Back in November — when the media coverage of the daily fantasy sports industry and its legal issues was at its height — I wrote a story that came out of evidence in the New York court cases involving state attorney general Eric Schneiderman, DraftKings and FanDuel.
That story was about evidence that DraftKings no longer felt it was that important to follow the Unlawful Internet Gambling Enforcement Act to the letter — that being in compliance with state law was far more important. It’s actually difficult to argue with DraftKings’ reasoning — the UIGEA is just a law that deals with processing of payments as it relates to fantasy sports and online gambling, and was used as the starting point for DFS legality at the federal level when it was enacted in 2006.
But that was just part of the story.
More important than DraftKings and the UIGEA?
At this point, the far more important issue is what did the Fantasy Sports Trade Association did when it came to the realization that DraftKings wasn’t following the UIGEA. The FSTA’s board of directors could have changed its paid-entry contest operator charter (since removed from the website) so that UIGEA compliance wasn’t a condition of membership. Instead, it changed the charter so that there is basically no enforcement mechanism for the charter.
This is a charter that says, among other things, that operators must segregate player funds from operational funds, and that the FSTA recommends “that each company has an annual audit performed, ensuring that the appropriate player funds are being segregated.” As members of the FSTA, sites are allowed to put the FSTA logo on their website, which is tacitly a signal that they are members in good standing with the organization, and following the charter — and should serve as peace of mind for players.
We’ve already seen at least one example of an FSTA member where segregation of funds was likely not occurring. And we may not have seen the last.
All of this comes with the backdrop that the FSTA is behind the base language for regulations that have been introduced in a variety of states. So why is the FSTA — an organization either unwilling or unable to enforce its own charter — the one being allowed to promulgate regulations that we’re seeing in many jurisdictions?
That’s a really good question.
What the FSTA did to its own charter
The tale starts with an FSTA call in May of last year, the minutes of which can be seen here. (They came to light as part of the NY DFS case).
There, the writer of the minutes related what DraftKings CEO Jason Robins said about the UIGEA and its compliance with the FSTA charter.
Jason indicated that DraftKings would be proposing a change to the paid operator charter. It was also discussed that if the change doesn’t pass, then there will have to be a decision of what to do next since DraftKings will be out of compliance with it.
Robins took issue with the accuracy of those minutes via ESPN, but that’s neither here nor there for the purposes of this story. What happened next is.
The need to change the charter
Also in the evidence in the NY case is an email sent by FSTA president Paul Charchian to the group’s board of directors:
For those who may not be aware, DraftKings is offering single-event contests for NASCAR, PGA and MMA. These contests are not in compliance with the carve-out language in UIGEA. And, since DraftKings is not in compliance with UIGEA, they’re not in compliance with the FSTA’s paid-entry contest operator charter.
Last week, the compliance committee took up the subject, and a spirited conversation ensued. There are several issues, but at the highest level, a disagreement exists about whether the UIGEA should be part of the the FSTA’s charter.
Instead of getting rid of the UIGEA language…
The FSTA had a relatively easy path: Take out the UIGEA language, DraftKings is happy, end of story. Whether that would have been a great idea or not is certainly up for debate, but it’s not what happened.
The minutes of an FSTA board meeting held in September of last year were also entered into evidence. That’s when we found out what the FSTA did:
The FSTA’s Paid Entry Contest Operator Charter, found at http://fsta.org/about/fsta-paid-entry-contest-operator-charter/, is amended to remove the second sentence from the first paragraph that states: “Any violation that is not remedied within 30 days of notification by the FSTA can result in revocation of FSTA membership at the FSTA board’s sole discretion.”
In short, the FSTA changed its own charter so that members can be in violation of it for any period of time, and not be held accountable for it. And even if they were, the penalty is pretty basic: No longer being a member of the FSTA. It brings into question why there’s a charter at all — if you can basically ignore it with no repercussions — and the efficacy of the FSTA in doing anything to rein in its own members.
The language theoretically stricken from the charter still appears online. The FSTA has previously had no comment in relation to my original story regarding its charter and the UIGEA.
