[toc]The wire fraud statute — a potent tool of federal prosecutors — could attach in the wake of bankruptcy court revelations that player funds at daily fantasy sports site Fantasy Aces may have been used to cover operating expenses.
Beyond important questions of whether Fantasy Aces’ users will ever see their money again, another question has emerged. If Fantasy Aces did indeed use customer funds to pay for company expenses, could that be criminal?
The federal wire fraud statute, as set forth in 18 U.S.C. § 1343, is expansive. If Fantasy Aces customer money travelled across state lines and the company pilfered it under false pretenses, a federal prosecutor could potentially bring a wire fraud case under the law.
Background on Fantasy Aces situation
Before its website closed, the Fantasy Aces portal included this statement (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.
Details contained in Fantasy Aces’ 90-page bankruptcy court filing cast doubt as to whether player funds were safeguarded and held in a segregated bank account. Well-accepted accounting standards in the gaming industry mandate that there is no co-mingling of customer funds and company operating accounts. Nevertheless, an entry in the bankruptcy filing reveals over $1.3 million attached to “various user accounts” in a lengthy sub-section devoted to creditors’ claims:
In comparison, a bank account and PayPal account listed as “players account[s]” have a combined amount just over $3,200.
Creditors with unsecured and nonpriority claims are rarely made whole in bankruptcy proceedings.
Overview of the federal wire fraud statute
The scope of the wire fraud statute is vast. In relevant part, the law states:
Whoever, having devised or intending to devise any scheme or artifice to defraud, or for obtaining money or property by means of false or fraudulent pretenses, representations, or promises, transmits or causes to be transmitted by means of wire, radio, or television communication in interstate or foreign commerce, any writings, signs, signals, pictures, or sounds for the purpose of executing such scheme or artifice, shall be fined under this title or imprisoned not more than 20 years, or both.
A 2011 Congressional Research Service document obtained by Legal Sports Report detailed five elements to a wire fraud claim:
- “the use of mail or wire communications in foreseeable furtherance;
- of a scheme to defraud;
- involving a material deception;
- with the intent to deprive another of;
- either property or honest services.”
The wire fraud statute has been applied in a variety of ways. Examples include an insider trading scheme, a liquor smuggling operation, and stock price manipulation.
Whether a federal prosecutor would use the wire fraud statute to address the emerging Fantasy Aces situation is currently unknown. There have been no public reports of such a prosecution.
Overlap between wire fraud and sports gaming
Sports gaming cases have invoked the federal wire fraud statute before.
The most high-profile example is likely the 2008 criminal case involving former NBA referee Tim Donaghy and two co-defendants. In addition to a Wire Act charge, Donaghy pled guilty to two counts of conspiracy to commit wire fraud. Those were in connection with wagers he placed on games he officiated.
In March 2016, a former United States prosecutor also mentioned the wire fraud statute in the context of daily fantasy sports and yet-to-be-made-public federal probes involving employee play on various DFS platforms.
Consumer protection issues in the daily fantasy space
When Congress held a May 2016 hearing devoted to fantasy sports, consumer protection issues were frequently mentioned. Likewise, consumer protection issues are central to many of the state-level regulatory efforts jump-started in 2016 and continuing this year. Required firewalls between user funds and operating accounts are central to many of these regulatory efforts.
But the still-developing Fantasy Aces situation — like prior scandals in online poker and esports skin betting — is a reminder of how high-profile incidents cast a shadow over legitimate operators. There is a stain on the entire industry regardless of whether criminal charges under the wire fraud statute or otherwise are forthcoming.