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Here’s Where The Federal Investigations Into Daily Fantasy Sports Might Be Focused

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Federal investigations into the daily fantasy sports industry are open in three jurisdictions and may be exploring a variety of criminal questions, per comments made Thursday by an attorney representing unnamed DraftKings employees.

The comments were made by Boston-based white-collar criminal defense attorney Paul Kelly during a public forum held at the University of New Hampshire School of Law where reporters were in attendance and audio recording was permitted. Near the start of his comments, Kelly said he represents “certain individuals, managers, from DraftKings.”

A transcript of the speech is available below. DraftKings, FanDuel, and Mr. Kelly all provided statements to LSR contesting the accuracy of Kelly’s remarks as presented.

Fleshing out the federal investigations

Per Kelly’s comments:

  • U.S. Attorney offices in the Southern District of New York, Boston, and Tampa, Fla. have all “launched grand jury investigations” into the activities of DraftKings and FanDuel.
  • The investigations are still in their “earliest stages,” according to Kelly. “One thing I know is that action on the criminal side is not going to happen next week, next month, or perhaps even in the calendar year of 2016 — if ever,” Kelly said.
  • It is far from a certainty that charges will be brought, argued Kelly, who noted: “If the Justice Department elects to go forward, and that’s still a pretty big if, because, frankly, I have not seen anything factually which would provide a legitimate basis for criminal charges at this point.”

Where is the focus likely to be?

Kelly speculated on two potential areas of inquiry by the U.S. Attorneys:

  • The first: “Have these two companies, or its executives, broken any of the federal laws […] in this space”
  • The second, which Kelly characterized as “the more likely ” area: “[H]ave any of the executives, managers or employees of these companies engaged in fraud, or some form of racketeering activity, through the use of nonpublic or what we might call “inside” information to gain an unfair advantage over ordinary citizens.”

How nonpublic information might have been utilized

From Kelly’s comments:

But the other thing they’re looking at, which has not yet been made public is, one of the things they do at FanDuel and DraftKings and I suspect all daily fantasy sports companies, they keep very careful track of people’s percentage of winning and losing. The statistics show that most of the money in these contests are won by the top, you know, one to five percent of people, I mean people who spend every waking moment thinking about this stuff and putting together their lineups, they’re the folks that are really winning, and they use all kinds of scientific modeling and the like.

But DraftKings and FanDuel both keep elaborate spreadsheets, and they literally list the winners, the big winners at the top all the way down to the big losers at the bottom. And so what was happening for a long time, it’s no longer happening, but FanDuel was encouraging its employees to bet on DraftKings and vice versa. The reason they were doing this is because it was felt that if they were participating in the games themselves, they would have a much better feel for what would appeal to the customers and the nuances of it all and it would just make them better employees.

And so what the employees were doing is they were taking these spreadsheets and they were then focusing on the losers.

Alright, so there’s a couple different ways you can play these games, for those of you that may not play them. You know, you can jump into one of these competition with a whole bunch of people, like this NFL contest the fella won second prize in, or you can specifically challenge another person to a one-on-one type contest.

And what the employees were doing is they were looking at these spreadsheets targeting the losers at the bottom, the people who didn’t know what the hell they were doing, right, and then they were challenging these people over email to contests involving specific sporting events, typically baseball games.

And they were beating these guys regularly because they were so bad at it, the losers, and they knew they were losers, and they were basically putting money in their own pockets. So the DraftKings guys were betting in FanDuel and vice-versa.

So the question is, is there anything wrong with that? Does it cross a line and become criminal, or was it lawful and proper?

The entire transcript of the speech is available below.

In a statement to LSR, Kelly said that his “comments on March 17, 2016 were taken out of context and, as presented, do not accurately reflect reality”

FanDuel, DraftKings firmly rebut employee play characterization

A spokesperson for FanDuel categorically refuted Mr. Kelly’s description:

Paul Kelly is not affiliated with FanDuel or its employees in any capacity.  He has no visibility into FanDuel’s operations or policies and thus has no basis for making any statements, much less these false and baseless assertions about our company and employees.

