by Glenn Stout
During the NFL’s opening week, DraftKings advertised that $10 million in winnings was up for grabs, including a $2 million grand prize, in its Millionaire Maker contest, the largest daily fantasy contest ever. Not to be outdone, FanDuel boasted: “Paying out $75 million a week!”
On October 5, the New York Times reported that a young DraftKings employee named Ethan Haskell had won $350,000 in a FanDuel NFL contest by finishing second overall and beating 229,883 entrants. The Times story alleged that Haskell used inside information—the percentage of ownership of various players by contestants that was unavailable to the public—to help win on the site of his company’s rival. The online headline dubbed it “insider trading,” and though the newspaper quickly changed it after DraftKings complained, the damage was done.
The sites’ employees had competed for years on each other’s platforms, despite the practice being long frowned upon by some lobbyists and industry consultants. Even the companies’ engineering and customer service employees had access to proprietary data that could give them an unfair advantage playing elsewhere. The numbers are alarming: DraftKings employees won an estimated $6 million playing on FanDuel, though executives at both sites insist most of their employees ended up losing more money than they won.
The optics only worsened when it became public that FanDuel, in a 2012 internal memo, had warned its employees playing on DraftKings to “do no harm” or raise suspicions by winning too often: “Never be among the top five players by volume on any one site (based on site leaderboards). Never be among the top 10 overall on the RotoGrinders leaderboard. Top players frequently become targets for accusations by other users.”
“This was destructive—and done because the sites felt they were untouchable,” says a longtime industry lobbyist. “It’s obvious that condoning this practice could easily backfire.”
Robins and Eccles now acknowledge that the practice angered customers and raised stubborn doubts about the games’ integrity. However, they both insist that their own investigations showed no employees had used proprietary information to win a single contest, though employees’ winning streaks attracted derision on message boards. A law firm hired by DraftKings later determined that Haskell, who declined to comment, did not consult inside information before posting his winning lineup on FanDuel.
But by then the finding didn’t really matter, because New York Attorney General Eric Schneiderman was a New York Times reader and a TV viewer who, like nearly everyone else in America, had become annoyed and exasperated by the onslaught of daily fantasy ads.
At 61, Schneiderman, a graduate of Amherst and Harvard Law School, had established himself as a hard-charging attorney general, pursuing a variety of attention-seizing targets, including the Airbnb industry, corruption-rife state contracts, and Medicaid fraud. Allies of the daily fantasy industry later grumbled that he had received more than $150,000 in campaign contributions from state gambling interests during his run for attorney general.
The morning after the Times story, lawyers and investigators from Schneiderman’s various divisions—consumer fraud, investor protection, the Internet bureau, taxpayer protection—huddled for a two-hour meeting in a large conference room at the office’s lower Manhattan headquarters. “We had no idea what we were looking at—we didn’t know what we didn’t know,” says Kathleen McGee, the Internet bureau chief. They were concerned about the insider trading allegations, but in interviews with Outside the Lines, they said they quickly became far more concerned with FanDuel’s and DraftKings’ promises of instant wealth that they kept seeing on television. “Everyone in the office was saying, ‘Their ads are everywhere,’ ” McGee says. “You couldn’t escape them.”
Within hours of their first meeting, several lawyers and investigators from Schneiderman’s office opened DraftKings and FanDuel accounts and began playing their contests. The sites’ lobbies “felt like online poker sites—or an online casino,” a senior investigator told Outside the Lines. And the investigators and lawyers would soon discover that the sites didn’t just offer daily fantasy contests on a single day’s full slate of games. The sites offered hourly fantasy contests, with an evening’s slate of NBA and NHL games carved into smaller and smaller slices with fewer and fewer players to draft—“turbo” contests for three NBA games tipping off at 8:00 p.m. ET, for example, or a fantasy contest based on two West Coast NHL games in which fantasy players would assemble lineups from only four teams.
