The FBI and the US attorney’s office in Boston have launched an investigation into whether DraftKings Inc. and other fantasy sports operators are violating federal gambling laws, according to a person familiar with the probe.
The investigation is in the beginning stages, the person said Wednesday night.
A spokeswoman for US Attorney Carmen Ortiz’s office said it could not confirm or deny the investigation.
Daily fantasy sports have been under scrutiny in recent weeks, with elected officials and lawmakers in several states calling for probes into the legality of the practice. But the new investigation marks the first time the federal government has officially begun to evaluate the industry’s legal status.
Boston-based DraftKings issued a statement late Wednesday saying “it is entirely predictable that the government would follow up on the misleading reports about our industry.”
“We have no knowledge of the specifics of any federal investigation but strongly disagree with any notion that our company has engaged in any illegal activities,” said the business, which has grown to more than 270 employees in three years.
DraftKings’ top rival, New York-based FanDuel Inc., declined to comment.
Customers of DraftKings have been contacted by FBI agents from the Boston office, according to The Wall Street Journal, which was the first to report the investigation.
Gambling has been a focal point for Ortiz’s office in recent years. In the most prominent case, in 2010, Ortiz charged the wife of then-US Representative John F. Tierney with helping her brother manage the profits of an illegal offshore gambling enterprise. Patrice Tierney pleaded guilty and was sentenced to 30 days in prison.
Daily fantasy sports contests generally require entrants to pay for a chance to win cash prizes — a system that recently prompted Massachusetts Attorney General Maura Healey and US Representative Frank Pallone Jr., a New Jersey Democrat, to question whether the companies should be considered illegal online gambling outfits. Healey has also reached out to DraftKings and FanDuel to discuss what steps the websites are taking to protect customers.
A recent data leak that raised questions about the integrity of cash contests also led New York Attorney General Eric Schneiderman to open an investigation into whether the companies’ employees have access to player data that gives them an unfair advantage when they enter contests.
DraftKings and FanDuel, which together have raised more than $700 million in venture capital, maintain that in all but a handful of states their contests are legal, based on an exemption to the federal Unlawful Internet Gaming Enforcement Act of 2006.
The law distinguishes between betting on point spreads and entering fantasy sports contests that “reflect the relative knowledge and skill of the participants.”
However, a former US representative, Jim Leach of Iowa, who coauthored the gambling act, said that he and other lawmakers could not have imagined at the time what fantasy sports would become and never intended to sanction the kinds of high-stakes contests now offered regularly.
Top prizes on DraftKings and FanDuel, which did not exist when the law was written, routinely top $1 million, and the companies have said they expect to pay out more than $3 billion in combined winnings this year.
Participation in fantasy sports leagues has more than tripled in the nine years since the gambling law was passed, to 57 million people in North America, according to the Fantasy Sports Trade Association.
In fantasy football contests, DraftKings and FanDuel users draft real NFL players for their imaginary teams and score points based on how well those players perform on the field.
Leach said the fantasy exemption, favored by professional sports leagues like the NFL and by Major League Baseball, was included to speed passage of the law.
“Concern was raised that we faced an amendment process that we could lose control of if no accommodation was made for fantasy sports,” said Leach, now a law professor at the University of Iowa. “Concern was also expressed that if the committee did not accommodate the concerns of the amendment’s advocates, we might not carry the floor vote, and even if we did, might have to deal with a delaying Senate amendment on the subject.”
Last week, DraftKings chief executive Jason Robins told the Globe that his company will comply with any new regulations that might be placed on the fantasy sports industry.
“Whatever the government wants to do, we have to accept it,” he said. “It’s not a choice we have.” But Robins contended that external checks are not needed to ensure the integrity of the contests.
The leak that caused so much uproar, he insisted, did not factor into a DraftKings employee’s $350,000 payday on FanDuel. The employee, Ethan Haskell, posted a data table showing the rates at which real NFL players had been selected for fantasy teams before contest entries were locked in on DraftKings.
However, an internal investigation concluded Haskell gained access to the data only after submitting final picks for the contest he entered on FanDuel, which had an earlier deadline.
Still, Haskell’s leak and subsequent winnings prompted questions about whether employees of fantasy sports companies might have an edge when playing against the crowd. In response, DraftKings and FanDuel banned workers from entering cash games on any site. The companies previously barred employees from playing on their own sites.
David Kaplen, a San Antonio man who quit his job as a restaurant manager to play fantasy sports full time in 2009, said he “never felt violated” by the participation of DraftKings and FanDuel employees. But he feels better knowing they are no longer playing against him.
“You have to decide which side you’re on,” said Kaplen, 41. “Are you going to work for one of the companies or are you going to play? You can’t have it both ways.”Callum Borchers
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