Sports wagering:

Turmoil in daily fantasy sports spreads beyond DraftKings, FanDuel

Industry insiders, experts differ in opinions on how to regulate industry

Associated Press

In this Dec. 1, 2015, photo, an ad for daily fantasy sports operator DraftKings is displayed in a subway station in Philadelphia. The fantasy sports field is dominated by DraftKings and FanDuel, but there are other players.

The ongoing debate about whether and how the daily fantasy sports industry should embrace regulation doesn’t center entirely on major operators FanDuel and DraftKings. Turmoil related to smaller sites has added fuel to the fire, too.

FanDuel and DraftKings together control the vast majority of the daily fantasy market, and they were the subjects of a major industry scandal last fall when allegations of activity tantamount to insider trading ushered in a wave of public scrutiny. But two recent instances of small websites shutting down, leaving players without access to their funds, also have led some experts to call for strong regulation of the industry.

In January, the site FantasyUp said it was closing, telling users it did not have the funds necessary to process all of their withdrawals. That called into question whether customers who were owed money by the site would ever be able to recover their money.

FantasyUp said in an email to customers that it had “essentially paid players” to use its platform, expecting that the industry would continue expanding and that a “financing deal” would help the site grow, according to the website Legal Sports Report, which closely monitors the daily fantasy sports industry. The email further explained that FantasyUp almost sealed such a deal months earlier, but it was delayed.

“Over the following weeks, the industry saw numerous legal issues arise, increasing the cost of doing business and the decreasing the ability to raise funds,” the site said. “FantasyUp no longer has the capital to fund even minimal operations.”

In an instance of good timing for customers of FantasyUp, help came along not much long after that. In early February, fantasy sports provider iTeam Network announced that it was stepping in to restart FantasyUp and reinstate all players’ accounts.

Experts say FantasyUp’s case indicates that the site wasn’t keeping players’ money separate from its operating funds — something that strong regulation could have prevented.

iTeam Network CEO Gabe Hunterton, who is based in Las Vegas, said the issues sent a clear signal to other daily fantasy operators.

“It’s a very, very clear-cut indication that our industry needs regulation,” he said. “If we are to be holding customer money, then we need to be worthy of that customer trust.”

It wasn’t much longer before something similar happened to another small daily fantasy operator. Two weeks ago, FantasyHub said it was suspending operations, though it claimed to be talking to a “strategic 3rd party” about the future of the site and its players.

Hunterton couldn’t say whether his organization would try to rescue FantasyHub the same way it did with the other site. And while the details of FantasyHub’s situation remain unclear, its case was arguably more controversial because, unlike FantasyUp, it was a member of the Fantasy Sports Trade Association. The trade group’s paid operator charter states that sites are supposed to keep player funds separate from operating funds.

“We continually make it clear that it’s never OK to spend prize money,” Paul Charchian, the trade association’s president, said in a statement after FantasyHub shut down. “The legislation we are proposing in each state has provisions for regulating and auditing (daily fantasy sports) companies to ensure that prize obligations are not mixed with other company funds.”

But Chris Grove, the Las Vegas-based publisher of Legal Sports Report, wrote that the trade association was really advocating for bills that “would do absolutely nothing” to prevent the situation at FantasyHub from happening again. He called the kind of oversight pushed for by the trade association “effectively self-regulation by another name.”

Grove said in an interview that fantasy sites like FanDuel and DraftKings were likely motivated to support legislation they believed would advance quickly.

“They need to reduce the amount of legal ambiguity around their product, and they need to do it in a hurry,” he said. “The longer the ambiguity stretches on and the deeper it becomes, the more uncertain the outlook for their company becomes.”

And FanDuel and DraftKings aren’t likely to embrace the kind of stringent oversight that gaming regulators have required of more traditional operators. After the chairman of Nevada’s Gaming Control Board said last year that daily fantasy sports was gambling under state law and required a license to operate, the sites quickly exited the state. FanDuel and DraftKings also are locked in a legal battle now with New York’s attorney general over whether their businesses violate that state’s gambling laws.

Some 30 states have taken up legislative efforts about daily fantasy sports, according to Legal Sports Report. Daily fantasy sites do not operate in a handful of states where they are generally considered illegal under state law.

Hunterton spent years working in the casino industry, with stints at MGM Resorts International and at Galaxy Entertainment Group in Macau. At the very least, he said daily fantasy operators should be able to agree on a “fundamental set of rules” based around segmenting customer funds from operating funds, assuring the integrity of games, keeping customer data secure and verifying the age and location of players.

But even that approach presents challenges. Seth Young, the chief operating officer of another smaller daily fantasy provider, Star Fantasy Leagues, said attempts to create a uniform set of standards hadn't worked because “not everybody has the same goals” in the daily fantasy industry. He has advocated for a different approach: empowering financial institutions — think banks and payment processors — to regulate daily fantasy sports.

“If they are satisfied that sites are taking the appropriate measures, and they know what they’re checking for, and it’s in line with other regulatory regimes, then why not?” Young said.

In any case, Hunterton said that resisting regulation entirely would come “at the great peril of the daily fantasy sports industry.” He said the industry was already extremely popular and should continue to grow substantially, “but that can only happen with regulation.”