Schneiderman’s lawyers and investigators initially focused on the insider trading allegations, sketching investigative avenues on a chalkboard-sized whiteboard as they wondered whether the companies were defrauding and deceiving customers. Early on, they say, they didn’t ponder the question of whether daily fantasy sports were legal under New York law.
Schneiderman’s top deputies asked FanDuel and DraftKings to provide information about their customers, consumer protection safeguards, and the names of employees with access to proprietary information, such as player data, roster values, and the contestants’ ownership percentages for pending and historical contests.
At separate meetings at the attorney general’s office on October 8, Robins of DraftKings and FanDuel’s outside counsel, Marc Zwillinger, fielded questions about their business practices while pledging their full cooperation. Still, executives and their lawyers were alarmed by the investigation. After all, the two companies had operated openly in New York State—and with no interference—for years. The company executives and their lawyers left Schneiderman’s office confident that, at most, they’d be forced to pay a hefty fine and then would have to seek a daily fantasy bill in the New York State Assembly, a recollection disputed by lawyers in Schneiderman’s office.
A senior AG lawyer recalls the DFS executives “running into our door and begging us, more or less, to regulate them and not shut them down.”
“Denial is a powerful drug,” says Eric Soufer, the AG’s senior counsel for policy. “Even beyond the illegal gambling claims, the evidence of false and deceptive advertising was massive, and it was clear to all sides that those claims would be moving forward.”
The move by Schneiderman had an immediate impact on both companies. ESPN, which had agreed in June to a two-year, $250 million exclusive branding and promotions deal across multiple platforms, decided on October 6 to remove all DraftKings-sponsored elements from its shows.
Ten days later, the Nevada attorney general released an opinion concluding that daily fantasy is sports wagering and that DraftKings and FanDuel needed gambling licenses to operate in the state. At the same time, the sites were preparing to enter the U.K. market, where they were seeking gambling licenses to be regulated as bookmakers. Both decisions reinforced the impression that daily fantasy is a game of skill in some places but considered a game of chance in others.
Meanwhile, during the daily strategy meetings before the whiteboard, the attorney general’s lawyers and investigators began discussing whether, in fact, daily fantasy constituted illegal gambling under New York law. “It quickly became apparent this was so much bigger than a consumer fraud issue,” McGee says. “This looks like gambling—and we kept asking, ‘How does this happen right under our noses? These guys are huge.’ ”
On November 10, Schneiderman sent cease-and-desist letters to FanDuel and DraftKings, declaring that their games constituted illegal gambling under state law and ordering the companies to stop accepting “bets” from New York residents. “It is clear that DraftKings and FanDuel are the leaders of a massive, multibillion-dollar scheme intended to evade the law and fleece sports fans across the country,” Schneiderman declared.
Inside FanDuel’s Manhattan offices and DraftKings’ Boston headquarters, executives were asked, by an ESPN reporter, about the letters before they had been delivered. Robins was in Sacramento at the statehouse; he got word of Schneiderman’s move 10 minutes before meeting with an influential California legislator about a daily fantasy bill. Eccles was in Edinburgh, visiting his mother, wh
en a colleague called him with the bad news. At no point had anyone from Schneiderman’s office told them they were facing the prospect of being shut down.
“I was shocked,” Eccles says.
Recalls a top DraftKings executive, “We never saw it coming.”
Welcome to the big time.
On November 13, three days after Schneiderman’s cease-and-desist letters were delivered, FanDuel’s and DraftKings’ top executives, lawyers, and lobbyists gathered for a summit meeting at the midtown Manhattan offices of Orrick, Herrington & Sutcliffe, a San Francisco–based global law firm. The session was attended by Robins and Eccles and nearly two dozen attorneys, lobbyists, government affairs specialists, and crisis communications consultants. Before the meeting began, “the only thing the two companies could agree on was us,” says Jeremy Kudon, a 45-year-old lawyer and lobbyist who is the founder of Orrick’s public policy group.
