[toc]DraftKings has agreed to pay players and charities owed hundreds of thousands of dollars by the shuttered daily fantasy sports operator FantasyHub.
The DFS operator had been closed for several weeks, with players unable to withdraw or access their balances.
The news was first reported at ESPN.
Paying out for FantasyHub
In announcing the move, DraftKings said it would “cover the full cash balance liabilities owed to former FantasyHub players,” in addition to money owed by the site to about a hundred charities, according to a press release.
DraftKings did not specifically divulge how FantasyHub got to the point where it became insolvent, but it alluded to the idea that the site used player deposits and payments that should have been made to charity for operational or other costs:
DraftKings is aware of the allegations regarding financial mismanagement at FantasyHub. This news is a troubling breach of trust for FantasyHub players. No operator, even a relatively small one, should ever co-mingle player funds, or funds intended for charity, with their own operating funds.
DraftKings co-founder and CRO Matt Kalish offered this statement via a press release:
“Since our founding, DraftKings has been committed to building the most innovative, entertaining fantasy sports experience in the world — and we have never forgotten our core value — to operate responsibly, and with integrity. The only thing fantasy players should need to worry about is building great lineups. We have kept a simple promise from day one: 100% of customer funds will be reserved and held separately from our operating funds.
“We are now championing legislation in dozens of states that requires all DFS operators to follow this industry-leading standard. We promise to uphold our commitment to consumer protections always, and guarantee that FantasyHub players can engage with our site with the trust and confidence they deserve.”
Other terms of the FantasyHub deal
- The exact amount of money for which DraftKings will be taking liability was not divulged. Money owed to charities was indicated to be more than $100,000, and ESPN characterized the amount owed to players as being in the six figures as well.
- Players wishing to claim their unpaid balances must simply transfer their FantasyHub accounts to an existing or a new DraftKings account. More than three-quarters of FantasyHub’s user base already has a DraftKings account, the company said in the announcement.
- The deal was not characterized as a sale of the site to DraftKings; the site is merely taking care of FantasyHub’s obligations. No FantasyHub employees will work at DraftKings.
The background of FantasyHub
FantasyHub is a small operator that allowed players to donate winnings to charities.
The site said it “temporarily suspended operations” on Feb. 19. On that day, FantasyHub shut down all functionality on its website, with a message that said “we are currently in discussions with a strategic 3rd party regarding the future of FantasyHub & its players.” Players were not able to access their accounts during that time.
While there had been chatter and rumors of a “third party” working with FantasyHub behind the scenes, there had been no official updates for players from FantasyHub over the course of more than three weeks since it shut down.
Anecdotally, some players at FantasyHub had contacted charities that they believed they had donated to; some of those charities had not been able to locate donations that had theoretically been made by those players. FantasyHub also ran increasingly aggressive promotions to encourage players to sign up and/or deposit in the weeks leading up to its closure.
This is at least the second time a DFS operator has ceased operations while owing players money in recent months. The first, FantasyUp, was taken over by iTEAM Network, which agreed to make players whole as a part of taking over their operations.
The inefficacy of the FSTA charter
The need to bail out FantasyHub pointed to a clear failing of the “self-regulatory” charter of the Fantasy Sports Trade Association, the industry group that is attempting to lead a push for regulation across the country.
That document — the Paid-Entry Contest Operator Charter (since removed from the website) — indicates that members of the FSTA must segregate player funds from operational funds. That appears not to have been done at FantasyHub, which was a member of the FSTA.
From the charter:
The signatory company will hold player funds (whether they are funds on deposit, or as entry fees in live games) separate from their operational funds. Player funds will not be used to fund the growth of their business and at no time are player funds at risk if the company were to cease doing business. Notwithstanding the above, signatory companies recognize that all prizes are paid from the general assets of the signatory companies, and the winners are not paid out of a pool consisting of funds received for any given contest.
Stated another way, signatory companies recognize they must pay winners of a contest the announced prize irrespective of the amount of funds received from entrants in that particular contest. Further, it is recommended that each company has an annual audit performed, ensuring that the appropriate player funds are being segregated.
What, if anything, the FSTA had been doing to ensure compliance with the above language, or any part of the charter, is unknown. But it appears that the suggested audits were not done, at least in the case of FantasyHub.
In 2015, the FSTA also took the need for enforcement of its own charter out of the document’s language, basically taking the teeth out of a mechanism whose efficacy is already in question.
Can audits, regulation stop another FantasyHub?
In bailing out FantasyHub, DraftKings pushed regulation as the answer for avoiding situations like the one at FantasyHub.
In addition to the statement from Kalish above, DraftKings indicated it is “focused on continuing its work with lawmakers across the country to develop thoughtful and appropriate consumer-focused regulation and to maintain its position as an industry leader in consumer protection.”
The base regulation being considered in many states calls for a third-party audit to be done annually. As discussed previously at Legal Sports Report, how effectual those audits would be in stopping malfeasance is in question.
Regulation also will not be terribly effective if it does not create a low barrier to entry for DFS operators. For instance, in Virginia — the first state to pass a fantasy sports regulatory bill — there is a $50,000 registration fee.
That has already led at least a couple of DFS sites to say they will not be staying in the Virginia market. Regulation is only effective if actually provides oversight to the companies it is tasked with regulating; right now, it’s not clear how many sites, other than DraftKings and FanDuel, will sign up for regulation in Virginia.
The FSTA has indicated that it is “deeply concerned” about the barrier to entry in states like Virginia and Indiana, another state close to creating a law governing fantasy sports.