If anyone in America still hadn’t heard of DraftKings and FanDuel by way of their aggressive advertising assault, they have now. The New York Times has broken a story—and deemed it worthy of a mobile news alert—on a DraftKings employee winning $350,000 on FanDuel this week. Sports and technology folks—not just those that already follow these companies—are going nuts.
Wait, remind me what these two companies are?
DraftKings and FanDuel offer real-money, “daily fantasy” sports—an alternative to traditional season-long fantasy, where you draft one team before the start of the football season and you’re stuck with it for five months. With daily fantasy, you can enter new contests and draft fresh teams every week, if you’d like. ESPN, a longtime leader in fantasy football, made a big partnership with DraftKings that becomes exclusive in January. Yahoo, another established fantasy football giant, built its own daily platform this year to compete with the two tech startups.
FanDuel launched three years earlier, but DraftKings, which has outspent FanDuel threefold on TV advertising, has an edge at the moment. Both are billion-dollar tech “unicorns.” The payouts in daily fantasy are much bigger, so the companies have come under glare from wary lawmakers and are already controversial.
Why were they already controversial?
There is an ongoing debate over whether daily fantasy sports constitutes gambling. At a federal level, fantasy sports are legal because they were left alone by the 2006 Unlawful Internet Gambling Enforcement Act. At the state level, 45 states allow daily-fantasy contests because they are deemed a game of skill (rather than games of chance), but five states still disagree.
So, what exactly is this latest scandal?
A DraftKings employee, Ethan Haskell, had access to DraftKings ownership data, meaning that he may have seen which NFL players had been selected by DraftKings users, and by how many users. That would have helped him select his own lineup on FanDuel, because the two sites work so similarly and typically have the exact same “price” for each player in a given week.
The way daily fantasy sites work is that you select a roster under an imaginary “salary cap” and the challenge is to balance players that will perform well with players who are under-the-radar and won’t be selected by other users. So if Haskell could have seen last week, for example, that New England Patriots running back LeGarrette Blount was owned by a very small percentage of players, he could have been motivated to choose him. (But using that data still wouldn’t guarantee a win—Blount still had to perform well, which is something no one can predict for sure.)
In FanDuel’s $5 million “NFL Sunday Million” contest this week, in which Haskell placed second and won $350,000, his lineup had a mix of big-name players owned by a high number of users, like New England kicker Stephen Gostkowski (owned by 11% of users) and Seattle’s defense (owned by 23%) and unexpected gambles that were not owned by many, like Cincinnati quarterback Andy Dalton (who has been playing terrifically but was still only selected by 2% of users) and Cincinnati wide receiver A.J. Green (who got 40 fantasy points and was owned by only 4.4% of users).
The Times compares what Haskell did to insider trading, but the analogy isn’t quite right because knowing the ownership data is only half the battle—the players you choose still need to excel. In Haskell’s case, he is an avowed “grinder”—that’s industry-speak for the obsessives who do research, make spreadsheets, and win by expertise. (One of the biggest critcisms of DraftKings and FanDuel has been that only the grinders win the big money.)
Just two months ago, Haskell spoke to the fantasy web site RotoGrinders, where he used to work before DraftKings, about his fantasy sports success. That is: having access to user data would have clearly helped him, but winning the FanDuel contest (one of the site’s busiest contests) also required expertise and smart picking.
What’s far more surprising in all of this is the revelation that, until now, DraftKings employees were allowed to play on FanDuel and vice-versa. In light of this scandal, both companies have, for now, banned their employees from playing on the other.
How have the companies responded?
Nothing is more important to DraftKings and FanDuel than the integrity of the games we offer to our customers. Both companies have strong policies in place to ensure that employees do not misuse any information at their disposal and strictly limit access to company data to only those employees who require it to do their jobs. Employees with access to this data are rigorously monitored by internal fraud control teams, and we have no evidence that anyone has misused it.
However, we continue to review our internal controls to ensure they are as strong as they can be. We also plan to work with the entire fantasy sports industry on this specific issue so that fans everywhere can continue to enjoy and trust the games they love.
For some reason, the version post on FanDuel’s website contains an extra clause at the beginningthat is not in the DraftKings version: “While there has been recent attention on industry employees playing on FanDuel and DraftKings,” the first sentence starts.
Late on Monday night, DraftKings sent Fortune a second statement that insists Haskell did not see the ownership data until after he had locked in his FanDuel lineup:
There has been some confusion regarding a recent piece of data that was inadvertently posted on DraftKings’ blog containing information about players and fantasy games. Some reports are mischaracterizing the situation and implying that there was wrongdoing. We want to set the record straight. For the last several days, DraftKings has been conducting a thorough investigation, including examining records of internal communications and access to our database, interviewing our employees, and sharing information regarding the incident with FanDuel. The evidence clearly shows that the employee in question did not receive the data on player utilization until 1:40 p.m. ET on Sunday, September 27. Lineups on FanDuel locked at 1:00 p.m. that day, at which point this employee (along with every other person playing in a FanDuel contest) could no longer edit his player selections. This clearly demonstrates that this employee could not possibly have used the information in question to make decisions about his FanDuel lineup. Again, there is no evidence that any information was used to create an unfair advantage, and any insinuations to the contrary are factually incorrect.
And on Tuesday night, the New York Attorney General, Eric Schneiderman, announced he was launching an investigation into DraftKings and FanDuel.
Will this scandal hurt the viability of these companies?
That’s unlikely. While they operate in something of a legal gray area—at least one sports law professor tells Fortune, in fact, that he thinks the PGA Tour single-tournament contests DraftKings offers are illegal—it hasn’t much hurt their ability to bring in new users. On just the first Thursday of the NFL season, when the New England Patriots played the Pittsburgh Steelers, DraftKings saw 220,000 new user signups.
The ongoing legal scrutiny, which will be potentially damaging to these companies, has arguably been brought on not by this one scandal but by their own advertising onslaught.
For much more from Fortune on these companies, read: