Déjà Vu, All Over Again: Preet Bharara Investigating Legality Of Daily Fantasy Sports Sites

Written By Chris Grove on October 20, 2015 - Last Updated on December 31, 2021
SDNY Courthouse

[toc]Preet Bharara, the U.S. Attorney behind the Black Friday indictments that permanently altered the landscape of the global online gambling industry, has turned his attention to daily fantasy sports.

That’s per a report from the Wall Street Journal, citing “people familiar with the matter.” Excerpt:

U.S. Attorney Preet Bharara’s office in the Southern District of New York is investigating whether the business model behind daily fantasy-sports firms like DraftKings Inc. and FanDuel Inc. violates federal law, some of the people said.

The investigation is at an early stage, they added, and even as New York prosecutors try to build their case, senior Justice Department lawyers in Washington are undecided on whether daily fantasy-sports betting violates federal gambling statutes.

What we know

Very little at this point.

  • The investigation is characterized as “at an early stage” by the WSJ.
  • The investigation does not appear focused on any particular company at this point.
  • No mention is made of what federal charges might be in play, although there’s a rather limited menu available (more on that below).
  • The news comes on the heels of reports that a federal grand jury focused on DFS has been empaneled in Florida and news of a preliminary probe of the industry involving the FBI and DoJ. It is unclear how the activity by the SDNY interacts with those investigations.
  • The news unequivocally represents a significant escalation of the legal woes facing DFS.

What we suspect

  • It is highly unlikely that Bharara would telegraph his intentions to the media without a strong degree of certainty regarding the viability of a case.
  • At a minimum, the scaffolding of the case is already in place. We should expect other pieces to fall in relatively quickly now that the informal announcement of the investigation has been made, although that’s no guarantee of a rapid resolution.
  • The focus of a case, should one result, would likely expand beyond operators to include at least some of the funding components of major daily fantasy sports sites.

Black Friday parallels: What fits, and what doesn’t

There are obvious and legitimate parallels:

  • The involvement of Bharara and the SDNY.
  • Both online poker and daily fantasy sports enjoyed rapid growth in a largely unregulated environment.
  • Both occupied a relatively ambiguous position vis a vis U.S. gambling law.
  • Both set themselves on a collision course with the land-based casino industry in the United States.
  • Both become victims of their own success, with growth and ubiquity raising inevitable questions regarding legality.

But also critical points of divergence:

  • Black Friday involved the filing of multiple indictments and the effective shutdown of major online poker sites. DFS is facing a preliminary investigation at this point and no sites are being shut down.
  • PokerStars and Full Tilt were overseas companies that were largely – albeit not completely – outside of the reach of U.S. officials.
  • Black Friday was largely a case about bank fraud, stemming from the need of online poker operators to work around restrictions on deposits and cashouts. DFS sites are transparent about their payment processing, operating largely in daylight, and are unlikely to have exposure on that front.
  • Daily fantasy sports has direct relationships with powerful American entities such as the NBA, MLB, and ESPN – Full Tilt and PokerStars had no similar support structure on U.S. soil.

The likely impacts

  • Payment processors may reconsider allowing DFS transactions, especially given the reputation of Bharara and SDNY.
  • We may see some sites exit New York immediately, with more following in short order.
  • The news of the investigation will cause partners of DFS sites – especially those closest to potential liability – to re-evaluate those relationships.
  • States considering aggressive action on DFS may accelerate their timetables for doing so.
  • Additional states will display interest in examining the legal status of DFS.
  • The investigation may force the hand of some DFS sites at the bottom rungs of traffic and funding, resulting in rapid consolidation that could spread up the chain.

The law in play

An educated guess suggests that a case would probably revolve around some combination of violations of New York state law and IGBA. There is a lesser probability of the UIGEA coming into the mix.

The long arm of the IGBA

The Illegal Gambling Business Act is arguably one of the most powerful tools at the disposal of the SDNY in this situation.

IGBA is a federal law enacted in 1970 as part of a broader suite of laws designed to target gambling operations connected to organized crime. You can read the entire text here.

IGBA requires three conditions to be met in order for a violation to be triggered:

(1) “illegal gambling business” means a gambling business which—

(i) is a violation of the law of a State or political subdivision in which it is conducted;

(ii) involves five or more persons who conduct, finance, manage, supervise, direct, or own all or part of such business; and

(iii) has been or remains in substantially continuous operation for a period in excess of thirty days or has a gross revenue of $2,000 in any single day.

Somewhat alarmingly for those behind the operators, IGBA appears to target not only those conducting the gambling, but also anyone who “finances, manages, supervises, directs, or owns” the illegal gambling business.

Read more on IGBA and how it might apply to DFS from attorney and SI.com writer Michael McCann here and here.

IGBA was among the charges asserted by federal officials in the Black Friday indictments leveled against online poker sites in April 2011. For a bit more color on the IGBA charge as it was applied to offshore online poker sites and how the sites responded to the charge, see PokerStars’ motion to dismiss from 2012.

What New York law says about gambling

The basic test for whether an activity qualifies as gambling under New York state law appears to be the “material degree” test.

Simply put, that means it doesn’t matter if skill dominates chance in outcomes – chance only needs to play a material role in the outcome.

Here are the relevant definitions from Sec 225.00:

1. “Contest of chance” means any contest, game, gaming scheme or gaming device in which the outcome depends in a material degree upon an element of chance, notwithstanding that skill of the contestants may also be a factor therein.

2. “Gambling” A person engages in gambling when he stakes or risks something of value upon the outcome of a contest of chance or a future contingent event not under his control or influence, upon an agreement or understanding that he will receive something of value in the event of a certain outcome.

Where the UIGEA fits in

There’s no guarantee that the UIGEA will enter the picture.

But if it does, we may see the industry split into two camps – one that has followed a strict interpretation of the UIGEA safe harbor requirements, and one that has offered sports that appear to test the tensile strength of the UIGEA safe harbor.

What to watch for in the days ahead

  • Where are the leagues? Watch for signs that the leagues are lining up behind DFS, or for signs of additional distance placed between the leagues and operators.
  • What new opponents emerge? The perceived vulnerability of the DFS industry brought a host of opponents out of the woodwork in the last few weeks. Who, if anyone, joins the crowd?
  • How aggressive is the defense? This news represents a clear threat escalation. Will DFS sites push back or seek to cut the problem off with cooperation?
  • How united are operators? We saw a fairly united front from DraftKings and FanDuel in the wake of DKLeak. Will that continue as the stakes move from PR headache to the prospect looming criminal liability?
  • Does traffic take a hit? Major DFS operators have generally managed to keep lobbies humming in the face of bad press thanks to the ongoing marketing momentum. That trend started to turn last weekend, and this weekend will be one to watch. A sharp decline could precipitate a vicious cycle of reduced guarantees and promotions that undercut the revenue base for operators.

Who is Preet Bharara?

Preet Bharara is the U.S. Attorney for the Southern District of New York (SDNY). He was appointed to the position by President Barack Obama in 2009 and the United States Senate unanimously confirmed his appointment in August of that year.

Bharara’s cases typically involve insider trading, terrorism, and political corruption. He is noted for being aggressive (even with judges), and is especially known for being a winner. An 85-win streak in insider trader cases was broken last year.

Unsurprisingly given his stomping grounds, Bharara goes after the money. According to Fast Company, between November of 2013 and January of 2014, Bharara’s office brought in over $3 billion in settlements working with an operating budget of $50 million.

Better than any hedge fund you’ve ever heard of,” Bharara told Fast Company.

Some examples:

  • JP Morgan settled a criminal case related to the Madoff Ponzi scheme for $1.7 billion in January, 2014.
  • Bharara secured the largest settlement ever in an insider trading case in April, 2014 when SAC Capital pled guilty and agreed to a $1.8 billion payout.
  • Bharara led the investigation into obfuscated defects in Toyota cars. Last year the company agreed to pay $1.2 billion to settle its case with the government.
  • In September, 2015, GM assented to a $900 million settlement with regard to its faulty ignition switch case.
  • On October 15, 2015, it was announced the Fifth Third Bancorp will be paying more than $84.9 million to resolve federal fraud charges tied to defective mortgages.
  • Days earlier, UFC Aerospace said it would pay $20 million for fraudulently asserting that the business was woman-owned.
  • And of course, we must not forget the PokerStars/Full Tilt settlement from 2012, which saw PokerStars forking over $547 million to repay customers and resolve charges against the company.

In a talk given to New York University law students earlier this month – at which the dean of the law school held up a copy of the NY Post with the headline “The Preet Is On” – Bharara spoke to the issue of public corruption.

“If you are able to make a neighborhood safer for people by getting rid of a gang problem, and the next day, people feel more comfortable letting their kids go play in the park because you’ve put away people who were terrorizing their neighborhood, that’s great,” he said.

“The same principal [sic] extends to every context. If you haven’t done something to try to make the problem better, then it’s not a great situation. And that’s true also of public corruption,” Bharara remarked.

The curious case of Amaya

It’s worth noting that Amaya’s timing – pulling StarsDraft out of all but 4 states just one day prior to this news – is now looking incredibly (perhaps to some unbelievably) fortuitous.

Amaya’s entrance into the DFS market may have played some role in changing the way that U.S. officials – including the U.S. Department of Justice, who continue to monitor the terms of the settlement reached by the Department with PokerStars in 2012 – intersected with the industry.

Prior to Amaya, there were no DFS major operators with direct ties to other regulated online gambling products. In fact, most of the daily fantasy industry had functionally no interplay with the gambling regulatory apparatus in the United States.


FanDuel, FantasyDraft, Star Fantasy Leagues, StarsDraft, and Yahoo did not respond to requests for comment.

A DraftKings spokesperson said the company couldn’t comment on any possible investigative matters, but offered the following statement:

We strongly believe the games on our site – and daily fantasy sports in general – are legal.

We recognize our responsibility to the millions of fans who are captivated by the excitement and interactive nature of daily fantasy sports to make sure they can continue to play the game they love.  Ensuring a level and fair playing field for all players is a fundamental tenet of our company, and we are committed to working with all relevant authorities to ensure that our industry operates in a manner that is completely transparent and fair for all consumers.

We are seeing a number of state regulators and other authorities taking a reasoned and measured approach to the daily fantasy sports business and hope that trend continues along with due consideration for the interests of sports fans across the country who love to play these games.

Image credit: Jannis Tobias Werner / Shutterstock.com

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Chris Grove

Chris is the former publisher of LegalSportsReport.com and OnlinePokerReport.com. Grove also serves as a consultant to various stakeholders in the regulated market for online gambling in the United States.

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