A spokesperson for DraftKings provided a similarly definitive rebuttal:

The comments made by Mr. Kelly about DraftKings and its employees are absolutely false and unfounded.

DraftKings has never encouraged employees to use company data to play games on other sites and this behavior has always been against the company policy. In addition, a third party independent investigation conducted by Greenberg Traurig showed absolutely no evidence of any pattern of violations of the company policies at DraftKings.

… with an additional clarification regarding DraftKings’ internal company controls via a statement from A. John Pappalardo, Co-Chair of Global White Collar Practice for Greenberg Traurig:

At the request of DraftKings, Greenberg Traurig conducted a comprehensive three month investigation of company practices, policies and procedures and the conduct of its employees. I am familiar with the statements made by Paul Kelly in an academic setting wherein he expressed hypothetical scenarios on certain company conduct to promote discussion and thought. To be clear, these statements were not accurate or consistent with the real practices of the company. Specifically, there was no ease of access to company information by employees and absolutely no culture of targeting players on other sites.

Statement from Paul Kelly

Kelly offered the following statement to LSR:

My comments on March 17, 2016 were taken out of context and, as presented, do not accurately reflect reality. The statements were made to a law school symposium as part of an academic exercise and, as I made clear, were based on publicly reported allegations and certain hypothetical situations which I advanced for the purpose of facilitating an academic discussion.  To be clear, nothing I said was based on information I have obtained in the course of representing any client, whether a DraftKings employee or otherwise, or interacting with any regulator.  Rather, I was putting hypothetical information out to the audience to stimulate thought and discussion among law students regarding some of the legal issues surrounding daily fantasy sports.  I also made clear during the presentation that it is my personal view that there is no factual basis for any civil action or criminal charges to be filed against daily fantasy sports companies or their employees.

A full transcript of Kelly’s speech at the event follows below.

Transcript of Kelly’s comments

Good evening, it’s nice to be with you tonight, to talk about this obviously very interesting and evolving topic of daily fantasy sports. I am also very pleased to be here with such an impressive group of experts. I’m also convinced that the only reason that I was invited was because it’s St. Patrick’s Day and I am an Irishman from Boston with the last name Kelly.

I did want to start by telling you I need to be just a little bit careful here tonight, as I represent certain individuals, managers from DraftKings, in the ongoing investigations. So I have to be just a little bit careful not to violate my attorney-client privilege, as well as to give the U.S. government any further reason to focus on my clients, who I will not be naming tonight.

So how and why am I involved in this matter? As Alex just mentioned, I was a federal prosecutor for about 10 years. I was the director, the head of the drug unit for a number of years, I was the head of the public corruption and the special prosecutions unit. I spent all 10 of those years in the Boston U.S. Attorney’s office, have prosecuted hundreds and hundreds of complex federal criminal cases.

After leaving the U.S. Attorney’s office I became a white collar criminal defense lawyer, and I have been in that position for approximately 20 years. I did take about a five year sabbatical and left the practice of law entirely and went into the sports world from 2007 to 2012. I spent some time as the executive director of the National Hockey League Players Association. And I also ran something called College Hockey Inc., representing 60 colleges and universities that play Division I men’s ice hockey, including the University of New Hampshire.

But I am here to talk about the criminal investigations involving daily fantasy sports. I’m not here to talk about state regulatory actions or civil enforcement actions by state attorney generals, such as in New York, or the class actions that have been brought by creative plaintiffs’ lawyers.

My focus is on federal, criminal law, and whether that topic comes into play when you’re talking about daily fantasy sports.

So what can I tell you about what we know today? We know that three U.S. Attorneys offices have launched grand jury investigations: Tampa, Florida; Boston, Massachusetts; and the Southern District of New York, which is basically Manhattan.

