The last few months have been hectic at DraftKings.
An overlapping sports calendar with simultaneous action in all four U.S. professional sports provided strong tailwinds to the company over the last two months, as for the sports betting industry as a whole. As a result, DraftKings reported pro forma revenue of $132.8 million for its third quarter of 2020, an increase of 41% from the same period a year ago. The Boston-based DFS-turned-sportsbook company has also grown its empire in recent weeks, notching partnerships with Michael Jordan and U.S. Open 2020 men’s golf champion Bryson DeChambeau. In between, DraftKings has dealt with troubling allegations.
Earlier this month, Sports Handle published an exclusive 3,000-word feature on alleged messenger betting allegations at DraftKings. The allegations involve claims that a bettor of a $3 million parlay placed the wager on his New Jersey mobile betting account while he was physically located in Florida. The transaction, which was allegedly placed through a proxy, may violate several state laws and the company’s own Terms and Conditions, as well as provisions of the Federal Wire Act of 1961. The customer subsequently claimed that DraftKings froze his account on Oct. 23, less than three weeks after the wager was placed.
All is not well between #DraftKings and its $3 million parlay bettor.
In fact, there's much more to the story.
— Sports Handle (@sports_handle) November 5, 2020
When asked earlier this month if the agency has launched an investigation into the DraftKings matter, representatives from the New Jersey Division of Gaming Enforcement (DGE) declined comment. A spokesman from the New Jersey Office of The Attorney General and the DGE did not have any updates to a Sports Handle request on Wednesday.
A spokesman from DraftKings confirmed the matter is under investigation.
“Sports betting is a regulated industry and we need to comply with the laws of every jurisdiction in which we operate,” a DraftKings spokesperson wrote in a Nov. 12 statement provided to Sports Handle. “We cannot comment on an ongoing investigation.”
In 2016, CG Technology LP paid a total of $22.5 million in fines to the federal government for a litany of violations, including knowingly accepting and facilitating “messenger betting” on repeated occasions at its sportsbooks. Although a potential fine against DraftKings may pale in comparison, a high-level source told Sports Handle that a monetary fine could be in the same neighborhood, albeit a little lower.
Beyond fines, regulators have a number of levers at their disposal in terms of enforcement action. A regulatory body could suspend an operator’s sports betting license to send a message that companies must play by the rules. Or, alternatively, a regulator could condition a license with certain requirements that compel an operator to provide the state with a full accounting of its business activities every six months. Furthermore, the conditions could come with the stipulation that a company discontinue its DFS (daily fantasy sports) activities in the state or make certain leadership changes, an industry expert told Sports Handle.
The penalties are only limited by the creativity of regulators, the source told Sports Handle.
While eight-figure fines can generate bold headlines, some regulators are hesitant to use them as an enforcement tool. With state budget deficits swelling in the face of COVID-19, many states could use every dollar that appears in their coffers. But a monetary penalty, sources say, has less impact than a limited or conditional license that could inspire robust organizational and compliance changes. What’s more, a stiff penalty with licensing restrictions can serve as a deterrent for others, while reinforcing the behavior of those who have kept their hands clean.
On the other hand, an agency can opt to hand down a relatively light punishment. Before a formal enforcement action is determined, a sportsbook can issue self-imposed penalties ranging from technology upgrades to management changes in an effort to bolster their compliance apparatus. The attempts to self-sanction may pacify some regulators. In an extreme example, when a regulatory agency launches an investigation it may entail nothing more than a cursory glance from an official when reading about the case in a local newspaper, an unnamed industry expert said.
VERY big story. DraftKings execs alleged to have knowingly facilitated & encouraged illegal proxy betting for whales. When one started winning, they froze his account and cried foul. If these allegations are true, DK's gaming license could be in jeopardy. https://t.co/qn3BWQX71m
— Rufus (@RufusPeabody) November 5, 2020
Sports Handle reached out to several regulatory agencies in states that either allow sports betting or are considering the legalization of the activity. Colorado Division of Gaming Director Dan Hartman declined comment through a spokesman. Messenger betting is illegal in the Centennial State.
The Ohio legislature, meanwhile, is still debating whether to permit sports wagering statewide.
“Should the Commission be granted the authority to regulate sports betting in Ohio, we will ensure it is conducted with integrity – just as we do in our current role overseeing casino gaming, fantasy contests and skill-based amusement machines,” Jessica Franks, director of communications at the Ohio Casino Control Commission, wrote in an email to Sports Handle.
Prospect of a federal investigation
It is unclear at the moment if the investigation has broadened to the federal level. A transaction as large as the one made by the Florida bettor has a strong likelihood of generating a Suspicious Activity Report, according to an unnamed former gambling regulator. Over an eight-year period through 2011, gaming institutions submitted 74,816 Suspicious Activity Reports by Casinos and Card Clubs (SAR-C) filings, according to a report from the U.S. Treasury Department’s Financial Crimes Enforcement Network (FinCEN).
A spokesperson from the U.S. Attorney’s Office for the District of New Jersey told Sports Handle that it is the policy of the office to neither confirm nor deny the existence of any investigation. Voice messages left with the U.S. Attorney’s Office for the Middle District of Florida were not returned.
“It would certainly not surprise me if the feds were looking into this. From my experience, large money transfers for gambling seem to attract federal attention,” said Richard Schuetz, the owner of Schuetz LLC, a gaming and regulatory consulting entity. “The tendency for those folks is to look at such things until they feel they are comfortable that they understand the reality of the transaction.”
Schuetz previously served as executive director of the Bermuda Casino Gaming Commission. In addition, Schuetz has held executive positions in Las Vegas, Atlantic City, Mississippi, and Louisiana, among others, and has served as a gaming consultant in numerous countries around the world.
DraftKings has not answered whether other customers are under investigation for messenger betting or if other bettors have had their accounts suspended for suspicion of using a proxy. With today’s cutting-edge geolocation technology, top sportsbooks can determine a customer’s exact location when a bet is placed. Federal law enforcement agencies also have broad wiretapping authority as an investigative tool in major cases. The agencies typically must receive approval from a federal judge before conducting searches through a wiretap.
For now, the Florida bettor is the only whale player or high net worth individual who has gone public with allegations of messenger betting against DraftKings.
“At this point, there’s more we don’t know than we do know,” Schuetz said.