Lawsuit accuses DraftKings of flouting bans in 5 states

A DraftKings logo was displayed on a board inside of the DFS Players Conference in New York.Lucas Jackson/REUTERS

Long before their legal battle in New York, DraftKings Inc. and other fantasy sports companies did not accept money from players in five states that have highly restrictive gambling laws.

But in his lawsuit seeking to shut down DraftKings for allegedly violating New York’s gambling laws, Attorney General Eric Schneiderman accused DraftKings of receiving nearly a half-million dollars in contest fees from residents of those states. Now, authorities in four of those states say they are looking into Schneiderman’s allegation, with one, Washington, launching a formal investigation.

And the attorney general of Arizona, Mark Brnovich, has sent letters to DraftKings and its top competitor, New York-based FanDuel Inc., asking for records of any transactions with players from his state. Brnovich also asked what steps the companies were taking to block accounts from Arizona, and questioned if the companies are sufficiently warning those players “that participation in your games for monetary winnings violates Arizona law.”

“It obviously caused us some concern,” Brnovich said about documents in Schneiderman’s lawsuit that indicated DraftKings took in $48,742 from players in his state in 2014.

Arizona law imposes numerous conditions on contests involving wagering that essentially ban most forms of gambling. An effort by a state lawmaker in 2014 to legalize fantasy sports failed. The other states, including Montana, Iowa, and Louisiana, also have rules that the fantasy sports companies have determined prohibit their contests.

DraftKings declined to comment on Schneiderman’s allegations.

On Friday, however, the company said it had hired a new technology vendor whose software makes it difficult for users in states where its games are not allowed to disguise their locations.

On its website, DraftKings refers to “excluded states” where its games are not allowed. “Legal residents of Arizona, Iowa, Louisiana, Montana, Nevada, and Washington (the “Excluded States”) are ineligible for prizes offered by the Website,” the company says in its terms of use.

Nevada is a recent addition; in October, its gaming board declared daily fantasy sports a form of gambling that requires a state license.

In his lawsuit, Schneiderman attached a copy of a spreadsheet that purports to show how much in contest fees DraftKings received from players in each state in 2014 — before the cash version of daily fantasy sports exploded in popularity.

For the five states, the lawsuit indicates the company got $484,897 “from player accounts registered in states where DraftKings purports not to offer DFS,” or daily fantasy sports, “for legal reasons.

“Serious questions have arisen regarding whether DraftKings is abiding by anti-gambling laws in jurisdictions where even the company accepts that DFS is wholly illegal,” Schneiderman said in his lawsuit. He did not make similar allegations against FanDuel.

The attorney general’s lawsuit did not include information on state-by-state player fees for 2015. His office declined to comment further.

New York State Attorney Eric Schneiderman spoke during a Law Day event at the Court of Appeals in Albany, N.Y. Hans Pennink/Associated Press/File 2015

Earlier in November, The New York Times published a story in which it said people in banned states were able to enroll in contests by using commonly available technology that disguises their locations. In response, DraftKings said the Times violated its terms of use and would not be eligible to play on its site. A spokeswoman later told the Globe that the company would have prevented the players from cashing out.

According to Schneiderman’s complaint, the fees DraftKings allegedly received from the five states represented a tiny portion of the money it collected in 2014; the company has separately said players spent $304 million that year.

The largest sum that Schneiderman said DraftKings collected from the five states was more than $422,000 in Washington, where the state Constitution bans most forms of gambling. A spokeswoman for the Washington State Gambling Commission, Susan Newer, confirmed her agency has launched a formal investigation but declined to comment further.

At the state capitol in Olympia on Friday, Washington legislators discussed a bill that would legalize a scaled-down version of season-long fantasy sports.

Officials in Iowa and Montana said they were reviewing the information but stopped short of opening investigations. A spokesman for Louisiana Attorney General James D. “Buddy” Caldwell did not respond to a request for comment.

The sums in Iowa are small — $5,676 in 2014, according to Schneiderman’s documents. Geoff Greenwood, a spokesman for Iowa Attorney General Tom Miller, said his office will review the payments and decide whether they warrant further action.

The new interest from these states adds to the mounting pressure on the daily fantasy companies, which are also under investigation by federal prosecutors in several states.

Meanwhile, lawmakers in several other states have filed legislation that would explicitly permit fantasy sports or set up rules to oversee the games. In Massachusetts, Attorney General Maura Healey has recommended sweeping consumer-protection rules but has not moved to shut the companies down, saying state gambling laws don’t explicitly ban fantasy sports.

New York represents the most serious threat yet to the companies’ businesses. If successful, Schneiderman’s action could cut off one of the largest markets for the companies. New Yorkers have spent an estimated $100 million in contest fees so far this year at Draft-Kings. A judge in Manhattan has set a hearing in Schneiderman’s suit for Wednesday. The companies have also gone to court in an attempt to block the attorney general.

FanDuel has suspended contests in New York while it fights Schneiderman, but DraftKings has continued accepting fees from players in the state.