And why are these three cities the ones that have launched investigations? Let’s talk for a moment about DraftKings and FanDuel. They clearly are the two largest companies in the space, they’re not the only companies by far, but they command over 90 percent of the market, it might even be higher at the present time.

FanDuel, of course is based in New York, which is the principal reason why the Southern District of New York has gotten involved. DraftKings is based in Boston, which is the reason why the Boston office has become involved — it’s kind of a Red Sox-Yankees thing going on here.

And Florida has always been a jurisdiction that has had a keen interest in internet gambling enforcement and related topics, and so it’s not a terrible surprise that one of the offices down there decided to jump in.

Each of these three criminal investigations are really still in their earliest stages. In this particular area, there is a five-year statute of limitations, so the investigators from these three cities still have in excess of three years more to probe this area, and to develop potential criminal cases.

A couple of subpoenas have been issued, particularly by the office down in Tampa for some records. But otherwise there has been a pretty thick cloak of secrecy which has been draped over these ongoing criminal investigations. And not much is really presently known about what the Department of Justice is up to.

But what is the Justice Department looking at? I suggest to you that there are two principal things that the Justice Department is taking a look at. The first one is, have these two companies, or its executives, broken any of the federal laws, specifically the two primary laws in this space, which is the Unlawful Internet Gambling Enforcement Act of 2006 — which I am sure Professor McCann will be talking about — or the second one which is the Illegal Gambling [Business] Act of 1970.

If they have violated either of those two statues, that would provide a basis for the government to actually indict the companies themselves.

The second principal area, and perhaps the more likely area, is have any of the executives, managers or employees of these companies engaged in fraud, or some form of racketeering activity, through the use of nonpublic or what we might call “inside” information to gain an unfair advantage over ordinary citizens.

For example, are they using intelligence that other people don’t have to defeat the customers who play these games? And I am going to tell you a little about that in just a moment.

We’re not simply talking about the DraftKings employee Mr. Haskell, who won $350,000 playing on FanDuel, for which he was cleared by an internal investigation by my former colleague John Pappalardo, who was the U.S. Attorney in Boston for a few years and is now with the law firm of Greenberg Traurig.

I suspect you know a little bit about that particular matter, but you know, this was a DraftKings employee who won second prize in something called the NFL Sunday Million contest. But what they determined after looking very carefully into this is that he submitted a lineup for that particular competition at 1 o’clock p.m. And then about 40 minutes later, he came into possession of an Excel spreadsheet that showed information that was not publicly available.

And of course, the original allegation was that he used this nonpublic information to kind of submit his lineup, which gave him an unfair advantage, which caused him to win that second prize. In fact, what the internal investigators found, was that he had already submitted his lineup, prior to coming into possession of this Excel spreadsheet.

But the other thing they’re looking at, which has not yet been made public is, one of the things that they do at FanDuel and DraftKings and I suspect all daily fantasy sports companies, they keep very careful track of people’s percentage of winning and losing. The statistics show that most of the money in these contests are won by the top, you know, one to five percent of people, I mean people who spend every waking moment thinking about this stuff and putting together their lineups, they’re the folks that are really winning, and they use all kinds of scientific modeling and the like.

But DraftKings and FanDuel both keep elaborate spreadsheets, and they literally list the winners, the big winners at the top all the way down to the big losers at the bottom. And so what was happening for a long time, it’s no longer happening, but FanDuel was encouraging its employees to bet on DraftKings and vice versa. The reason they were doing this is because it was felt that if they were participating in the games themselves, they would have a much better feel for what would appeal to the customers and the nuances of it all and it would just make them better employees.

And so what the employees were doing is they were taking these spreadsheets and they were then focusing on the losers.

Alright, so there’s a couple different ways you can play these games, for those of you that may not play them. You know, you can jump into one of these competitions with a whole bunch of people, like this NFL contest that the fella won second prize in, or you can specifically challenge another person to a one-on-one type contest.

