[toc]This week, we learned that daily fantasy sports operator Fantasy Aces filed for Chapter 7 bankruptcy.
The main takeaway from that revelation? The site was not actually segregating player funds from operational funds before it closed down.
It brings up a number of questions from:
- How this could happen at a DFS site?
- Why did DFS regulations not catch it?
- What are other operators are doing on this front?
Fantasy Aces blew through $1.3 million belonging to players
Fantasy Aces’ liabilities for player accounts exceeded $1.3 million, according to bankruptcy filings. Those same filings showed only about a few thousand in cash on hand to cover player funds.
That’s despite the fact that Fantasy Aces’ website used to say this, when it was still in operation (emphasis added):
Are you looking for a more exciting way to play fantasy sports? Then you’ve come to the right place, where you can use your knowledge of professional athletes to win real cash and have the confidence of knowing your funds are safe! Fantasy Aces LLC is a US based fantasy sports website owned and operated in Southern California and our members funds are held in a segregated US bank account, separated from our operational accounts.
While that appears to be semantically true, it obviously wasn’t true for the purposes of keeping player funds’ safe, or in any sort of legal way.
It’s one thing to have separate bank accounts, if you are a DFS site. It’s another matter to keep them out of the reach of a site’s operational arm. That would occur by creating a separate entity to oversee and hold the funds, or by putting them in a trust.
I have confirmed with multiple sources that FantasyAces was using player funds operationally dating back to 2015, in the six-figure range.
So while FA kept money in separate accounts, there was obviously nothing to stop them from accessing that money to use it for whatever purposes they desired.
What do other sites do for fund segregation?
There are an increasingly fewer major DFS sites left at this point: DraftKings, FanDuel and Yahoo, FantasyDraft constitute the biggest.
We still don’t know a ton about the logistics of how they segregate funds. Both FanDuel and DraftKings use separate companies to hold player funds. Legal Sports Report reached out to them to paint a picture of what they do on they do on this front, currently.
All statements were provided by spokespeople for the sites. The statements do not represent independent confirmation by LSR of how segregation of funds is handled by any of these sites.
“FanDuel has always considered segregation of player funds a core operational principle. All of our player funds are held in a separate account created for the sole purpose of protecting those funds and ensuring that players can withdraw funds at any time.”
“DraftKings believes all fantasy sports operators should adhere to a strict policy of segregation of player funds, as promulgated by various state laws and regulations, so that customers are always protected and 100% guaranteed to have access to their money.
“As we work collaboratively with lawmakers and regulators across the country to pass fantasy sports legislation, it is critical our industry demonstrates a collective commitment to the segregation of funds and other consumer protection standards. On DraftKings, users can play the fantasy games they love, confident their funds are always available for withdrawal.”
A deal for FantasyDraft to acquire FantasyAces fell through when the former went through due diligence.
“FantasyDraft player funds, both deposits and contest winnings, are held in a separate, segregated account which is held by Fantasy Draft Player Funds LLC, a subsidiary of Fantasy Draft LLC. Player funds are the property of our players and are never commingled with company operating funds. Furthermore, FantasyDraft is licensed and/or registered with every state that has passed DFS legislation and as such is compliant with the laws as prescribed by each.”
“Since starting operations in 2011, DraftDay has operated segregated player funds and operations accounts. Through the years, we’ve been bought and sold between multiple companies, each requiring independent audits at each stage.
Our majority holder, which also owns Rant Media (Rant Sports) uses a top tier institution as our independent auditor. We are fully compliant with all jurisdictions that we operate in and have consistently press released our innovative player protections (first to use identity verification, first to use GeoComply). DraftDay also powers the largest daily fantasy sports site in Australia, Draftstars.com.au.
We have been very concerned by the newcomers over the last couple years (as most groups have been compared to us) and dread instances like this where a site fails to uphold what we consider foundations of the industry. “
DFS industry lobby
The statement below comes via someone working on behalf of the industry to pass laws state by state. Those laws usually include language about segregation of funds.
“A strong belief in the segregation of funds as essential is why we have sought – and passed — legislation across the country to install regulations requiring all fantasy operators to meet rigorous standards for keeping player funds separated from company funds.”
