Law, Sports Business, and Technology

Fantasy sports catches attention of law enforcement

In Michigan, there is some question whether the activity is even legal.

October 30, 2015
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Fantasy sports players may want to reconsider drafting their next team.

The U.S. Department of Justice and the FBI are investigating whether the fantasy sports model goes against federal law, and many states are questioning whether the games are illegal, as well.

“At the national level, in the last couple of weeks it’s been revealed that there are employees of FanDuel and DraftKings who are participating in games on the competitor’s site,” said Michael Huff, an attorney with Mika Meyers.

The revelation has federal investigators questioning whether an employee’s access to insider information creates an unfair advantage in selecting players for a fantasy sports team.

“The reason this matters is because one way to win is by picking players who are going to score more points, who are being drafted by fewer participants within the game,” Huff explained.

“The argument is the employees of these companies have information on what players are being selected a lot so they can look where the market and efficiencies might be and have the potential to win a lot more money.”

In fact, in the last month it was revealed an employee of one of the daily sports companies did just that.

“An employee won $350,000 doing this,” Huff said. “That sparked the interest of the New York attorney general, who is a little worried these games might not be as fair as represented if people are using insider information to take money.”

A class action suit has been filed in New York as a result, and Huff said it could have an impact on fantasy sports players in Michigan.

“If you are a fantasy sports player and you’ve been paying your entry fee to participate in the game, if it’s determined now that these games weren’t actually fair because there were people using insider information and there is some sort of class action suit settlement, you may see people get a portion of their participation fee refunded,” Huff said.

DraftKings investigated the situation internally and also hired an independent law firm to perform its own investigation. DraftKings said it found no wrongdoing by its employee.

Huff said while the class action suit will be interesting to follow from a legal standpoint, of greater interest is whether participating in fantasy sports is legal at all in Michigan.

“The director of the Michigan Gaming Control Board (Richard Kalm) made a statement a couple of weeks ago where he said daily fantasy sports are illegal,” Huff said.

Huff said there are arguments being made to refute that claim, but it’s still undetermined in Michigan if fantasy sports will be treated as illegal gambling or not.

“Our general understanding is it is illegal,” he said.  “It most likely is defined as gambling under Michigan law, so people need to be aware of the fact that you are going to deal with the same issues as if you were participating in illegal gambling.”

Huff said the Fantasy Sports Trade Association has hired a lobbyist in Michigan who is working with legislators to ensure fantasy sports become legal under Michigan law.

And, Sen. Curtis Hertel Jr., D-East Lansing, has introduced a bill, SB 459, to amend the Michigan Penal Code to specify fantasy football as a game of skill rather than chance, which would legalize it under Michigan law.

Under federal law, Huff said the Unlawful Internet Gambling Enforcement Act, which was passed in 2006,is being considered in relation to today’s fantasy sports gambling.

“It was designed to prevent Internet gambling, but it explicitly carved out participation in fantasy sports games,” Huff said.

He noted fantasy sports were exempt specifically so that friendly games between family members and friends would be protected. The law did not envision the multibillion-dollar fantasy sports industry that has arisen today, he said.

Huff said the growth of fantasy sports and the opportunity for large-scale winnings incite regulatory questions.

“If this is going to be legal, how do we go about regulating it and making sure the IRS and the Michigan Department of Treasury are getting the payments they are owed by people generating an income from this,” he said.

For now, Huff said a lot of people are waiting to see how the pending legal investigations play out. They are also keeping an eye on related sports book cases in New Jersey that could have further impact on the broader world of sports gambling.

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