FanDuel and DraftKings, two companies that deal in fantasy sports, are under some very real scrutiny and rightfully so.
Recently these two fantasy sports companies have had to deal with serious allegations of insider trading. These allegations will likely result in lawsuits, public outcry in the court of public opinion, a mass exodus of clients and the ire of lawmakers and prosecutors.
The basis of the allegations is that an employee at DraftKings intentionally used nonpublic information gained through his job to place bets at FanDuel and won $350,000.
DraftKings has released a statement attempting to convince everyone that if this was done, it was done inadvertently.
Yeah, riiiiggghhhhtttt. Let me explain why this is a problem and why I don’t buy the explanation.
Fantasy football leagues used to be made up of guys hanging out in their basements or backyards, sitting around poker tables or kitchen tables and participating in fantasy drafts for the season.
That is not the case anymore. Fantasy football (and other sports) leagues are becoming commonplace with female and male fans of all ages participating. There are daily, weekly and seasonlong leagues with the option to select players by careful consideration or simply by random.
A player signs up online, pays an entry fee and makes choices. Oh yeah, and did I mention that paying the entry fee is basically “betting” and is legal?
Well, it is and that, along with massive marketing plans, have resulted in the explosion of companies such as DraftKings and FanDuel.
Insider trading is defined as the illegal practice of trading on the stock exchange to one’s own advantage through having access to confidential information. It is illegal because it is not fair.
If you take the story explained above and plug it into the definition of insider trading and it would sound something like this: the practice of betting in the fantasy sports online world to one’s own advantage through having access to non-public information from your employer who happens to be a big player and payoff setter in that same fantasy sports online world. Doesn’t sound too great does it.
Some of the employees at these online fantasy betting sites have access to information BEFORE it is disclosed to the general public/customers.
Eventually that information is released. However, if someone has access to that information before its public release, that person can use that information to gain an unfair advantage and win money, a lot of it, to the detriment of others. The employee above took that information and made a lot of money to the detriment of other players.
Apparently, the fantasy sports online industry is lightly regulated, which is surprising considering it is a type of gambling, and gambling is highly regulated.
Before the allegations surfaced there were no particular rules about the employees of these companies playing and betting or doing something akin to insider trading. This is going to change.
Insider trading is a real and dangerous concept, just ask Martha Stewart. Since this industry has little to no regulation it is likely nothing much can be done to these sites for what HAS happened.
However, now that they are in the spotlight, I predict they (along with other similar businesses) will draft their own rules prohibiting employees from playing in any fantasy leagues, period.
Hot on the heels of the change in their internal rules we will likely see laws being implemented on national and state levels.
The whistle has been blown but the game is far from over. No doubt these companies will continue to thrive, they just can no longer pull a Tom Brady in that they will now have to play by the rules, insider trading rules.
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