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New York attorney general calls foul on fantasy sports companies

The two leading companies of the multi-billion dollar fantasy sports industry are under scrutiny from New York's attorney general, who has declared they should not be able to operate in that state since they constitute illegal gambling. William Brangham learns more from Devlin Barrett of The Wall Street Journal.

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  • JUDY WOODRUFF:

    Playing daily fantasy sports has become a multibillion-dollar business, and one increasingly connected with professional sports leagues who either have a sponsorship deal with the biggest companies or are investors in these companies. But it's an industry under widening scrutiny.

  • The latest front:

    New York state's attorney general has said they shouldn't be allowed to operate in New York since they constitute illegal gambling.

    William Brangham fills in the picture.

  • WILLIAM BRANGHAM:

    The two main companies at the center of this latest controversy, DraftKings and FanDuel, have tens of millions of players on their sites everyday.

    Here's how they work. This is from one of their promotional videos. You pay some money to play fantasy football or baseball or whatever sport you want. You then create a lineup of actual professional players to be part of your fantasy team. If your players do better statistically on a given day than the other people in your league, you win money. Or if they don't, you lose.

    The sites have said they're just games of online skill, and not actual gambling. But, yesterday, New York Attorney General Eric Schneiderman called foul, saying — quote — "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."

    Joining me now to help unpack these developments is Devlin Barrett, who's been covering this for The Wall Street Journal.

    So, how big a deal is this, the attorney general's move?

  • DEVLIN BARRETT, The Wall Street Journal:

    It's a really big deal.

    One, it's 10 percent of their customer base is based in New York state. But, actually…

  • WILLIAM BRANGHAM:

    Ten percent of all these players are in New York itself?

  • DEVLIN BARRETT:

    That's according to some of the internal figures, as best as we can tell.

    The larger problem, though, is that if what the New York attorney general says influences or lines up with the thinking of the federal officials who are looking at this, these companies, this industry is in a world of trouble, because what the attorney general says in his letter is that this thing is illegal in multiple ways.

    And the Justice Department is looking at that. Now, the New York decision is important for New York, and it's important, obviously, for the company's reputations, but if the U.S. attorney for the Southern District of New York, who's a federal official, ends up agreeing with even half of what's in that letter, these industries are in huge — this industry has a huge problem.

  • WILLIAM BRANGHAM:

    Let's talk a little bit about what the attorney general is arguing.

    In one of his complaints against these companies, he is saying, you're basically a wolf in sheep's clothing. You pretend you're not a gambling site, but you are a gambling site.

    In your analysis, is that a fair accusation?

  • DEVLIN BARRETT:

    Well, I think the biggest analogy you could draw is to online poker. And if you look at the screens from what online poker used to be, back when it was allowed and done in the United States on a regular basis, the screens actually look quite similar.

  • WILLIAM BRANGHAM:

    You mean the actual Web sites that you look at?

  • DEVLIN BARRETT:

    Actual Web sites that you look at, and the lines of betting options that you have, do I want to make this bet, do I want to make that bet?

    The other thing that the attorney general lays out which is an interesting argument and is really the crux of this debate is, this is instant gratification gambling, meaning traditional fantasy sports was always about you play for a whole season? At the end of the season, someone wins the office pool and they have a party and everyone smiles and makes jokes about each other.

    Daily fantasy sports essentially blows up that model and says you can bet today on stuff that happens today and you can get paid today. A lot of what the New York officials are saying is, look, this is instant gratification, which is gambling, and that's a problem. That's why in some ways it's a huge threat to the companies far beyond the borders of New York state.

  • WILLIAM BRANGHAM:

    These companies have vehemently rejected these accusations. They said in a call today that they made with reporters that they are going to going to fight this in court. They have hired lawyers to do this.

    Yesterday, in a statement, FanDuel said — quote — "Fantasy sports is a game of skill and legal under New York state law. This is a politician telling hundreds of thousands of New Yorkers that they are not allowed to play a game that they love and share with friends, family, co-workers and players across the country."

    You hear this a lot from these companies, that these are games of skill and not chance.

  • DEVLIN BARRETT:

    Right.

  • WILLIAM BRANGHAM:

    Why do those particular words matter? Do they keep coming up?

  • DEVLIN BARRETT:

    They matter because under the federal law, if it's a game of skill, it may not be illegal. If it's a game of chance, it almost certainly is illegal.

    Now, that argument also failed in the online poker case that happened about four years ago. So, just because they say it's so doesn't make it so. I think the other issue you have to look at when you look at their defense is, if they can't beat the New York attorney general on this, if that legal analysis holds, you know, that could threaten their entire business model.

  • WILLIAM BRANGHAM:

    How much money are we really talking about here? How much is circulating in these fantasy game markets?

  • DEVLIN BARRETT:

    It's essentially billions of dollars.

    Both of these companies are valued at more than $1 billion, and their growth rate is astronomical. You can argue about their valuations. I think that's kind of a fun exercise at times, especially — I think their valuations might change quite a bit after what's happened in the last 24 hours.

    But it's essentially billions of dollars moving around. And for that reason, it's drawn an incredible amount of scrutiny just recently from regulators and law enforcement officials.

  • WILLIAM BRANGHAM:

    And how much of this is about the involvement of the major leagues? Some of the major, the biggest names in sports, professional leagues, are directly involved in a financial way with these sites.

  • DEVLIN BARRETT:

    That's right.

    They have a degree of institutional buy-in for daily fantasy sports that you haven't seen before, or at least to this degree, with other forms of gaming like online poker. It is a huge advantage for them. But I don't think that just the institutional support alone can protect them if, for example, the Justice Department decides that the New York attorney general is right.

  • WILLIAM BRANGHAM:

    One of the other arguments the attorney general made was that these firms are fleecing their customers.

    What is he arguing there?

  • DEVLIN BARRETT:

    That's one of the most interesting debates about daily fantasy sports, which is, is it fair?

    And one of the things he says in the letter is the vast majority of the winnings go to less than 1 percent of the players. One of the things that we haven't really had a good explanation of, as all the sort of regulatory attention has come to them, is, who are the whales? Whales is a term for the big winners.

  • WILLIAM BRANGHAM:

    Right, the big fish.

  • DEVLIN BARRETT:

    Who are they? Are they company employees? If there's a significant number of company employees among the whales, that raises huge issues about not only is it legal, but is it actually fair, or is this just a scam on some level for the smart, sharp people to take advantage of the less sharp?

    Now, that's obviously a dynamic that you have in poker as well. It's another point where the online poker analogy comes in. But I think that's one of the great unanswered questions so far. The attorney general seems to be signaling that, from what he's seen, it's not fair.

  • WILLIAM BRANGHAM:

    All right. Fascinating stuff.

    Devlin Barrett from The Wall Street Journal, thank you very much.

  • DEVLIN BARRETT:

    Thank you.

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