And what the employees were doing is they were looking at these spreadsheets targeting the losers at the bottom, the people who didn’t know what the hell they were doing, right, and then they were challenging these people over email to contests involving specific sporting events, typically baseball games.

And they were beating these guys regularly because they were so bad at it, the losers, and they knew they were losers, and they were basically putting money in their own pockets. You know, so the DraftKings guys were betting in FanDuel and vice-versa.

So the question is, is there anything wrong with that? Does it cross a line and become criminal, or was it lawful and proper?

A couple of things you should know about the Justice Department. The first thing I will tell you is that when multiple offices of the Justice Department are looking at the same alleged crime, they don’t always play nice in the sandbox. There’s often a race to be the first office to come out with charges. Sometimes the Justice Department in Washington headquarters has to kind of sit people down and have them make nice.

I remember years ago, I was on something called the Unabomber Task Force. And maybe you are too young to remember this, but there was this crazy guy named Kaczynski who was mailing bombs out to people. They were blowing up and killing and maiming people around the country.

So there were several jurisdictions across the U.S. that had these bombs blow up in them: New Jersey, different parts of California, Massachusetts, Illinois. And each of the districts wanted to prosecute this knucklehead. When they finally found him in a cabin in the woods, there was a big brawl about who was gonna actually be able to have a chance to indict the guy.

I recall specifically Janet Reno, at the time, the attorney general, called us all into a big conference room and basically settled it. And what she did was she took the lead prosecutor from New Jersey, and made him the point person, but had the case brought in Sacramento, California, to appease both California and New Jersey, which had the worst of the cases, and then basically told everyone else to go home and just do something else.

My point is, it’s not necessarily going to be the case that New York and Boston and Tampa are going to coordinate their efforts. The other thing is that you’ve got a couple of offices here that have a track record of pushing the envelope in criminal cases, and breaking new ground, and setting precedent in the criminal area.

None moreso than the Southern District of New York, which has been very successful in the securities area, in the gambling area, in the corruption area. And Boston, which has really been a trendsetter in health care fraud prosecutions and complex organized crime prosecutions, including people like Whitey Bulger.

You’ve got a couple of examples, in the Southern District of New York, of course — and I know Professor McCann will talk about this — was very successful back a few years ago in shutting down the internet poker websites, has had a string of successes prosecuting Wall Street insiders.

In Boston, another example is — I don’t know if you are familiar with this — but there was a company called New England Compounding, which was like a big pharmaceutical company that was sending out these compound pharmaceuticals. And what happened was, there was a terrible outbreak across the country of spinal meningitis, and 67 people died, in like seven different states.

And the Justice Department, the Boston office of the U.S. Attorney, has indicted 14 people, including one of my clients, who’s a pharmacist. Here’s a guy, young pharmacist, young family, never had a traffic ticket, and he’s now facing multiple — like dozens — of counts of second-degree murder.

They have taken basically a pharmaceutical company that put together drugs to deal with all kinds of terrible illnesses, and they are now prosecuting over a dozen people, and trying to put them in jail for the rest of their lives for racketeering, conspiracy and second-degree murder. Talk about breaking ground and taking novel positions; those are the offices you’re talking about here.

Now what law could be used here in the DraftKings matter? First of all, if the Justice Department elects to go forward — and that’s still a pretty big if, because frankly, I have not seen anything, factually, which would provide a legitimate basis for criminal charges at this point. But my sense is that if the government decides to go forward, it will likely keep any prosecution clean, and simple, and straightforward.

By this I mean that I would expect them to use some of the more commonly used federal criminal laws, rather than to jump into something that is really elaborate. And so the laws that are likely to be used are — first of all, in federal law, there is something called mail fraud and wire fraud. Both of those are effectively the same.

