In recent weeks, DraftKings CEO Jason Robins has gushed about his sportsbook’s performance in New Jersey, which has already exceeded his expectations for attaining profitability under the company’s state playbook methodology.
At an annual Investor Day presentation on March 3, DraftKings disclosed that its operations in New Jersey generated $68 million in contribution profit in Fiscal Year 2021, making it one of only five states where the company turned a profit last year. In an ironic twist, the presentation concluded hours before the company began to deal with the fallout from settlement of a troubling, months-long investigation.
On Feb. 18, DraftKings agreed to pay a $150,000 civil penalty to the state of New Jersey under a stipulation of settlement with the state’s attorney general. The settlement, which became public late last week, stems from a 2020 case involving messenger betting activities of a Florida customer with an account in the Garden State.
The allegations came to light in November 2020 when Sports Handle published a 2,700-word exclusive feature on DraftKings’ business relationship with Eric Stevens, the VIP customer based in Jacksonville. DraftKings does not provide sports betting in Florida, where presently it is illegal.
Election coverage has dominated the news cycle over the last 72 hrs but yesterday @sports_handle published a fairly extensive story on allegations of proxy betting at DraftKings Interested to see how prevalent proxy betting is among whales as we dig deeper https://t.co/OJpYTzuuX5
— Matt Rybaltowski (@MattRybaltowski) November 6, 2020
Stevens made two identical bets on a 3-leg parlay in October 2020, wagering $3 million in total. The VIP whale player made the wagers from Florida through longtime friend Larry Porter, a Garden State resident. Stevens used Porter, the proxy, to place dozens of out-of-state wagers on his New Jersey DraftKings account while he remained in Florida. The practice of messenger betting is illegal in New Jersey and runs afoul of DraftKings’ own terms and conditions.
Federal law enforcement sources told Sports Handle last fall that the case is not isolated, indicating that there are other known instances of illegal proxy betting nationally. The scope of any investigation on the federal level, however, is unknown.
Despite the illegality, Stevens asserted in 2020 that DraftKings allowed him to bet through the New Jersey proxy even though the company, as its stated policy, frowned upon the activity. For instance, Stevens told Sports Handle that he placed a $900,000 bet on the San Francisco 49ers at halftime of Super Bowl LIV from DraftKings’ suite inside Hard Rock Stadium near Miami.
Stevens also claimed that he called his proxy to make the wager as he stood near several DraftKings executives, including Robins. Without mentioning Robins by name, the report on the investigation by the New Jersey Division of Gaming Enforcement (DGE) found Stevens actively used a proxy to wager on the Super Bowl in the presence of and with knowledge of DraftKings personnel.
By the fall of 2020, Stevens routinely made six-figure, out-of-state wagers through his proxy, often placing single bets in excess of $1 million. Stevens also continued to win at a high clip. Among his victories, Stevens returned a profit of $2.1 million on a two-team, $2 million parlay featuring the Lions and Dolphins on the moneyline.
When DraftKings suspended his account on Oct. 24, 2020, Stevens had 21 bets pending with about $15 million in outstanding funds, according to sources. While DraftKings determined through a geolocation velocity check in 2019 that Stevens’ account was being accessed by a New Jersey proxy while he was physically located in Florida, Stevens received verbal authorization from a VIP host that he could continue to bet under the arrangement.
I talked to Eric about this in the Fall of 2020. Can't believe DK only getting a 150k fine for this. Sends the absolute wrong message. And I'm sorry, but DK's statement is complete baloney. Jason Robins was sitting with this guy when he was proxy betting! https://t.co/1obiyq708A
— Rufus (@RufusPeabody) March 8, 2022
The allegations were so pronounced that one professional sports bettor suggested in 2020 that DraftKings could be fined in the neighborhood of $20 million by New Jersey regulators. For comparison, now defunct sportsbook operator CG Technology LP paid a $22.5 million fine to federal authorities in 2016 to settle a litany of violations, including illegal proxy betting. Due to the influence of offshore betting, CG’s violations are widely considered to be more egregious than the ones committed by DraftKings.
Still, New Jersey had numerous punitive tools at its disposal, including suspension of DraftKings’ operations with a potential reinstatement possible once certain conditions were met. In the end, the fine of $150,000 is less than 0.25% of DraftKings’ contribution profit in New Jersey last year.
“This settlement is ridiculous, this is a joke,” a former gaming regulator told Sports Handle. “It made no sense whatsoever — it’s less than a slap on the wrist.”
