numerous of federal fraud laws and consumer protection laws in the states where they were filed — Massachusetts, Louisiana, Illinois and New York.
All four suits seek full restitution of entry fees, actual damages plus interest and unspecified punitive damages.
The Louisiana case goes further, accusing DraftKings and FanDuel of engaging in corrupt enterprises under the Racketeering Influenced and Corrupt Organizations act, or RICO, the 1970 law that the federal government uses to pursue the Mafia and other organized crime gangs.
Under that law, any damages the plaintiffs win would be tripled.
FanDuel said it has asked former U.S. Attorney General Michael Mukasey to conduct a review of its internal controls, standards and practices, adding: “It’s our job to ensure that as our company grows, so does our ability to ensure that our fans can be confident in the sanctity and integrity of every game, every day.”
DraftKings said its policy is to take “strong and immediate action” based on the “specific circumstances” of any allegation. It said it has hired a legal team led by John Pappalardo, a former U.S. attorney for Massachusetts, to conduct an investigation.
The central allegation is that executives of both companies looked the other way — or, in some cases, joined in — while employees used their secret knowledge of which athletes competitors “drafted” into their fantasy teams to help identify the players they could then draft to build the most lucrative teams possible for themselves.
“The biggest edge any player can have comes from having data and information,” the Louisiana suit says. “DraftKings and FanDuel employees have access to both things, neither of which is public.
“For instance, DraftKings performs analytics to determine winning strategies, return on investment of certain strategies, and even how lineups on FanDuel would do if they were entered into DraftKings contests.”
The suit alleges that a “significant number” of big-time players in both companies’ games — players known inside the industry as “whales” — are employees and executives of the other’s company.
“Whales” make up about 1.3 percent of all Daily Fantasy Sports players, but they account for 40 percent of all revenue the companies collect in entry fees, making them cherished customers, according to the suit.
That’s why, the suit alleges, the companies blitzed the airwaves with more than $100 million each on TV ads at the start of the 2015 National Football League season, instantaneously making them two of the top television advertisers in the United States. They had to attract millions of new, inexperienced players likely to lose to keep their most profitable players happy, the suit says.
New York Attorney General Eric Schneiderman has opened a separate investigation, demanding that FanDuel and DraftKings identify all employees who compile statistics, set draft prices for fantasy sports players and compile information on fantasy players’ winnings.
As the backlash has grown, both companies last week barred employees from playing Daily Fantasy Sports “while the industry works to develop and release a more detailed policy.”
Comcast Corp., which owns NBCUniversal and NBC News, has invested in FanDuel.
M. Johnson