The Online Business of Betting on Sports – Real and Otherwise

DraftKings, Inc. and FanDuel, Inc. have been operating under the legal radar. In fantasy sports betting, customers pay entry fees to draft virtual sports team that then compete for prize money that is awarded based on how real teams perform. The business has been booming. Fueled by venture capitalists and with DraftKings even featured on the Triple Crown winner’s colors, these companies are doing so well that Fox News anchors have boasted of winning $30,000 betting online in this quasi-fantasy world. Bryce Mauro, an economics major at DePauw University has won hundreds of thousands through FanDuel. Walt Bogdanich, James Glanz, and Agustin Armendariz, New York Times, October 16, 2015, p. A1. You can read about the company growth here.

University of Arkansas business law professor John Norwood presented a paper at the Academy of Legal Studies in Business on this issue in August 2015. Working with an economics honors student. Professor Norwood noted, presciently, that this field was growing and largely unregulated. Only five states, Arizona, Iowa, Louisiana, Montana, and Washington have made the activity illegal. However, on October 15, 2015, Nevada’s Gaming Control Board issued a notice to the companies that their activities “involve wagering on the collective performance of individuals participating in sporting events” and, as such, the companies must obtain a gambling license to continue operating within the state of Nevada. Sharon Terlep, “Fantasy-Sports Sites Told to Shut in Nevada,” Wall Street Journal, October 16, 2015, p. B1. Professor Norwood also noted that the large amounts of money involved could result in the involvement of organized crime and was bound to attract nefarious forces. Allegations of what amounts to insider trading have also emerged with regard to the sites.

Online gambling has been a regulatory challenge. First, there are the networks for payment. Those who bet set up an account online in the United States, but the funds customers pay for are deposited in off-shore accounts that they can draw on for bets. The two largest sites for the accounts are in Panama and Costa Rica. Investigations and prosecutions are expensive and difficult for these types of foreign entities. So far, the key to shutting down these foreign country gambling payment sites has been the voluntary actions of the secure payment servers in the United States who have refused to do business with the off-shore companies. However, the FBI has begun an investigation.

Next, there is the difficulty with writing legislation to cover all the activities related to gambling. In 2006, Congress did pass legislation that curbed online gambling by prohibiting online payments for illegal bets on college and professional sports teams. However, the legislation provided for a fantasy sports exemption. Former Representative Jim Leach of Iowa who sponsored that legislation was not in favor of the exemption because the ease with which people can get in over their heads when it comes to Internet gambling, regardless of the subject matter of the bets.

The exponential growth of fantasy sports may, as one expert noted, be its downfall. The growth has been so fast that the fantasy sports companies have not taken the precautions necessary to prevent the use of information not available to the public in placing the bets. There are insufficient controls on who is betting and even some timing issues. FanDuel banned its employees from betting on October 7, 2015.

The sums are so high, the draw so great, and the regulation so sparse that this new industry is ripe for both abuses and increasing regulation. The rapid growth has made it difficult for lawmakers and law enforcement agencies to keep up with the issues, let alone individual cases in which there is fraud. However, Nevada us just the beginning. Keep watching because the changes are coming to this underdeveloped area of cyber law.

DISCUSSION STARTERS

Explain the regulatory structure for fantasy sports.

Discuss why it is difficult to prosecute abuses.

What kinds of regulations will result from all the concerns about fantasy sports?