New York Regulators Demand Proof Of Segregated Funds From Fantasy Sports Operators In Wake Of Fantasy Aces Debacle

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The New York State Gaming Commission sent letters to licensed daily fantasy sports operators, asking them to prove that they segregate player funds from operational funds.

That move comes in the wake of DFS site Fantasy Aces filing for bankruptcy while owing players more than $1.3 million.

Fantasy Aces had acquired a temporary permit from the NYGC. The company has since been removed from the list of temporary permit holders.

What NY regulators did on DFS

Legal Sports Report obtained an email sent to at least one DFS operator.

The assumption is that it was sent to all operators that have a temporary license in New York, including DraftKings and FanDuel.

Here is the email:

Racing, Pari-Mutuel Wagering and Breeding Law Section 1404(1)(l) requires a temporarily permitted interactive fantasy sports operator “ensure authorized players’ funds are protected upon deposit and segregated from the operating funds of such operator or registrant and otherwise protected from corporate insolvency, financial risk, or criminal or civil actions against such operator or registrant.”

The Gaming Commission requests documentation that clearly illustrates the legal mechanism and internal controls associated with such a segregated account by which player funds are protected from “corporate insolvency, financial risk, or criminal or civil actions against such operator or registrant.” Accordingly, please include any documentation with banks or other depository institutions that establishes the restricted purposes of any accounts established for players’ funds and prize funds and the identity of all those authorized to transfer funds out of such accounts; a copy of your internal controls governing the receipt and disbursement of player funds to such players and the funding and disbursement of contest prize accounts; your procedures for players to withdraw funds from their player accounts in the event of operator insolvency.

Pursuant to Racing, Pari-Mutuel Wagering and Breeding Law section 1405(g) and 104(5, 6), you are directed to produce the following records insofar as they relate to your conduct of Interactive Fantasy Sports (“IFS”) wagering:

  1. most recent audited financial reports (Balance Sheet, Income Statement, and Cash Flow statement). If audited financial statements are unavailable, indicate why.
  2. current financial reports (Balance Sheet, Income Statement, and Cash Flow statement), and
  3. monthly bank statements for the previous six months for segregated bank accounts of players’ funds pursuant to Racing Law section 1404(l), operating or other accounts into which funds were directly transmitted from such players’ fund accounts, and accounts that hold prize payments (including distributed prizes that remain in a player’s account with you). In addition, provide a separate written statement of the following:
  4. total dollar amount of player funds, less prize payments to players, that you currently have on deposit in segregated accounts
  5. total dollar amount you have removed from player funds, for operating funds or other purpose excluding prize payments, in each of the previous six months., and
  6. total dollar amount of your liabilities (unpaid prize money) for pending contests as of date of receipt of this communication.

New York’s path to DFS regulation

New York has served as a focal point among the nationwide legal and legislative wrangling over DFS.

It all started with New York Attorney General Eric Schneiderman. Back in October 2015, he noted to the media that he was investigating DraftKings and FanDuel, characterizing DFS sites as “totally unregulated gambling venues.”

Cease and desist orders from his office to DraftKings and FanDuel followed in November, an action that likely set off a number of other attorneys general to look into DFS.

A court battle ensued, with an emergency hearing held to consider injunctions from the AG against FanDuel and DraftKings the same month.

A Supreme Court judge found on the side of the NY AG on Dec. 11, but an appeals court put a stay on the preliminary injunction, reinstating the status quo, before DK and FD exited the state in March.

The legal saga was ultimately rendered moot in June 2016 when New York Gov. Andrew Cuomo signed a bill into law that legalized and regulated real-money fantasy contests.

In a somewhat bizarre twist, Scheniderman has since been tasked with defending the legality of that bill, forcing his office to make the case that fantasy contests as defined in the bill are, in fact, not gambling.