What is fantasy sports betting and why is it legal?

Scandal has hit the little-understood world of fantasy sports betting.

An employee at one of the premier companies, Draft-Kings, allegedly had access to proprietary information that could have helped him snag some winnings at its main rival, FanDuel.

DraftKings has disputed this charge, but the bigger issue facing these sites is that every misstep — real or merely alleged — raises deeper questions about the underlying legitimacy of the whole fantasy betting industry.

For instance: Why is this kind of betting legal in the first place? And what regulations should apply to an industry that seems so very much like gambling?

How does fantasy betting actually work?

Let’s say you want to join one of these fantasy football leagues. You start by visiting its online site, getting an account, and adding some money to the weekly pot, sometimes as little as a few dollars.

At that point, you’re given a budget and the opportunity to pick players for your personal team. On DraftKings, for example, you get a budget of $50,000 and you choose nine team members — eight individuals, and one team’s defense/special teams. Selecting a superstar like Tom Brady will cost you a big chunk of your budget, whereas a promising outsider will cost far less.

When your lineup is set, you wait for the weekend and watch to see how your players perform. Their triumphs bring you points, but their blunders take them away. Again using Draft-Kings as an example, a punt returned for a touchdown is awarded six points, and a lost fumble loses one point. At the end of the week, if your lineup racks up more points than the other fantasy teams in your pool, you get a share of the winnings — which can be hundreds of thousands or even millions of dollars.

Over the last few years, there’s been an explosion in fantasy betting — and in advertising. Today, it’s a multibillion-dollar industry, with some 50 million participants.

Why is fantasy betting legal?

It might not be. Just because fantasy leagues are taking bets in the open doesn’t mean those bets are legal. It just means no one has done anything about it yet. Some future court ruling could well declare that online fantasy games were always violations of federal law.

For now, though, fantasy betting seems to have found a comfortable, legal gray area.

The one thing federal law roundly forbids is betting on the outcome of sporting events (outside of a few exempt states, like Nevada).

But in fantasy play, people don’t bet on games, they bet on the performance of individual players. And that’s an activity that federal law seems to allow.

Federal law isn’t the only standard, however. Each state has its own say. And while fantasy betting is already illegal in a few states, lots of others just haven’t weighed in yet. Eventually they will, and the current scandal may prod them to do it sooner.

If enough states turn against fantasy betting, that could quickly bring an end to this lucrative and fast-growing industry.

What’s the current scandal about?

It’s about the use of proprietary insider information.

On first blush, it might seem impossible to get any inside information about fantasy sports. After all, it’s not as if employees at DraftKings know how well individual NFL players are going to perform next week. They have to watch the games, like anybody else.

How, then, does running a fantasy league help you put together a winning team?

All the advantage lies in this fact: To win big in fantasy sports, you want to pick players that other people overlook.

Assemble a team full of beloved stars, and you can certainly do well if those stars play well. The only trouble is that lots of other people will do just as well, since beloved stars end up on many people’s fantasy rosters. So you’ll have to share the pot with many other winners.

By contrast, if you pick talented, dark-horse players that no one else has chosen, and they have a good week, you can walk away with most of the winnings.

That’s where being an employee makes a difference, because you can check to see which players are being overlooked in any given week. And if they’re being overlooked on your site, odds are they’re also being overlooked on the other sites, allowing you to put together a unique team and boost your odds.

This is exactly what one DraftKings employee is thought to have done: using numbers from his company to gain an advantage on a rival site, ultimately pulling in $350,000.

DraftKings denies that this actually happened and claims that employees with access to this kind of information are “rigorously monitored by internal fraud control teams.“ In this case, they say their records show that the employee didn’t have access to the inside information until after his winning team was finalized.

Is this really insider trading?

Not exactly. Even if the employee did improperly use company information, that doesn’t technically amount to insider trading, in the financial sense of the term.

Partly, this is just a question of definition. Insider trading involves trading, and in this case no shares were sold or purchased.

More generally, though, insider trading generally gives investors a huge advantage, something close to a sure thing. But in this case, even with detailed company information about the popularity of different players, the employee would gain only a slight advantage.

That isn’t to say the alleged action is benign.

Stephen Bainbridge, a law professor at UCLA, wrote Monday that the employee’s activity would not meet the definition of insider trading, but might violate a provision of contract law that bars people from using confidential corporate information for private gain.

Legal issues aside, the companies know that if people start to doubt the fairness of their games, they’ll be less likely to play.

So while they deny any wrongdoing, DraftKings and FanDuel have temporarily banned employees from using each other’s sites.

Are the games fair?

Even setting aside the question of insider information, the standard rule of gambling still applies: The house always wins.

There’s a reason investors have been pouring money into fantasy betting companies, and it’s not because they’re giving money away.

Those companies take a cut, which drives the odds below 50:50.

Also, as with so many games, winning is for professionals, not amateurs.

Casual players may pick up a few pots here and there, but the real money flows toward serious players with sophisticated systems for running odds and selecting teams.

What’s the future of fantasy sports betting?

Judging from the money being pumped into the industry, investors seem to think the future of fantasy betting is bright. And it may well be. But the legal uncertainty, combined with the scrutiny likely to follow this latest scandal, should raise doubts.

Fantasy sports betting is such an odd outlier, given the highly controlled nature of sports gambling more generally. That doesn’t mean it’s destined to be shut down. It could easily have the opposite effect, normalizing sports betting to such a degree that other restrictions come to seem outmoded, opening up new opportunities for sports gambling at casinos across the country or at other online venues.

Betting on soccer matches, for example, has been legal in the United Kingdom for more than 90 years.

What seems especially unlikely, though, is the status quo. It’s hard to imagine that fantasy sports betting can continue to fly under the regulatory radar, while flaunting its wares on TV and occasionally getting caught up in public scandals.