Danger Danger! Come on regulators. Get your shit together. Slap on the wrist!!! https://t.co/rP8HbmtNjZ
— Roger Gros (@GlobalGamingBiz) March 4, 2022
The equivalent of a bonus bet
If financial penalties are intended to bring about corrective action, it is difficult to see how DraftKings will feel the pinch. In New Jersey, DraftKings gained market access through an online skin with Resorts Digital Gaming. According to New Jersey DGE monthly filings, Resorts made $159.7 million in online sports betting revenue in 2021, with the majority derived from DraftKings.
If DraftKings’ hot start in neighboring New York is any indication of its revenue potential, the prominent sportsbook operator will do even better in the Empire State. Over a two-month period through Feb. 27, DraftKings generated a pre-tax online GGR of $58.9 million, netting about $28.9 million. Even when factoring in New York’s lofty 51% tax, DraftKings is taking home a net of about $578,000 per day from online sports betting.
Based on new state launches and strong underlying performances, DraftKings increased the midpoint of its 2022 revenue guidance last month to $1.93 billion. At the same time, DraftKings offered full-year 2022 adjusted EBITDA guidance in the range between negative $825-$925 million. Even by conservative measures, DraftKings will be losing money at a burn rate in excess of $2.25 million a day.
The fine, in comparison, amounts to pennies on a dollar. Over the last week, there has been a vigorous debate on social media on the severity of the penalty.
“This is minutes of their operation, this is not worth anything,” said the former regulator, who asked not to be named. “This is a bonus bet, this is even less.”
A slippery slope in other states
Beyond New Jersey, Stevens also used his proxy in other states. Around the time DraftKings launched in Pennsylvania, Stevens’ VIP host informed him that he could earn an introductory bonus for making wagers in the Keystone State, according to court documents. Stevens instructed Porter, his proxy, to make a short drive across the state line to place several bets in Pennsylvania, the investigation found. The Pennsylvania Gaming Control Board has yet to comment on the case.
Further south, North Carolina is moving closer to the full legalization of sports betting this year. The Tar Heel State, home to a bevy of rabid college basketball fans, currently offers sports betting on a limited, tribal-only basis. As the state considers the full adoption of sports wagering, some political leaders are conducting their due diligence to ensure that the proper consumer safeguards are in place.
Dennis Justice, who is running for a seat in the North Carolina House of Representatives, is pushing for legalization of sports betting in the state as one of the hallmarks of his campaign. He consistently informs the Henderson County Board of Commissioners on gambling issues, and he told Sports Handle he believes a one-day suspension of DraftKings’ New Jersey operations would have sent a clear message that proxy betting cannot be tolerated.
Had a one-day suspension occurred on a major date on the sports calendar, say the first day of March Madness, the penalty could have cost the company millions.
“Proxy betting is a serious problem, but DraftKings’ reaction is worse,” Justice said. “It’s almost as if the big names want Congress to take sports betting over. They can afford it.”
In the New Jersey and Tennessee cases, a one-day suspension would have sent the appropriate message to everyone.
Other states better wise up and stop looking at sports betting and other gaming as a "gravy train" or these incidents will motivate Congress to take this all over. pic.twitter.com/lk0qQa1yKV
— Dennis Justice (@JusticeForNC) March 4, 2022
An appropriate judgment?
Not everyone believes that DraftKings necessarily received a slap on the wrist. Shortly after the suspension of Stevens’ account in 2020, a few New Jersey gambling authorities questioned the severity of the case.
They included former state Sen. Raymond Lesniak, who told Sports Handle that he did not have a major problem with the messenger betting infraction unless there was “criminal intent behind it.” Lobbyist Bill Pascrell III echoed the sentiment, asserting that as long as there wasn’t any evidence of money laundering, the violation itself should not be viewed as an “extraordinarily big deal.” It appears that Stevens will be cleared of any criminal wrongdoing, sources indicate.
When asked by Sports Handle for his take on the settlement, Monmouth Park CEO Dennis Drazin responded that he believes the DGE took the “appropriate action.” Drazin is one of the chief architects of legislation that brought legal sports betting to New Jersey.
As part of the settlement, DraftKings was required to submit a list of revised internal controls to the DGE to reflect the improvements made by the company in training employees to spot potential proxy betting cases. The augmented training programs should enable employees to better identify “one-user, one-account” violations by customers who live outside of New Jersey, according to the DGE. The settlement required DraftKings to submit the revised controls by March 1.
“We strive to continuously improve our systems to detect violations of our terms of use. In this instance, our systems failed to detect the violation of our terms of use,” DraftKings said in a statement. “We have taken corrective action to address that.”
Jeremy Balan contributed to this story
