FanDuel, DraftKings Insider Trading Scandal: Are Games Rigged And Should Fans Care?

Greg Thurell’s cousin bounded up to him at a summertime family gathering, asking if he’d been in a commercial. Thurell, 37, had been featured in a spot for daily fantasy sports site FanDuel, which like rival DraftKings, has advertised incessantly.

"I guess he woke up startled at one morning, and couldn't figure out if he was having a really weird dream or if I was actually on the TV," Thurell recalled. Thurell had played daily fantasy for almost four years and FanDuel approached him after he won a chunk of money. To TV viewers, Thurell soon became the face of daily fantasy sports, a service he had regularly enjoyed.

But Thurell has been less pleased with daily fantasy sports after the news broke Monday that a DraftKings employee -- who had inadvertently released important data that was not commonly available to the public -- also won $350,000 during Week 3 of the NFL season in a competition at FanDuel. The scandal within daily fantasy sports continued to expand Tuesday, as the two major purveyors, FanDuel and DraftKings, began damage control and assured daily fantasy players that they had shelled out money for fair contests.

With a number of daily fantasy sports players upset at the latest insider scandal, DraftKings and FanDuel are at a critical point that will require them to convince users their games are fair if they want to continue to thrive. The daily fantasy industry has grown massively in recent years. DraftKings and FanDuel both passed out hundreds of millions in prizes last year to winners and plan to award more than $1 billion apiece this year. Lucrative partnerships with pro sports leagues and major endorsements also have boosted the public's perception of daily fantasy. But the industry, which is largely unregulated, has at the same time struggled to overcome a stubborn image that it's simply sports gambling that found a loophole. Questions about whether the games are rigged could further hurt its reputation.

"If my ads got people to join, those people better be getting the most level playing field these companies can provide while they need to be as transparent as possible," Thurell said in an email interview Tuesday. "Anything less than that is unacceptable to me as a person."

Growth And A Scandal

DraftKings and FanDuel are each valued at more than $1 billion. Combined, the two companies spent $32 million on TV ads during just the first week of the NFL season, according to iSpot.tv. Many of its ads feature average joe players -- like Thurell, who works at a university -- who took home cash playing daily fantasy. Eilers Research, which studies the daily fantasy industry, estimated the games will garner about $2.6 billion in entry fees this year and grow 41 percent annually.

Fantasy players take part in massive games that collect entry fees from up to thousands of users. The players select a lineup of real-world athletes and compete against other users' lineups, each lineup earning points based on the actual performances of the athletes.

Daily fantasy companies had already struggled with some perception questions as many wondered if the industry was actually online gambling, which was banned in 2006 by a law from Congress. The daily games are allowed because of that same law, which carved out an exception aimed at traditional yearlong fantasy sports.

Monday's scandal essentially boiled down to allegations, denied by DraftKings and FanDuel, that employees of services were selecting lineups on the rival site using information about the selections of users compiled by their employers. If a player had a competition's lineup data, they could select a lineup of players not commonly selected by other users, thus making it more likely they would win. The scandal came to a head when DraftKings writer Ethan Haskell unintentionally posted lineup information to one of the company's massive games and went on to win $350,000 playing a similar game at FanDuel. DraftKings said in a statement Haskell did not have the data before his lineup for FanDuel was locked and that he did not benefit financially.

The companies need to let customers know they're working to regulate the games better, said Mark Conrad, director of the Gabelli School of Business at Fordham University in New York City. "They're in crisis-management mode and have to come up with the perception at least that they're doing more," said Conrad, who specializes in sports business and also teaches law and ethics.

Players must not perceive that the system is in any way cooked, otherwise FanDuel and DraftKings will lose a hold on their market, he said. "They've really operated under the radar screen through a lot of really positive coverage," Conrad said. "They’ve now been caught in a problem."

Disappointed Players

Marc Edelman, a law professor and sports business expert at Baruch College in New York City, said DraftKings failed particularly when it came to its policies. "It seemed like a billion-dollar company, DraftKings, lacked the proper institutional control," he said. "It seems like the focus at DraftKings is short-term revenue maximization and they are not looking at the long term."

But the biggest fallout could come if fans react poorly. Some players already said they were angered by the scandal. "I was irked by the news because many [daily fantasy sports] players, as well as myself, feel like we've been cheated out of our money," said Andrew Peerless, a 27-year-old paralegal from Boston, who has been a regular daily fantasy player for two years. "With the amount of advertising we've seen these last few months ... I figured they'd enforce stricter policies regarding letting employees play on any type of DFS site," Peerless added in an email.

For Thurell, at times the face of FanDuel, it's unclear if he will keep playing daily fantasy. He wants to see how the industry reacts before making a decision.

"I believe even with its warts, [daily fantasy] is an awesome community," Thurell said. But at the same time, he said an unfair playing field would taint the whole experience. "I think the ball is in their court," he said.