After three hours, the two rivals agreed on a uniform strategy to push for legislation clarifying daily fantasy’s legality in dozens of statehouses around the country. FanDuel and DraftKings executives agreed to share the exorbitant costs of going on offense to seek DFS legislation that would regulate, and tax, their industry in any state where there was legal uncertainty or even the slightest chance that an attorney general might move against the industry. It was a marriage of necessity.
But the sites continued fighting other, separate legal battles. An investor recommended that DraftKings hire David Boies, the 75-year-old lawyer who became famous representing Al Gore before the U.S. Supreme Court in the deadlocked presidential election in 2000.
Boies was kept busy. Seemingly every day, a new civil lawsuit was filed against the companies and their executives; the companies now face more than 40. The biggest lawsuit alleges that DraftKings and FanDuel granted scores of advantages to an elite group of high-volume players. “The vast majority of bettors who are small guys, playing one or two contests a day for $20 at most, are overmatched by an elite few who have the algorithms, the technological advantages, all the advantages to win the biggest money,” New York attorney Hunter J. Shkolnik says. “No one tells you that in the commercials.”
Now consolidated in a Boston courtroom, the sprawling 266-page class-action lawsuit—alleging conspiracy, fraud, negligence, and RICO violations, among other claims—represents losing DFS players from 25 states and the District of Columbia. Shkolnik alleges that FanDuel revealed to its investors that only the top one-tenth of a percent of its customers actually win money. “The top 10,000 users had a negative-9.5 percent return on investment,” the lawsuit alleges. In another lawsuit, one of the plaintiffs, Brandon Peck, a 42-year-old losing player from California, says that “DFS sites knowingly and intentionally pulled the wool over the eyes of many Americans when quoting the UIGEA. We deserve our money back.”
DraftKings and FanDuel deny the accusations. Robins and Eccles declined a request by Outside the Lines to discuss any of the legal proceedings and criminal inquiries.
Throughout the autumn, Schneiderman’s lawyers kept investigating. They became even more offended by the companies’ grandiose advertising claims and the promises to customers that both companies made—and, the lawyers say, had repeatedly broken—in their bonus programs.
Schneiderman’s action had a dramatic ripple effect across the country. In nearly two dozen states, including Illinois, Texas, and Alabama, offices of the attorney general quickly opened investigations. In some states, AGs released reports declaring that daily fantasy was illegal, while legislators began considering bills that would legalize the games and regulate the industry.
“I’ve never seen attorney general opinions weaponized like this before,” Kudon says.
Says Boies: “I think DraftKings, and the industry in general, did not do as much as it could have . . . to regulate itself, to impose rules and regulations. It was a new industry. It was a growing industry. And I think that [DraftKings] focused much more on their product and their service than explaining it.”
The parade of negative headlines also appeared to erode customers’ trust. In the second half of the NFL season, DraftKings and FanDuel experienced week-by-week reductions in entry fees and major tournament payouts, according to data compiled by SuperLobby.com. By week 14, for example, DraftKings’ large tourney entry fees were down 32 percent from a week 5 high of $25 million. And FanDuel’s tourney entry fees had dropped 53 percent from a week 6 high of $40 million, SuperLobby.com found. (FanDuel and DraftKings dispute these statistics, saying there was only a slight drop-off in large contests but that their ads attracted hundreds of thousands of new customers, many of whom have become loyal players.)
On December 11, a New York Supreme Court granted Schneiderman a temporary injunction against the two companies, but they quickly appealed and won, allowing them to continue accepting wagers in New York. The pushback infuriated Schneiderman’s lawyers, who filed an amended complaint on New Year’s Eve seeking enormous financial penalties against DraftKings and FanDuel for allegedly violating New York’s false advertising and consumer fraud laws. Schneiderman accused the sites of misrepresenting the ease and simplicity with which the average user could win big payouts and the amount of skill needed to win their contests, among other accusations.
Inside both companies, morale plummeted. They had been the hottest thing going; job applications had flooded into their headquarters. No more. And for the CEOs and executives, the stress level was relentless and the realities ever-present.
