Daily Fantasy Sports News: Federal Prosecutor Probes Whether FanDuel, DraftKings Business Model Violates Federal Law

A U.S. attorney in New York has opened an investigation into the embattled daily fantasy sports industry to determine whether companies like DraftKings and FanDuel can legally operate under federal law, according to a report filed Wednesday. The investigation is unfolding weeks after an inside-information leak drew unprecedented scrutiny of the largely unregulated industry’s internal practices.

The probe, which is still in its preliminary stages, will purportedly focus on whether daily fantasy sports contests are games of skill, as DraftKings and other companies have argued, or games of chance, the Wall Street Journal reported. The industry has operated for years under the protection of a 2006 federal statute that excludes fantasy sports from federal bans on other forms of online gambling.

U.S. Attorney Preet Bharara is leading the investigation, the Journal reported. Bharara spearheaded the 2011 investigation that crippled America’s online poker industry and is also known for his tough stance against individuals accused of insider trading.

“We strongly believe the games on our site -- and daily fantasy sports in general -- are legal,” a DraftKings spokesman said in a statement to the Journal in regard to the investigation. FanDuel has yet to comment on the situation.

FanDuel and DraftKings are each valued at more than $1 billion, and both have secured hundreds of millions of dollars in private investments. The companies are expected to award more than $1 billion each in prizes by the end of 2015.

But the revelation this month that Ethan Haskell, a DraftKings employee, leaked inside information about fantasy lineups the same week he won $350,000 while playing a FanDuel contest, led federal and state officials to question the legality of the daily fantasy sports industry. An FBI probe into DraftKings’ business practices is underway in Massachusetts, and the U.S. Department of Justice is conducting an inquiry into the legality of the industry’s business model as a whole. Separately, members of Congress, including Sen. Harry Reid, D-Nev., have called for formal oversight and regulation of daily fantasy sports.

Nevada gambling regulators banned daily fantasy sports companies last week from operating within the state’s boundaries until they are properly licensed under state gambling laws. Officials in Massachusetts and several other states are also considering some form of regulation, the Associated Press reported.