FBI Daily Fantasy Sports Probe: Customers Aren't Scared, But It Could Change DraftKings, FanDuel's Business Models

Zac Manafort, a longtime daily fantasy sports enthusiast from Alexandria, Virginia, wasn’t worried this week when he heard the FBI and Department of Justice were investigating the daily fantasy sports business. In fact, the widely publicized inside information leak and ensuing federal probe all but assure that he’ll continue to enter the contests.

"I feel that if the FBI is involved that a thorough job will be done to ensure there are no illegal activities occurring, and if any are found that they are corrected and held accountable," said Manafort.

Plenty of daily fantasy sports players agree with him. DraftKings and FanDuel drew a record 7.1 million entrants and a combined $45 million in entry fees for their daily fantasy sports contests last Sunday alone, even as state investigators and federal lawmakers questioned the companies' practices.

But the entry of the FBI and the Department of Justice into the fray is a “huge game changer” that could dramatically affect the way companies like FanDuel and DraftKings do business, according to H. Brian Holland, a professor of law at Texas A&M University.

“As long as we’re in the quiet phase of the investigation, where the DOJ and the FBI aren’t releasing a lot of information, you may not see an immediate consumer response. But what you might see is some changes in the games themselves," Holland said.

FBI officials in Boston are contacting daily fantasy sports customers this week as part of an inquiry into the legality of DraftKings’ business model, the Wall Street Journal reported. The probe became public knowledge days after Ethan Haskell, a mid-level DraftKings employee, accidentally leaked inside information about fantasy football lineups the same week he won $350,000 in a FanDuel contest.

Manafort, a 32-year-old government worker from Virginia, has played daily fantasy sports for much of the last two years, wagering anywhere from $30 to $300 daily on everything from Major League Baseball games to PGA golf tournaments. And he has no intention of stopping, even as federal lawmakers express concern about consumer fraud and internal protocols in a largely unregulated industry.

“While some players may have had inside information, it still has proven to be a fun way to keep my interest up in all sports, in addition to providing a little extra income on the side,” Manafort. “Additionally, I hope at the end of the investigation that anything negative that is found will be corrected and policies put in place to avoid these things from happening in the future.”

FanDuel and DraftKings are two of the industries’ most successful operators, each drawing hundreds of millions of dollars in private investments and securing partnerships with the United States’ top professional sports leagues. The companies, which are each valued at more than $1 billion, have operated legally under the 2006 Unlawful Internet Gaming Enforcement Act, a federal statute which exempted fantasy sports from online gambling bans.

Federal investigations into the daily fantasy sports industry are still in their preliminary stages, and officials have yet to provide much detail. The Justice Department is in the early stages of assessing whether daily fantasy sports companies are protected under the 2006 UIGEA exemption, or whether they’re games of chance subject to federal and state bans on Internet gambling, according to the Wall Street Journal. The FBI’s probe centers on DraftKings’ business practices, including whether it accepts entry deposits from customers who reside in states that do not allow paid fantasy contests, the New York Times reported.

Regardless of their starting points, Holland suspects the federal probes will end with a determination on whether daily fantasy sports contests are legal.

“The question of whether daily fantasy sports is gambling or not now can’t be avoided,” Holland said. “Rather than the limited resources that you have for states to investigate this, you now have the full force of the FBI and DOJ.”

The implementation of some form of formal oversight of the daily fantasy sports industry became all but inevitable once the inside information leak alerted federal and state lawmakers to the possibility that users were vulnerable to fraud. U.S. congressmen from New Jersey have asked the Federal Trade Commission to review the industry, joining similar movements already underway in several other states.

It’s unclear what form oversight laws and regulations will take, and whether they’ll be enacted on a state-by-state or federal level. But the FBI and Justice Department inquiries could hasten the process.

“I think a total shutdown is very doubtful,” said Justin Fielkow, an attorney at the Franklin Law Group in Illinois who represents fantasy sports operators, including daily fantasy companies. “But I do think it’s definitely well within the realm of possibility that we see a speeding up of the timeline in terms of potential consumer protection regulations being put into place.”

DraftKings and FanDuel have already taken steps to reassure their customer bases. Both companies have banned their employees from participating in any paid fantasy sports contests and hired third-party experts to examine their internal safeguards on user data and other business practices. The increased FBI scrutiny could push both companies to look very closely at elements of their businesses that could be construed as illegal.

“They’ve going to do everything in their power to end up with a clean bill of health for whatever businesses they have left at the end of this,” Holland said.

In the meantime, federal probes will have little effect on the daily fantasy sports business so long as officials stay mum about the details. Some avid players, like Manafort, will be even more inclined to enter contests with federal watchdogs on the case.

“I still feel that DraftKings is a legit operation,” Manafort said. “There may be a few bad apples working within the company, and hopefully they get weeded out with this investigation.”