DraftKings and FanDuel face class action lawsuit over ‘insider information’

October 9, 2015, 5:43 PM UTC
DraftKings Inc. And FanDuel Inc. Applications As Ad Spending Increases
The DraftKings Inc. app and FanDuel Inc. website are arranged for a photograph in Washington, D.C., U.S., on Monday, Oct. 5, 2015. Fantasy sports companies DraftKings Inc. and FanDuel Inc. raised a total of $575 million in July from investors including KKR & Co., 21st Century Fox Inc. and Major League Baseball to attract players to games that pay out millions of dollars in cash prizes in daily contests. Photographer: Andrew Harrer/Bloomberg via Getty Images
Photograph by Andrew Harrer — Bloomberg via Getty Images

Following a week of media criticism and regulatory scrutiny over whether employees of fantasy sports sites DraftKings and FanDuel received an unfair betting advantage, a class action lawsuit was filed Thursday accusing the companies of fraud and false representations.

The controversy essentially boils down to whether the sites’ employees engaged in insider trading when picking their fantasy sports team rosters, to “win prize money through inside information,” according to the complaint filed in New York. But while insider trading is clearly illegal when it comes to buying stocks, the law is less well defined when it comes to using non-public information to gain a competitive advantage in fantasy sports gambling.

At the heart of the allegations against the companies is the recent revelation that the DraftKings employee had access to his own site’s data on other customers’ bets, information he could have used to instruct his own wagers on competing site FanDuel—an edge similar to say, knowing your opponent’s cards in a game of poker. “It would have given him the competitive advantage of knowing which NFL players were likely to not be selected by many users in the FanDuel contest, since the two sites function so similarly,” explains Fortune writer Dan Roberts in a piece outlining the timeline of the controversy.

In a statement to Fortune on Monday, DraftKings denied any unethical play: “Again, there is no evidence that any information was used to create an unfair advantage, and any insinuations to the contrary are factually incorrect.” While employees of DraftKings and FanDuel were not allowed to gamble on their own company’s site, they were allowed to play on each other’s—a policy that both companies nixed in the wake of the scandal, prohibiting staff from playing on a competitor’s site.

According to ESPN, DraftKings had recently admitted that some of its own employees were making more money competing on rival fantasy sports sites than their DraftKings paychecks.

DraftKings CEO Jason Robins further addressed the issues, and defended the employee in question, in an exclusive interview with Fortune yesterday:

And as it turned out, he did not do anything unethical, he made a mistake—but that was an error in his job, not an error in his ethical judgment….We’ve addressed the immediate issue, which is banning all employees from playing anywhere in the industry in public games. That’s a big step. I think that honestly solves this issue, and while there are certainly additional safeguards to enforce that, I think if we can successfully enforce that, and we will, then that solves this issue.

…while we acknowledge the problem of someone seeing the data, and certainly seeing that data would be helpful, it’s not insider trading because it’s not like he had a specific data point that guaranteed he would win.

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