Eric Schneiderman: Why Daily Fantasy Sports is Gambling

February 9, 2016
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The first time that daily fantasy sports caught the attention of New York Attorney General Eric Schneiderman was late last summer, when an advertising blitz made it close to impossible to watch an NFL game without seeing an ad for one of the industry’s two most popular sites, DraftKings and FanDuel.

“I think DraftKings and FanDuel spent something like $31 million in the first week of the NFL season alone,” says Schneiderman. “Then the stories started to break about employees of these companies using non-public information to get a competitive advantage to win money on other sites. At that point, we launched our investigation.”

New York has become a key battleground in the fight over whether daily fantasy sports should be legal or not. In November, Schneiderman decided that the two sites were in violation of New York’s gambling laws. In a cease-and-desist letter, he ordered the two sites to stop accepting “wagers” in the state, the largest market in the nation for the daily fantasy sports industry. An appeals court judge later ruled that the sites could keep operating until questions over their legal status were better settled.

While the sites defend their contests as perfectly legal games of skill, Schneiderman’s office has described daily fantasy sports as a “convoluted scheme.”

In the below interview with Walt Bogdanich of The New York Times, conducted for our joint investigation into daily fantasy sports, Schneiderman talks about why he chose to investigate the industry, why he thinks the odds are stacked against users, and why he calls the sites “a particularly pernicious form of gambling.”

This is the edited transcript of an interview conducted on Jan. 25, 2016. 

A Fan Duel executive told me that daily fantasy sports is really all about entertainment. Why, then, would the government, and you in particular, decide to get involved in a product that’s just about entertainment.

Well, gambling is entertainment. People go to casinos to be entertained. The issue here is not whether or not it’s entertaining, it’s whether or not it is gambling. … And you can’t have unregulated gambling without running into problems.

There’s the saying, “no harm, no foul.” Is that the case here? I mean, who’s being harmed?

Well, the fact is, we just don’t know what’s going on in there. So our investigation is ongoing. It’s clear to us that what they’re doing is gambling, And there are people who have gambling addiction problems. And for them to contend that it’s not gambling, you can almost lure people who know they have gambling addiction problems into getting back involved in betting. And gambling addiction experts have come forward to say this is a particularly pernicious form of gambling.

Is perhaps one of the reasons that they’ve been able to operate so freely across the country due to this 2006 law, or shall I say the ambiguity of the 2006 [Unlawful Internet Gambling Enforcement Act]?

No, the 2006 federal Internet gaming statute is not ambiguous. It does not prohibit gambling on fantasy sports. Now in 2006, of course, the technology for DraftKings and FanDuel didn’t exist. All that exists were the season-long rotisserie baseball leagues and things like that, where traditionally, the sites made money from administrator fees and advertising. They weren’t online gambling enterprises here, where FanDuel and DraftKings described themselves with poker terminology. They take a rake, they take a portion of each betting pot. These are not a new version of traditional fantasy sports. This is just a new version of Internet gambling, more in common with Internet poker than with traditional fantasy sports leagues.

FanDuel told me that they engage in self-regulation and that they’re doing a good job of that. What’s your opinion of that answer?

The answer is no one knows, really. They only caught the attention of state regulators, for the most part, in the second half of 2015, with their advertising blitz, and reports of the improper use of non-public information by employees at DraftKings and FanDuel. State regulators have just started to look into this. They’ve not filed reports, there is no regulatory agency like the Securities and Exchange Commission, which regulates stocks, so we don’t know what they’re doing. We know some of their misrepresentations out there are clearly false and we’re looking at the fraud issues there.

The threshold question is [whether] they’re gambling. Even Nevada, which has a lot of different kinds of gambling, their gaming commission ruled that this is gambling. That doesn’t mean that they’re never going to be able to operate in Nevada, that just means that they have to fully disclose what they’re doing, demonstrate that they’re not committing fraud, and submit to the heavy regulatory structure that all gambling in Nevada is subject to.

Have these daily fantasy companies implemented sufficient consumer protection safeguards?

Well, they clearly had not prior to this round of investigations by my office and others. They claim that they’re implementing new ones, but we really have no way of knowing since there’s no regulatory agency that supervises them. They’re not filing reports as other enterprises would. In New York State, we have a gaming commission that regulates pari-mutuel betting, for which there’s an explicit exemption from our state constitutional ban on betting. We just amended the constitution a couple of years ago to allow for a limited number of Las Vegas-style casinos. They will be subject to heavy regulation. Up until now, FanDuel and DraftKings have not been subject to any regulation, so all we’re doing is taking them at their word that they’re doing the right thing. …

The standard in New York is not whether or not there’s some skill involved. In fact, our laws make it explicitly clear that if there’s a material element of chance, even if skill is involved, it’s still gambling.

… FanDuel told me that they know of no players who are addicted to fantasy sports. Are they telling the truth?

I can’t speak to what they know, but it would be incredible to me that they do not, since we’ve already found in our investigation … produced from DraftKings and FanDuel requests from players to “Take me off, shut my account, I’ve got a gambling problem.” We’ve included in our papers we’ve submitted to the court statements from gambling addiction experts.

This is a particularly pernicious form of gambling, because it’s an app on your smartphone. You can go into a sports bar, with your buddies, and lose your rent money. The casino, at least you’ve got to go to the casino, go in, and you know what you’re doing, and you can set limits for yourself. This is a real problem for gambling addicts, for gambling addiction experts, and again, the fact that they continue to deny that it’s gambling really sends a message to people, “you don’t have to worry about your addiction here,” when in fact, people do.

Are daily fantasy games fair, as far as you know?

That is something that we’re looking into in our investigation. It’s an ongoing investigation. There certainly have been allegations that they’re not fair … What the daily fantasy sports sites do to make this worse, is they run ads that are clearly geared to attracting “the minnows,” attracting the small players, suggesting that “it’s easy to win,” “everybody can win.” In fact, it’s very difficult to win, for an average player … Eighty-nine percent of the players lose money. If that’s true, or if it’s even worse, then that raises the question of who is winning all of the money, and if there are a small number of professionals using computer scripts so that they can quickly move hundreds of lineups at a time, based on the latest breaking information about player injuries, and things like that, they have a huge advantage over the casual player. This is something that we’re investigating.

We’re also very curious about what representations are being made. We know that there have been representations, for example, that average winnings are in excess of $1,200. That representation fails to take into account the losses, so yes, for the winners, that’s their average, but the overwhelming majority of people lose. The average net is a loss. That type of misleading statement makes us wonder what other kinds of misstatements they’re making and what other sorts of misconduct are going on inside this incredibly, opaque, massive gambling enterprise.

If most people who play lose, what percentage of the players win?

Again, according to DraftKing’s own statistics, fewer than 11 percent are winners, and a small portion of those winners win the overwhelming majority of the money. There has been some of these circumstances documented in investigative journalistic reports. One in the Sunday Times Magazine, about these professional operations that use computer scripts and that can bet hundreds of lineups, pick hundreds of lineups for a game, every day, much more nimble than a regular, casual player, about adjusting their lineups right before the deadline. And the allegations are that the fantasy sports sites sometimes cater to these high rollers, to these folks whose business they really are dependent on.

How did daily fantasy sports come onto your radar screen?

I think, for my office, and for a lot of other state regulators, it really was the advertising blitz that took place this summer.

That was a lot, wasn’t it?

Hundreds of millions of dollars. I think DraftKings and FanDuel spent something like $31 million in the first week of the NFL season alone. Then the stories started to break about employees of these companies using non-public information to get a competitive advantage to win money on other sites. At that point, we launched our investigation in early October, other states started to make inquiries, and since then, state after state has held that this, in fact, is gambling, and that subjects them to the rules and regulations and laws which vary from state to state. Once it’s gambling, you can get it inside a regulatory system and work out what is true and what is false and subject them to penalties if they’re committing fraud against any players.

If I understand your legal argument, what daily fantasy companies are doing right now is illegal, and there is no middle ground. If you’re doing it, you’re violating the law. Is there a middle ground, perhaps regulation?

In states across the country, and what I think you’re seeing in our complaint and the case we brought, and the order we already received from the Supreme Court justice who ruled on the case is that states are finding it’s gambling, but then each state has different laws and regulations about how you regulate gambling, whether it’s completely prohibited. Obviously, Nevada doesn’t prohibit all forms of gambling, but you have to submit yourself to a very rigorous regulatory process to run a gambling operation in Nevada.

… You mentioned the big ad blitz in the run-up to the NFL season. Apart from the fact that there were so many ads, was there something about those ads that troubled you?

Some of the content of the ads we’re looking into because we believe there were misrepresentations made. So beyond the issue of whether or not this is gambling, our investigation is looking at whether fraud has been committed. You’re not allowed to lure people into spending their money or betting their money based on false representations. For example, the deposit bonuses, in FanDuel’s case, they say, “We’ll match the first $200 that you bet,” is clearly a misrepresentation. I think the average that they actually match is something like $8. Things like that, that lure people in, the representations about how easy it is to win, that all comes in the category of possible consumer fraud, and that’s part of our investigation, too.

… Some have suggested that if it is concluded that daily fantasy sports is illegal in the state of New York then it might be pushed underground, much like the Internet offshore gambling sites are.

Well, I’m the top law enforcement officer in this state. My first job is to enforce the law, and I think it’s really misleading to suggest that we can’t vastly reduce the number of people who are online gamblers by enforcing the law that makes gambling illegal. In the online poker industry, they refer to the day that the U.S. Justice Department went after the big online poker sites as Black Friday, because it shut them down. The casual bettors, the people we are the most worried about are not going to seek out illegal offline sites. It would make a big difference. The extent that there are states where there are processes in place, which, it really is true in most states, to regulate and legalize gambling, they just have to go through the same process that racetracks went through, or casinos have gone through, to make sure that it’s regulated, and they’re not committing fraud.

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