FSTA’s charter doesn’t do much, but group is writing regulations?
Here’s where the problem really comes in, beyond the charter as an ineffective mechanism:
The same group that decided that its charter doesn’t need to be enforced is going to lawmakers in a variety of states and handing them a template for regulation.
If that sounds crazy to you, you’re not alone.
FanDuel CEO Nigel Eccles actually pointed to the charter that he helped to pen during a hearing in Nevada on Monday, citing it as the industry’s attempt at self-regulation. Given the change made to the charter, it’s difficult to point to that as anything approaching an effective tool, however.
That’s not to say that there isn’t some good in the regulations that the DFS industry has written. But the FSTA is an organization looking out for the best interests of its member companies — or at least DraftKings and FanDuel — which is what it’s supposed to do. It’s trying to offer legislation with a low barrier to entry and regulations that would not be too onerous for its member companies.
The FSTA is not necessarily trying to write regulations that are in the best interests of fantasy sports players, or the states themselves. It’s a happy coincidence if those interests happen to line up.
The industry is also pushing bills that designate fantasy sports as a game of skill and not as gambling, for reasons we’ve written about ad nauseam at Legal Sports Report.
That’s despite the fact that gaming regulators are easily in the best position to oversee DFS sites, or to adjust on the fly with the industry, if given the power. (The FSTA model bill does not give power to any governmental organization to promulgate new regulations; it merely gives the ability to review annual audits and assess a $1,000 civil penalty for a violation of the law.)
If players’ interests were first-and-foremost, a more rigorous form of regulation would be floated by the industry.
Revisiting the audit question
As mentioned above, the FSTA charter suggests that member companies undertake audits to ensure segregation of funds.
In the wake of news that FantasyHub, an FSTA member, was temporarily suspending operations, the FSTA originally said that the group required third-party audits:
FSTA quote is insane. Admits 3rd party audits failed, praises self for proposing bills that rely on THE SAME AUDITS pic.twitter.com/igwfyKiGBT
— Chris Grove (@OPReport) February 19, 2016
The FSTA almost immediately backed off the idea that an audit was required, leading us to believe audits aren’t taking place, or at a minimum aren’t being required.
The annual audit is one of the few bits of oversight that the FSTA model bill actually contains, and its efficacy is certainly in question. If a company only has to disclose its financials once a year, states might have to get lucky to catch an operator dipping into player funds before it’s too late. Yes, the existence of a state-required audit might discourage bad actors, but not necessarily.
In reality, which would be worse for the FSTA vis a vis the audits in state legislation:
- If the FSTA got an audit from FantasyHub and nothing was turned up?
- If the FSTA isn’t doing audits to ensure compliance with its charter?
Final takeaway: Lawmakers should be using FSTA bill only as a starting point
Let’s start here: Being a state lawmaker is difficult.
It’s not great pay, it’s often a part-time job, and attention is usually split, by necessity, across myriad issues.
Many of the lawmakers introducing fantasy sports legislation likely have the best of intentions: They think they are helping out businesses while also protecting fantasy sports players. In the end the FSTA bill might do neither of those things effectively — that’s certainly up for debate.
The bottom line is this: If states are simply rubber-stamping the FSTA bill, that’s likely not going to create good public policy. The FSTA bill can be used as a starting point for lawmakers who want to consider regulation of the industry, but it can’t stop there.
The FSTA hasn’t proven it can oversee its own members effectively, so to think that it is in the best position to write bills that oversee the industry via government is a specious argument.
Beyond the non-enforcement of its own charter, there’s the hastily planned Fantasy Sports Control Agency — what was supposed to be a self-regulatory body for the industry — that was announced late last year by the FSTA; it was scuttled just a few months later.
Should the fantasy sports industry have a voice in how it is regulated? Absolutely. They know far more about the ins-and-outs of fantasy sports than the vast majority of lawmakers, who are often learning about it — and usually just on a surface level — when they see a bill for the first time.
But to give the fantasy sports industry carte blanche to write its own regulations would be a mistake.