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Nasir and Matt discuss the scandal involving an employee of DraftKings winning a contest for competitor FanDuel and why this has sparked a discussion on gambling and insider trading.
Full Podcast Transcript
NASIR: Welcome to our podcast where we cover business in the news and add our legal twist to the business news. My name is Nasir Pasha.
MATT: And I’m Matt Staub.
NASIR: And we have a huge problem because I have a list of articles that we’re covering but no title so I’ve no idea what we’re doing. Who was responsible for putting the title in? Matt, was that you?
MATT: Possibly. You know, I almost wrote something up there and then I didn’t. I usually just copy and paste from an article.
So, this is big for you because you’re probably oblivious to…
NASIR: Oblivious?
MATT: Right now, what do you think is going on where you’re located? Are there any sports happening today?
NASIR: You know, what’s funny is – if he’s listening, it’s going to be funny – I was in the elevator with somebody today. He’s like, “Hey, are you going to watch the games tonight?” and I’m like, “What games?” Yeah, as a pure accident, I am aware that the Astros and the Texans are playing – not each other.
MATT: No, it’d be interesting.
NASIR: It would be interesting, and I saw a bunch of people wearing Texas jerseys out and I’m like, “Man, it’s kind of odd.” It’s like, not Sunday, and I realized it was a Thursday night game.
MATT: There’s a Thursday night game every week so the Texans are playing. That’s not that big of a deal but the Astros are in the playoffs. They won the other night in this weird one game wildcard. They’re actually playing right now as we record. I guess both of those games will be going on while we record but I’m guessing you probably can’t name one player on the Astros.
NASIR: Of course, I can name one player on the Astros.
MATT: I hope you Google and say someone who’s retired.
NASIR: Yeah. I mean, isn’t Scott Kazmir going to pitch Game 2 tonight?
MATT: Well, it’s Game 1 tonight.
NASIR: I mean, that’s what I mean. Oh, no, I meant he’s going to actually pitch Game 2.
MATT: It’s possible, yeah. It’s only funny because he’s been on the team for probably a couple of months because he got traded in the middle of the season.
NASIR: Oh, yeah, of course, I know. Actually, you know, I know we’re covering fantasy sports but, you know, fantasy football, I get, but fantasy baseball, with so many games per year, that’s too much.
MATT: That’s why I led into this sports-related question and I don’t know, I would assume they have some sort of baseball… Fantasy sports, we’re talking about specifically DraftKings and FanDuel which fantasy sports used to be you’d have a team, you’d pick your team, you’d basically go with that team throughout the year, adding or dropping players, making trades. These companies – and I think there are some more out there too but these are probably the two biggest ones – DraftKings and FanDuel – for football, it’s huge because basically what you do, from what I understand – I’ve never played – is you have an allotted amount of money of your salary or your payroll and you pick whatever players in the different positions and you have to come in under the payroll and there’s some contest every Sunday because there’s one game every week per team in NFL. You take the total points and they have this big contest and I think it’s either a million dollars or close to a million dollars for the first place every week.
NASIR: At least not FanDuel but…
MATT: DraftKings.
NASIR: Don’t they advertise a million dollars?
MATT: Yeah. I mean, I should know since there’s about a billion commercials between the two, if you watch any sports channels. So, here’s what happened. There was an employee who worked for DraftKings. Like I said, these are two different companies. He worked for DraftKings and I guess he’s privy to some information on, you know, who is selecting what players for this big contest and I’ll get to that why that’s important later on but, basically, he’s privy to this information because he works for DraftKings. So, what does he do? He goes and competes on this FanDuel contest.
NASIR: Wait, I think it’s the opposite, right? He works for FanDuel?
MATT: This one says he’s a DraftKings employee.
NASIR: Yeah, you’re probably right.
MATT: Yeah, because he placed second in FanDuel’s NFL Sunday Millions contest.
NASIR: Okay, yeah.
MATT: That’s the contest I was describing. He got second place and the argument is, well, because how this works is you pick – I don’t know – it’s like a QB, a couple of running backs, a few right receivers, tight end, kicker, defense, I think. But the idea is, if you picked all the favorites, that might not be the thing. The key is you grab some of the favorites and grab some of the under the radar guys, especially because there’s a set payroll and you can kind of look and see, if you knew all the information, you can see what percent of the picking were picking whom so you would have better odds of kind of finding that under the radar pick that nobody else is doing. That’s the argument of what this guy did.
NASIR: If everyone picked the same players, then it’s very unlikely to get first because everyone’s picking the same players. In order to actually get first, you have to not only pick different players but get lucky enough that those different players actually do better than the top picks of that week.
