DraftKings and FanDuel Dealing With Concerns over Insider Information, Likely to Face Congressional Scrutiny

Over the weekend, issues arose in Daily Fantasy Sports that could dramatically alter the manner of regulation for the industry. The New York Times wrote about it with the title “Scandal Erupts in the Unregulated World of Fantasy Sports.”

Here’s what precipitated the New York Times being on it–during week 3, a DraftKings employee named Ethan Haskell published, inadvertently, ownership percentages (the percentage of entries on which each fantasy player appeared) across all week 3 games. It was first noted on a RotoGrinders forum and the first article about it was written by DFSReport.com. That same DraftKings employee happened to come in 2nd out of over 300,000 entries in a FanDuel contest, earning $350,000 at the end of that week.

As noted by DFS Report, this kind of information about ownership percentages can be extremely valuable.

" It is extremely valuable in fact it could be the most valuable data available which is why it is kept so under wraps and why this is such a big deal. The edge that can be created by having access to this data is 2nd to none. No other data comes close to being as valuable as having a complete understanding of exactly what way the DFS crowd is leaning in any given week. That is why our FanDuel Thursday ownership piece is so popular. It is because it gives a small glimpse into the key ownership levels for that week. "

In many of the contests with large purses, a select few entries earn lots of money, while most lose the cost of the entry fee. Thus, building lineups able to take advantage of market inefficiencies are valuable. Knowing where those inefficiencies are, then, can provide an advantage to a person with information. It’s a similar concept to things like winning a March Madness pool, where coming in 10th isn’t any better than coming in 50th. In pools like that, I would love to know what others were picking, in setting my selections, to try to find value. You may wonder how DraftKings info on ownership could benefit in FanDuel, and vice versa. The sites’ values are going to be similar, though not exact, and with a large sample size, it can be a decent indicator of behavior at the other site.

So in this case, there are a couple of things at issue. Ethan Haskell has denied, according to RotoGrinders forum comments, that he got that lineup info before lineups locked at FanDuel (the sites differ on whether you can make late changes to a lineup if players in that game haven’t started yet). But the larger issue is concerns over data protection, who has access to valuable proprietary information, and what safeguards are in place. In an industry where DraftKings and FanDuel are advertising to the masses, while maintaining public confidence that the games are fair, that is vital.

From the New York Times:

" A spokesman for DraftKings acknowledged that employees of both companies had won big jackpots playing at other daily fantasy sites. Late Monday, the two companies temporarily barred their employees from playing games or taking part in tournaments at any other site; they already had prohibited their employees from playing on their own company sites. “Both companies have strong policies in place to ensure that employees do not misuse any information at their disposal and strictly limit access to company data to only those employees who require it to do their jobs,” the statement said. “Employees with access to this data are rigorously monitored by internal fraud control teams, and we have no evidence that anyone has misused it.” "

The next issue, of course, is whether that response of “trust us, we’ve got this” will suffice. A month ago, reports came out that Congress was going to examine daily fantasy sports and the various legal issues connected with it. Just a few minutes ago, David Purdum of ESPN also said that a House hearing on DFS is likely.

“The single greatest threat to the daily fantasy sports industry is the misuse of insider information,” attorney Daniel Wallach told the New York Times. “It could imperil this nascent industry unless real, immediate and meaningful safeguards are put in place. If the industry is unwilling to undertake these reforms voluntarily, it will be imposed on them involuntarily as part of a regulatory framework.”

Several politicians have expressed concern about the issues involved with Daily Fantasy Sports, so expect these recent events to be a lightning rod for those wishing to push the issue.

[Disclosure: our site is owned by USA Today Sports, which also owns Daily Fantasy Site FantasyScore.]

[photo via USAT Sports Images]