What it means is that if you perpetrate a scheme to defraud another person, and you either use the United States mails, or you use some form of electronic communication — it can be faxes, it can be emails, it can be text messages — that is what gives the federal government jurisdiction, the use of those interstate communications vehicles, and they can prosecute you for mail and wire fraud. Probably the most commonly used federal laws anywhere.

They obviously have conspiracy laws, the racketeering laws. There’s something called the Travel Act, which means if you travel from one state to another, to carry out a certain unlawful activity, again, if it gives the federal government jurisdiction, and it can be a Travel Act violation.

And of course, there are very onerous money laundering laws, if you engage in investment or banking activities, with the proceeds of some unlawful activity, you violate the money laundering statutes of the United States.

You know, it’s also possible although I think less likely that prosecutors could decide to use those two main statutes that I mentioned earlier, and that I am sure the panel will be discussing.

One obvious problem with using the Unlawful Internet Gambling Enforcement Act, is that that statute has an express safe harbor for daily fantasy sports, if certain criteria are met, including that the winning outcomes “reflect the relative knowledge and skill of the participants, and are determined predominantly by accumulated statistical results of the performance of individuals in multiple real-world sporting events.”

That’s a line directly from the statute. That is a very major challenge for the Justice Department to overcome if it wants to use that particular statute to prosecute any of the daily fantasy sports companies directly.

So what tools are available to the federal government to investigate these companies and their employees? Having been in that chair for a number of years I can tell you that federal prosecutors have vast resources at their disposal. We had multiple investigative agencies, and they have multiple investigative agencies involved presently in these cases — principally, the FBI, the Secret Service, the Internal Revenue Service. There are some other peripherals, but those are the principal agencies involved.

The government obviously has the ability to use search warrants. At any time, unannounced, the FBI could show up at DraftKings or FanDuel and literally take everything that’s not nailed down — every piece of paper, every computer, every telephone, cell phone, everything they want, they do it all the time.

They have the ability to use grand jury subpoenas, to bring in people from anywhere in the United States. You can issue a subpoena out of Boston to bring somebody in from Idaho, literally within a matter of hours.

They have immunity orders, and the ability to compel testimony. So in other words, if someone goes in front of the grand jury and pleads the Fifth, the government can cloak that person with immunity, saying effectively, we won’t prosecute you, and take away your Fifth Amendment right. And then put you back in front of the same grand jury, either the same day or the next week, and ask you those same questions.

And you have no ability to refuse to testify, because if you do, you will immediately be brought downstairs to a courtroom and jailed by some federal district judge until you change your mind, or until the grand jury expires, which is usually 18 months. It’s a very powerful tool, we used it very effectively, particularly in organized crime, getting mafia figures to testify, under threat of sending them to prison.

They have undercover operations. And this is a significant concern for those of us in daily fantasy sports. Have they put agents among the employee ranks of our companies? Do we have agents currently working within the company, gathering documents, gathering evidence, snooping around, talking to people? Probably they do.

They have electronic surveillance. They can tap telephones, they can tap cell phones, computers, paging devices. You name it, we can tap it. And they do.

They have the ability to use consensual recordings. You know some states are what they call two-party states, you can’t tape record a telephone call or a conversation between two parties, without the consent of both parties. That doesn’t apply to the federal government. All they need is the consent of one person, whether it’s an undercover operative, or a cooperating employee if they turned the employee, they hang a device on him or they put it in his cellphone or they put it in the brim of his hat, or they put it in his belt so you can’t find it, and they can tape all along.

And if they have people in an undercover capacity, you can bet that they are tape recording conversations. They can pressure companies to waive their attorney-client privilege, DraftKings just did an elaborate internal investigation about some of the matters I just mentioned, and they could certainly pressure Greenberg Traurig to turn over those documents. And something that a lot of these companies fear is that they have very powerful forfeiture laws and seizure laws, the ability to seize assets, and to freeze them for long periods of time.

In short, when the federal government decides to dig in and investigate, it has a formidable arsenal of weapons at its disposal.

