Fantasy Sports Sites Target of Lawsuit Citing Fraud

Fantasy sports companies FanDuel and DraftKings are coming under further pressure as a player in Kentucky accused them of negligence and fraud in a lawsuit.

Adam Johnson, a daily fantasy player from Jefferson County, says in the suit that players were “fraudulently induced into placing money onto DraftKings because it was supposed to be a fair game of skill without the potential for insiders to use non-public information to compete against them.” The suit, which was filed in the Southern District of New York and seeks class action status, asks for a jury trial and requests that the companies pay damages with interest while also changing their practices to make sure employees don’t benefit from inside information.

The suit is the latest fallout from a controversy that erupted this week when it came to light that a DraftKings employee had inadvertently released information about which athletes were most likely to end up on the rosters. The week before, the employee, Ethan Haskell, had won $350,000 playing in contests on FanDuel, raising questions about whether he had used proprietary information to gain an edge on the competition. The companies have said he didn’t.

“The biggest edges any player can have come from having data and information. DraftKings and FanDuel employees have access to both things, neither of which is public,” Johnson claims in his lawsuit. “For instance, DraftKings performs analytics to determine winning strategies, return on investment of certain strategies and even how lineups on FanDuel would do if they were entered into DraftKings contests. DraftKings knows the value of this data and knows that it should not be shared.”

FanDuel declined to comment. DraftKings couldn’t be reached for comment.

The lawsuit questions the companies’ decision to let their employees play on other sites.

Until this week, workers at FanDuel and DraftKings didn’t seem to see anything wrong with playing fantasy sports while running fantasy sports companies. Both companies had banned players from playing on their own sites but didn’t restrict any other action.

At DraftKings, employees were actively encouraged to play on FanDuel, according to a former employee. Thomas Starr, who worked for both DraftKings and Draftstreet, another daily fantasy sports company, said one of the draws of working at a fantasy company was spending the day talking about playing the games.

“It’s an ongoing conversation all day, like an open forum, who’s betting on what, who’s the sleeper today,” he said.

On Wednesday, DraftKings and FanDuel said they were banning their workers from playing fantasy sports for money, a restriction that parallels the practices of some casino companies that prohibit employees from placing bets at competing casinos. Johnson’s suit claims that this should have been done years ago, citing past comments made by Jason Robins, the chief executive of DraftKings, expressing concern about the fairness of his company’s policies on that practice. Not banning such activities violates consumer protection law in Kentucky and the New York Deceptive Acts and Practices and False Advertising laws, according to the suit.

DraftKings and FanDuel, the two biggest daily fantasy sports companies, are under investigation by the New York Attorney General and are facing calls for congressional hearings. They could also face scrutiny by the U.S. Federal Trade Commission over possible violations of consumer-protection laws, according to former lawyers for the agency. “It seems like a pretty troublesome practice, and rigging a contest is right up the FTC’s alley,” said Joel Winston, a lawyer at Hudson Cook LLP in Washington.

Online gaming has been a recent focus for the FTC, and the agency will probably be interested in expanding into fantasy sports betting because it has similar attributes, said Phyllis Marcus, a lawyer at Hunton & Williams LLP in Washington.

“The FTC has really jumped into the online-gaming industry,” Marcus said. “That’s where the attention is. That’s where consumers are.”