“Due to the new laws we helped to pass, some of the first states to regulate fantasy sports are now beginning to review operators’ compliance with requirements to segregate funds. We believe every fantasy sports company, operating in any state, should be meeting these same standards.
“As more states implement smart regulation, there will be no place for operators who cannot meet these standards. This is an instructive example of why regulations to protect customers using any fantasy sports operator should be passed in all states.”
Why wasn’t Fantasy Aces caught?
As those state regulations that were enacted in 2016 have come online, there’s certainly a question of why Fantasy Aces wasn’t caught before it went bankrupt.
First, the FSTA and oversight
Once upon a time, the Fantasy Sports Trade Association presented itself as a quasi-regulatory body overseeing sites that paid dues. Part of membership in the FSTA for DFS sites was adhering to the paid-entry contest operator charter. (That page no longer appears on the website but can be seen here.)
The charter said this on segregation of funds:
The signatory company will hold player funds (whether they are funds on deposit, or as entry fees in live games) separate from their operational funds. Player funds will not be used to fund the growth of their business and at no time are player funds at risk if the company were to cease doing business.
Notwithstanding the above, signatory companies recognize that all prizes are paid from the general assets of the signatory companies, and the winners are not paid out of a pool consisting of funds received for any given contest.
Stated another way, signatory companies recognize they must pay winners of a contest the announced prize irrespective of the amount of funds received from entrants in that particular contest. Further, it is recommended that each company has an annual audit performed, ensuring that the appropriate player funds are being segregated.
The FSTA long ago admitted it was doing nothing to enforce this. And, of course, the only penalty for not adhering to this charter is revocation of FSTA membership.
That’s what happened. The FSTA suspended Fantasy Aces just hours before news of the company’s bankruptcy broke, in a move that did nothing for anyone.
Fantasy Sports Trade Association suspends membership of daily fantasy site FantasyAces. Statement from FSTA president @PaulCharchian: pic.twitter.com/vqnlonICek
— David Payne Purdum (@DavidPurdum) February 1, 2017
So, the FSTA, despite having Fantasy Aces as a member, was not in a position to do anything about segregation of funds. All it did was lend an air of credibility to a site that clearly didn’t deserve it.
The FSTA’s inefficacy on this subject is well known. It’s one of the first opportunities for state DFS regulations to see action.
Where Fantasy Aces doesn’t operate
According to FantasyAces’ website, here are the states that it didn’t serve.
Where does Fantasy Aces fall under regulations?
Fantasy Aces has declined to comment to Legal Sports Report on any matter in the past week, including a query about which states in which it is registered.
But LSR can confirm it has at least a temporary license or registration in New York and Mississippi. By using the list above, we can also determine other states where Aces might have been operating illegally or under regulations with no registration.
- Massachussetts (No registration component).
- Virginia (Despite not appearing on the list above, it appears Aces was not operational in Virginia. It is not registered in the state.)
- Missouri (I am not sure it Aces was accepting players here or not. But it is not registered in this state, and does not appear on their excluded states list).
- Idaho (Most sites, including DraftKings and FanDuel, pulled out of the state because of a negative legal climate).
- Maryland (Sites must notify the comptroller of their intent to operate in the state under recently enacted regulations.)
Of all the states above, the only place with a realistic chance of catching Fantasy Aces was New York. In Mississippi, very little is required of sites wanting to operate there on the front end, currently. Regulations in Massachusetts and Maryland are set up to be reactive rather than proactive.
New York had issued a temporary license to operate to FA, but that would not have come with the level of vetting that a full license would have. LSR understands that sites are in varying stages of the licensing process.
The annual audits that some states require have generally not yet taken place in the first year of DFS regulations.
The bottom line: It’s too early to call state regulations in effectual on this front.
What’s next on the segregation of funds front?
As outlined above, we need to wait for state regulations to fully take effect.
But it’s still clear that an annual audit would not always catch an operator before it’s too late. However, it’s clear state regulators — if they don’t already — should have access to a company’s financials up front, upon registration or licensure.
We will start to find out if state regs will give players any sort of recourse in the Fantasy Aces case.
In the meantime, the call for all paid-entry fantasy contest operators to be as transparent as possible on segregation of funds remains germane.