Boston’s DraftKings Inc. was dealt a stunning blow Tuesday as New York Attorney General Eric T. Schneiderman ruled the company and its fantasy sports rival were running an illegal gambling operation and ordered them to stop accepting bets from state residents.
New York is the highest-profile and most populous state to forbid the contests, but the decision is only the latest shock to the embattled $4 billion daily fantasy sports industry. Federal investigators are probing whether DraftKings and its New York rival FanDuel Inc. are violating federal gambling laws, while the two companies were forced to withdraw from Nevada in October after state gaming officials ruled the contests were a form of gambling that required a license.
“Our investigation has found that, unlike traditional fantasy sports, daily fantasy sports companies are engaged in illegal gambling under New York law, causing the same kinds of social and economic harms as other forms of illegal gambling, and misleading New York consumers,” Schneiderman said in a statement. “Daily fantasy sports is neither victimless nor harmless, and it is clear that DraftKings and FanDuel are the leaders of a massive, multibillion-dollar scheme intended to evade the law and fleece sports fans across the country.”
Schneiderman’s letter to DraftKings said daily fantasy players were lured by the company’s television advertisements that promised instant gratification — easy money and easy games requiring “no long-term strategy.”
His ruling stokes worries that the entire daily fantasy industry is on increasingly shaky legal ground in the United States, even as DraftKings and FanDuel look to expand overseas. It could also jeopardize the nearly $1 billion investors have pumped into the two companies.
“It’s disastrous,” said Adam Krejcik, an online gaming analyst with Eilers Research LLC. “There’s no other way to put it.”
DraftKings vowed to fight Schneiderman in court.
“There is a process by which hasty and uninformed opinions can be challenged in a court of law, which would allow DraftKings to not have to cease operations in the state of New York,” the company said in a statement. “We will pursue this fight to the fullest to ensure that New York fantasy sports fans do not need to stop playing the games they love.”
Former Massachusetts Attorney General Martha Coakley, an adviser for DraftKings, said Schneiderman’s decision caught the company by surprise.
“This determination by the AG is not evidence-based and was made in too hasty a manner,” Coakley said in an interview. “It’s not a fair decision. If you’re concerned about consumer issues, focus on how to mitigate them. Don’t say, ‘we’re not going to let anybody play.’ ”
FanDuel, which is based in Manhattan, also decried Schneiderman’s decision.
“Fantasy sports is a game of skill and legal under New York State law,” FanDuel said. “This is a politician telling hundreds of thousands of New Yorkers they are not allowed to play a game they love and share with friends, family, coworkers, and players across the country.”
In his order Schneiderman said New York State’s constitution prohibits most forms of gambling unless they are expressly authorized, and pointedly noted that the Legislature enacted criminal penalties to prosecute offenders. That raises the prospect that Schneiderman could bring criminal charges against DraftKings executives and backers, said Marc Edelman, a law professor at Baruch College in New York.
“The attorney general can go after any person that advances gambling activity. That absolutely includes high-level shareholders and executives of a company, and may even extend at the attorney general’s discretion to the employees of that company,” Edelman said. “I would be really surprised if the attorney general did not go after senior executives and substantial shareholders of these companies if they do not observe the cease-and-desist letter.”
Edelman said he would advise the companies to suspend operations and file their own lawsuit to get the games declared legal.
“Without a court order of legality, I would not be continuing business operations in New York,” Edelman said.
Schneiderman’s determination is troubling for DraftKings and FanDuel on another legal front: The companies can be prosecuted under federal law for violating a state’s gaming rules, said Daniel Wallach, a sports and gaming lawyer with Becker & Poliakoff of Fort Lauderdale, Fla. The companies are being investigated by the US attorney in Manhattan, Preet Bharara, and by the federal prosecutor in Tampa, reportedly for possible violations of Florida gaming law.
“Today’s action by the New York attorney general has set the stage or opened the door for an indictment” by federal prosecutors in New York, Wallach said. “If the US attorney is looking at the legality, he has just been gift-wrapped a guaranteed indictment.”
“Forget the talk of regulation,” Wallach said. “Now they’re fighting for their survival.”
Krejcik said New York is one of the largest markets for online fantasy sports; players in the state spend more on average, he said, perhaps owing to its popularity among Wall Street traders.
“Obviously, this sets a terrible precedent. It’s one thing for Nevada, where people think it’s the gaming industry trying to protect its own interests,” Krejcik said. “It’s another thing for a state like New York to turn on it fairly quickly — not to mention that FanDuel is located there.”
The companies have long insisted their contests are legal because federal law defines fantasy sports as games of skill, not chance.
The companies had not offered its contests in five other states whose laws appeared to prohibit the games.
In New York, Schneiderman’s ruling cited a state law that says any contests involving bets on events outside players’ “control or influence” and involve a “material degree” of chance are gambling.
The industry immediately began marshalling its customers to sway political leaders in New York, where it said there are an estimated 500,000 players. An online petition posted by the Fantasy Sports Trade Association urged players to contact Schneiderman and New York Governor Andrew Cuomo.
Top fantasy sports players reacted angrily to Schneiderman’s ruling.
“It feels personal, and it’s infuriating because this is clearly a game of skill. It’s something I’ve spent tens of thousands of hours working on,” said Peter Jennings of Colorado, cofounder of Fantasy Labs, a company that provides daily fantasy players with software that helps them pick rosters. “My big concern here is the domino effect — New York is a state I really didn’t want to lose.”
A spokesman for Massachusetts Attorney General Maura Healey, who is reviewing daily fantasy sports, declined to comment on the New York decision. She has said that the games are not explicitly illegal under Massachusetts law and that she does not intend to move against them.
Other states, including Illinois and Georgia, have also questioned the legality of the games. In response, the companies have joined in an aggressive, state-by-state lobbying campaign to stave off anything except industry-friendly “regulation lite.”