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The FBI is investigating daily fantasy sports gambling after DraftKings and FanDuel scandal

DraftKings (Facebook)

Daily fantasy sports operator DraftKings is under investigation from the Department of Justice and the FBI, The Wall Street Journal reports, as the government questions the legality of its business model. The DOJ and the FBI are considering whether DraftKings and daily fantasy rivals such as FanDuel constitute gambling operations, and whether, by accepting money, they are breaking rules set out by the Unlawful Internet Gambling Enforcement Act of 2006. Daily fantasy operators — which charge an entrance fee, allow players to build a team of real-world athletes, and pay out to winners in cash — argue that they are covered by an exemption in that act that allows for financial rewards in online games of skill.

A DraftKings employee won $350,000 on FanDuel

No decision has yet been made on whether daily fantasy games are indeed a form of unlawful gambling, The Wall Street Journal says, but the the FBI has reportedly started asking DraftKings customers about their experiences with the company. The investigation comes a week after it was revealed a DraftKings employee won $350,000 on a FanDuel daily contest, sparking an insider information sharing scandal, and leading some sponsorship partners to pull support. Ethan Haskell — a mid-level content manager who had also courted controversy by accidentally leaking information about the most commonly used players in DraftKings' games — was investigated by both DraftKings and FanDuel, but found not guilty of wrongdoing because he didn't have access to player usage data by the time he'd decided his FanDuel lineup.

In the wake of the scandal, both FanDuel and DraftKings put a temporary ban on playing paid-for fantasy games for their employees. FanDuel turned that into a full ban a short time later, barring its employees from playing competitors' daily fantasy challenges, and restricting employees of other fantasy operations from using its own site.

Nonetheless, the event caused some sponsorship partners to distance themselves from both companies, or pull support entirely. Major League Baseball stated publicly that it banned its own employees from playing fantasy baseball games "where money or something of value is at stake," and that it "did not know that the situation was different at DraftKings." ESPN said that it would dial back its association, too, continuing to run commercials for both companies, but eliminating segments sponsored by the sites. The scandal also drew the attention of the Attorney Generals' offices of New York and Massachusetts. The former asked both FanDuel and DraftKings for internal data, including the algorithms they use to work out how much fantasy athletes cost to customers, while the latter is discussing with both companies how to set up consumer safeguards.

Both companies are under investigation from New York and Massachusetts Attorney Generals

In a short space of time, daily fantasy sports have become part of the fabric of televised sports in the US. Commercials for both FanDuel and DraftKings — the biggest two companies in this nascent industry — are ubiquitous on game days, each promising that average sports fans can earn millions simply by applying their existing knowledge of stats, players, and trends to a condensed version of the more traditional season-long fantasy format.

If the government does indeed decide that daily fantasy sports operations are unlawfully promoting and enabling gambling, it could mean a complicated end for a rapidly growing multi-billion dollar industry that's already woven its way into the big leagues. Investment in DraftKings reached $426 million in July, with Fox Sports, Major League Soccer, and the National Hockey League adding an extra $300 million to existing venture capital from companies such as Major League Baseball, and individuals such as Dallas Cowboys owner Jerry Jones. ESPN and Disney were also gearing up for heavy investment in the company, but backed out at the last minute. Its rival, FanDuel, scored another $275 million in July, having signed sponsorship deals with 15 NFL teams a few months earlier.