Just over one week after a scandal erupted involving insider play on daily fantasy sports sites DraftKings and FanDuel, the FBI and the U.S. Department of Justice have launched an inquiry into the industry and its two market leaders.
The Wall Street Journal first reported late on Wednesday night that FBI agents in Boston have been reaching out to DraftKings users. The investigation, still in the early stages, is "part of an ongoing discussion within the Justice Department about the legality of daily fantasy sites," the Journal wrote. A New York Times followup added that the investigation is primarily focused on DraftKings, for now, and on whether its employees shared inside information or took advantage of other users.
FanDuel had no comment for this story, while DraftKings sent Fortune this statement: “It is entirely predictable that the government would follow up on the misleading reports about our industry. We have no knowledge of the specifics of any federal investigation but strongly disagree with any notion that our company has engaged in any illegal activities.”
This inquiry is just the latest development, but certainly the most significant, in an ongoing scandal (and P.R. nightmare) for DraftKings and FanDuel, both red-hot, billion-dollar "unicorn" startups that are growing explosively. The scandal began with an October 5 New York Times report that a DraftKings employee, Ethan Haskell, entered the Sunday NFL Millions weekly contest on rival site FanDuel and placed second, winning $350,000. The Times story suggested Haskell had seen ownership data (which would tell him which NFL players hadn’t been selected by many DraftKings users) and used it to his advantage on FanDuel. DraftKings insists that was not the case. (Read a full timeline of the scandal here.)
Since then, the press—including a wide range of news outlets that previously had not covered this nascent business—has been fixated on the industry and particularly on DraftKings and FanDuel. The two sites together have an estimated 95% share of the "daily fantasy" market, one part of the much larger industry of traditional season-long fantasy sports that media giants like ESPN and Yahoo have offered for years.
DraftKings, FanDuel, and Yahoo (which just began offering daily fantasy this football season) all quickly banned their employees from playing on any daily fantasy sites. Robins, in an exclusive interview with Fortune, said, "We may have been late to the game on the employee ban—and hindsight 20/20, that’s something I admit we should have done before."
The scandal has caused major damage to the reputations of these brands. It also has attracted new scrutiny from regulators (as well as three notable class-action lawsuits). But it has not hurt their businesses—the most recent report on entry fees from last weekend showed that, in fact, existing users spent more money on DraftKings and FanDuel contests than ever before.
Daily fantasy sports companies were controversial before the current scandal unfolded. They operate in a legal gray area: Under federal law their contests are permitted thanks to the 2006 Unlawful Internet Gambling Enforcement Act, which made online poker illegal but not fantasy sports games. But on a state level, five states in the country are still unfriendly enough that DraftKings and FanDuel do not operate there. In the other 45 states, their contests are considered to involve more skill than chance.
Fortune has been covering these companies closely since September, when we profiled DraftKings CEO Jason Robins and his red-hot, but controversial company. On just the first day of the new NFL season, DraftKings notched more than 220,000 new user signups—that was more than 10 times its previous biggest day ever. But DraftKings and FanDuel have spent scores in aggressive advertising this year to get their names out there.
Now they'll have to reckon with the F.B.I. and D.O.J.
See more of Fortune's coverage of DraftKings and FanDuel: