DraftKings Files Motion To Dismiss Securities Suit From Short-Seller Report

Written By John Holden on March 22, 2022
DraftKings

Late last month, DraftKings filed a motion to dismiss an amended complaint in litigation surrounding securities laws.

The litigation stems from a class-action lawsuit filed in July 2021 alleging that DraftKings violated federal securities laws. In particular, the lawsuit alleged that DraftKings made false or misleading statements about the company’s relationship with SBTech.

The case was filed about a month after the Hindenburg Research report that alleged the merger between the two gaming companies exposed DraftKings to “black-market gaming.” The rise of short-seller reports will undoubtedly raise novel questions that courts will be forced to tackle.

While the lawsuit has languished in recent months as the plaintiffs have amended their complaint, DraftKings has now filed a motion to dismiss the amended complaint, likely hoping to head off an expensive and potentially intrusive discovery process.

Background on original DraftKings complaint

The original complaint filed on July 2, 2021, by Kent Rodriguez on behalf of himself and similarly situated individuals against DraftKings, the SPAC which brought DraftKings to the public markets, CEO Jason Robins, and several other company insiders alleged that the

“Defendants made materially false and misleading statements regarding the Company’s business, operations, and compliance policies.”

Specifically, the complaint alleged that DraftKings failed to disclose:

  • “SBTech had a history of unlawful operations;”
  • “accordingly, DraftKings’ merger with SBTech exposed the Company to dealings in black-market gaming;”
  • “the foregoing increased the Company’s regulatory and criminal risks with respect to these transactions;”
  • “as a result of all the foregoing, the Company’s revenues were, in part, derived from unlawful conduct and thus unsustainable;” and
  • “as a result, the Company’s public statements were materially false and misleading at all relevant times.”

If these allegations sound familiar, it is likely because they are similar to the claims in the Hindenburg Research report published in June 2021. The plaintiffs reported that after the publication of the Hindenburg Report, DraftKings stock price fell by 4.17% to $48.51 per share. Currently, the stock trades below $20 per share.

The amended complaint

In January 2022, the plaintiffs filed an amended complaint under the new caption of “In re DraftKings Inc. Securities Litigation.” Headed now by the lead plaintiff, Walter Marino, the amended complaint revised some of the allegations against DraftKings.

However, the crux of the amended complaint continued to center on DraftKings’ relationship with SBTech and SBTech’s alleged “long and ongoing record of operating in black markets.”

The amended complaint alleges that SBTech was a critical component to DraftKings going public via SPAC. SBTech was described as the “technological and financial backbone” and “was the only positive contributor of operating income.”

You’ve heard this before

A great deal of the amended complaint is devoted to reiterating the allegations contained in the Hindenburg Report.

The amended complaint makes several specific alleged violations of securities laws, including:

  1. Violations of Section 10(b) of the Exchange Act; and
  2. Violations of Section 20(a) of the Exchange Act;

The amended complaint seeks compensatory damages for the entirety of damages suffered by all class members, and prejudgment and post-judgment interest along with attorneys’ fees and costs.

DraftKings motion to dismiss amended complaint

DraftKings and the individual defendants named in the complaint filed a motion to dismiss the amended complaint in a largely predictable move. The defendants argue that the plaintiffs have failed to state a claim upon which relief can be granted under federal rules of civil procedure 9(b) and 12(b)(6).

DraftKings breaks their memorandum of law down into separate arguments for why the amended complaint should be dismissed with prejudice.

No specific mention of misstatements or omissions

The memorandum of law argues that while the plaintiffs make various damning claims, they lack specificity regarding any statements or omissions made by the defendants that would be actionable. The defendants cite the Supreme Court Basic Inc. v. Levinson for the proposition that “silence, absent a duty to disclose, is not misleading.”

The memorandum then argues that nowhere in the complaint do the plaintiffs allege a violation of law by SBTech. The defendants argue that merely pleading that the defendants have engaged in alleged “illegal” acts without specificity does not meet the standards necessary for securities litigation.

The memorandum’s first argument is built around the fact that while the complaint makes various allegations of illegal activity, there is little specificity as to how the alleged activity violates the laws. Additionally, nearly all (if not all) the alleged impermissible activity is reported to have taken place outside the United States.

Ma, where’s the fraud?

The defendants’ second argument is that there is no clear allegation of fraud in the complaint. DraftKings’ lawyers argue that there is no “cognizable motive to defraud the plaintiffs” and that the plaintiffs have failed to plead convincingly that there was even strong circumstantial evidence of fraud.

In addition, the defense argues that DraftKings made extensive disclosures about risks associated with uncertainty about gaming laws “in unregulated jurisdictions outside the U.S.”

Still, more

Additionally, the defendants argue that the plaintiffs have failed to plead a viable claim against each defendant. It is the plaintiffs’ responsibility to connect all defendants to the acts in the complaint (or amended complaint in this case.)

DraftKings argues that the plaintiffs failed to do so in the case of at least some of the named individual plaintiffs. Finally, the defendants argue that the complaint fails to allege causation, meaning there is an apparent disconnect between any act by the defendants and the loss by the plaintiffs.

What to make of DraftKings filing?

Securities litigation following short-seller reports has become quite common. In the immediate term, the plaintiffs will respond to the defendants, followed by a reply from DraftKings.

After fully briefing the motion to dismiss, we might see oral arguments (which have been requested) where the two sides will argue the motion.

Even if the motion to dismiss is granted, there will likely be an appeal.

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John Holden

John Holden J.D. / Ph.D. is an academic. His research focuses on policy issues surrounding sports corruption.

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