We already know that in the three investigations I mentioned, that investigators have either contacted and interviewed or attempted to interview customers, former employees of the companies and current employees seeking information and cooperation.

But as I mentioned at the outset, the government is really not in any rush here. Frankly, it’s my view that they want the dust to settle a bit, they want to see what the courts do with certain things, such as the Attorney General of New York’s challenge to these companies as being in violation of New York state law. I think they also want to see how many states pass legislation or take some form of regulatory action in the coming months, as giving them some sense of the public’s thinking about the issue.

Just a few other things, just thoughts, to present to you here. This case has been the full employment act for lawyers. I will tell you that, for example, David Boies, of Boies Schiller who of course represented Al Gore in the Bush v Gore matter, is a principal attorney for DraftKings in the New York matter in particular, Gibson Dunn has about 18 lawyers, I think, working with Mr. Boies.

FanDuel, of course, has hired an army of lawyers from Debevoise & Plimpton, there are also lawyers involved from Ropes & Gray, Foley Hoag, including my former colleague Martha Coakley, Greenberg Traurig and several other lawyers in various states.

I know that DraftKings has budgeted lawyer’s fees between now and the first of July at a staggering number and my guess is that they will exceed that by many millions of dollars.

The other thing I’ll mention is that the Justice Department, about a year ago or so, passed a new policy on holding individuals accountable for criminal behavior. It used to be that if you were a company, say a General Motors for example, and you get investigated by the Justice Department, you can resolve that criminal investigation by paying a big fine or doing a deferred prosecution agreement without any of your executives or officers actually being charged with crimes. It used to be that way and it’s been that way for decades. Until now.

The Justice Department now has a very new policy which basically says that one of their principal objectives is going to be to hold individuals – individual executives, officers, board members, employees – accountable for criminal conduct. And so, this policy will definitely be in effect as they look at, whether it’s FanDuel, DraftKings and any other daily fantasy sports companies moving forward.

The other thing I know is that I’ve been in this business a long time, I know most of the people that practice in the area, the U.S. Attorney’s Offices in New York and Boston in particular have assigned some of their most seasoned, experienced, respected, successful prosecutors to look at this case. These are people who know how to make a criminal case, who are particularly vigorous in following leads and putting together complex cases, and that doesn’t bode well for people on the defense side.

One other kind of interesting twist here is I also do sports work and do a lot of work for colleges and universities and NCAA infractions cases and enforcement matters. Of course, the NCAA considers daily fantasy sports as a prohibited form of gambling in violation of the NCAA bylaws, particularly bylaw 10.3. I won’t read you what it says, but at the same time that they consider it illegal gambling in violation of their rules, which if they catch somebody doing it, they can immediately suspend you, probably for a year as an athlete, despite the fact that they consider it to be a prohibited act, they believe that between thirty and fifty percent of all student athletes across the United States do in fact play daily fantasy sports. More than a third to a half of all of the people out there are violating NCAA rules. And the NCAA doesn’t really frankly know how to grapple with this problem, yet.

Right now they’ve taken the typical NCAA line, which is not always the most commonsensical approach, but, and they have just flat-out said it’s prohibited but they have not yet begun to enforce it and it remains to be seen whether they will.

In closing, I want to say that I’m anxious to hear from this illustrious panel as to their view as to how all of this will eventually play out. One thing I know is that action on the criminal side is not going to happen next week, next month, or perhaps even in the calendar year of 2016, if ever. Hopefully, if I’m doing my job correctly, that will be the desired outcome, but I want to thank you for inviting me here this evening and I wish all of you a happy St. Patrick’s Day.

The above transcript is provided without warranty and has been lightly edited for readability. While all efforts have been made to ensure accuracy, this transcript may contain material errors, omissions, and inaccuracies. LegalSportsReport disclaims any liability stemming from use of or reliance on this transcript and provides the transcript as-is.

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