“People asked me, ‘Where do you work?’ And I’d say, ‘I work at FanDuel—I’m sorry about the commercials,’ ” says Andrew Giancamilli, FanDuel’s 37-year-old vice president of revenue and customer retention marketing.
By the end of last winter, 38 states were weighing daily fantasy legislation. Armed with a team of 105 lobbyists, Kudon and his colleagues discovered that despite their skill-game arguments that daily fantasy is not illegal gambling, influential gambling interests saw them as a threat and blocked them in states where they were entrenched, just as Charchian and others had predicted. Rivers Casino, located in Des Plaines, Illinois, helped kill the state’s daily fantasy bill, and the Illinois attorney general issued an opinion that daily fantasy is illegal under state law. In California, Florida, Connecticut, Oklahoma, and Arizona, Native American tribes with casinos managed to kill or thwart daily fantasy bills. The companies now don’t accept wagers from players in 11 states, up from five a year ago.
In early March, Virginia was the first state to pass DFS legislation, a bill critics dismissed as “industry-friendly.” Five other states followed: Indiana, Tennessee, Mississippi, Colorado, and Missouri. The Massachusetts attorney general introduced extensive regulations aimed at increasing transparency and fairness, which the state adopted in August.
But the fight’s epicenter was the New York Capitol in Albany. No state was more important to daily fantasy’s future than New York, where each company had the highest number of customers, who spent a total of $268.3 million in fees in 2015, second only to California. In February and March at DraftKings and FanDuel, executives debated whether they should settle the Schneiderman complaint by agreeing to stop operating paid contests in New York.
“It was tough,” says Genetski, the FanDuel executive. “Shutting down seems counterintuitive, and we’d be second-guessed if it failed, but in my view it was clearly the right decision.”
When the settlement was announced on March 21, Schneiderman waved the victory flag. “As I’ve said from the start, my job is to enforce the law,” he said, “and starting today, DraftKings and FanDuel will abide by it.”
For the companies, it was a worthy trade: they’d stop accepting wagers from New York residents for their less active NBA, NHL, and MLB contests in exchange for clearing a major hurdle with state legislators to get a DFS bill passed. “If we didn’t get a settlement,” Kudon says, “I don’t think we’d have gotten the bill introduced in the Assembly.”
Without New York, Eccles
and Robins worried legislatures in other important states with entrenched gambling interests would be more likely to reject daily fantasy bills—and, the thinking went, failure in New York might embolden prosecutors pursuing the trio of federal investigations.
“The reality is, neither company was in a position to continue to operate without New York,” Kudon says. “They both needed for this to happen. When I had spoken to investors, everyone agreed on its importance—it was less a financial thing and almost a psychological thing. They’d say, ‘We won’t believe this industry will survive unless New York happens.’ How’s that for pressure?”
But getting the bill passed was far from a certainty, and FanDuel and DraftKings had to play a political game now.
One of the bill’s staunchest opponents was Batavia Downs, a harness racetrack and casino in western New York owned by the quasi-public Western Regional Off-Track Betting Corporation. Over a frantic weekend in early June, FanDuel struck a $300,000 marketing agreement with Batavia Downs, a sum that caused the track’s owners to flip and throw their support behind the DFS bill.
FanDuel and DraftKings enlisted retired quarterbacks Jim Kelly and Vinny Testaverde to meet legislators. An email campaign produced a windfall of more than 100,000 emails from New York residents, urging their legislators to vote for the bill. Lobbyists from every corporation with a financial stake in DraftKings or FanDuel, including Verizon and Comcast, pushed the bill. Even still, in the final 48 hours before the Assembly recessed, the bill appeared on the brink of being defeated. “It felt as if they might just kill our bill for the sport of it,” Kudon says.
Just after 2:00 a.m. on Saturday, June 18, the DFS bill passed by a wide margin. And on August 3, Governor Andrew Cuomo signed it into law.
“Monumental,” Eccles calls it. “The most important victory in daily fantasy history.”