MATT: Yeah. I mean, what he did was a combination of luck and skill – well, not skill but just luck and inside information – we’ll get to that, too. What happens is he does this, he goes on FanDuel, places second, wins $350,000 and then this huge – I think this story is blown up a lot bigger than I expected it but, yeah, they’re making a big deal out of this, so much so that, as of recording, I believe the New York Attorney General has already gotten involved and is investigating both companies because there’s a lot of issues going on with this. One is gambling – is that legal? Two, they’re really pulling in this insider trading issue as well – I mean, amongst other issues. But these are two issues that really come to the forefront because this guy basically kind of got lucky with his picks. I saw his line-up and, I mean, there was one guy on there who I didn’t even know who it was and I follow football fairly close so it’s a little bit of luck and a little bit of knowledge.
NASIR: Yeah. And so, what’s interesting about these New York Attorney General letters is it’s one of those kind of friendly requests for information. The attorney general is not quite saying, “Hey, you’re doing something wrong.” What they’re saying is that there’s something that may be wrong here and we want to find out a little bit more. Basically, they gave him a very short deadline. I think it was sent on the sixth of October and they have till the 15th to respond. Basically, they said, “Okay, give us an access list of all your employees that have access to these statistics,” and then, amongst other requests, like, “What are some policies that you have and so forth?” and there’s also been other allegations of insider trading which, by the way, this isn’t a stock so I’m not sure if people are using the word “insider trading” because I think it’s a good fit for it but, really, there’s already been civil lawsuits related to this and I think what people are saying is that, basically, you have a terms of service that says that this is a contest and, if it’s truly a contest, then everyone should have an even chance of winning based upon their skill level, et cetera. But, if somehow people are given an up over others, then the game ends up being rigged and, you know, there’s a huge number of theories you could have. You could say fraud or you could say, you know, they’re misrepresenting the terms or they’re breach of contract, et cetera. And so, it’s an interesting kind of play that’s going on here.
MATT: Yeah, and I agree with you. The insider trading thing is definitely very weird because, like you said, we’re usually dealing with some sort of security and this is just people using inside information – or at least one guy using inside information- to gain an advantage in another contest. It’s not even just media people that are saying this. There are attorneys out there saying, “Well, this is definitely insider trading.”
NASIR: Yeah, and maybe there’s some statute that they can hang their hat on but, if you think about, it doesn’t really also fit the classic definition of “insider trading” because, here, you’re taking, in this case, one employee of one company probably used – or may or may not have used – at least this is what’s alleged – used the data and statistical information they had for one company to play a game on the other company. And so, let’s assume the games are the same – they may not be but let’s assume they are – then a statistician would argue, “Well, you basically have preview to a sample of statistical information that is probably near identical to the other game if all being things equal,” right? Because there’s no reason why – well, maybe there is but there’s no reason to believe that the players of one game is much different than the players of the other game and, if the information as to what those players choose is significant, then it’s virtually having knowing of both the statistical information of both games. Did that follow?
MATT: Maybe. Yeah, I mean, this isn’t a situation of, because, like I said, these two companies are competitors and it’s not a situation of an employee of one using the information he has, confidential information of his employer to do something against the competitor that’s adverse to it because someone’s going to get second place so, if it’s not him, it’s going to be somebody else. And so, it’s a very unique situation how it’s all being framed and it’s all being discussed and, like I said, it’s really blown up. I think people are just fed up with the, like I said, the millions of commercials.
NASIR: That’s probably true.
MATT: On a side note, I was reading about one of the things on ESPN. They restructured their website maybe a year or so ago and now they’ll have kind of the heavy part on the right as the story and then, on the left, there will be a column with kind of scores and there’s ads mixed in. But, while I was reading the article, it was this thing about DraftKings and FanDuel and, on the left, I screenshotted it, it was a huge ad for I think it was for DraftKings.
NASIR: Yeah, of course, that’s inevitable, I think. Actually, their reaction is pretty interesting. I think both companies have already set in policies that, “Okay, if you’re an employee,” they’ve actually worked together. “If you’re an employee of either company, then you cannot play the game for either company.” I think both have already had longstanding policies that, if you’re an employee, you can’t play the game itself.
MATT: Oh, yeah, of course.
NASIR: For your company and, for example, for DraftKings, I think that was maybe for the first month or two that wasn’t a rule because I think they were still testing the site or whatever. But then, at a certain point, when they had 40 or 50 users, they cut that out. So, that’s pretty interesting. They are reacting to it – even a lot of ESPN still played their ads but I guess they had some sponsorship or co-sponsorship deals and I think DraftKings pulled their ads unilaterally until this kind of blows over or something to that effect. It’s hard to tell which one’s which but, by the way, did you know that FanDuel is also partly owned by Major League Baseball?
MATT: I also think ESPN might own part of DraftKings or something.
NASIR: I don’t know if there’s co-ownership but there’s definitely some sponsorship going back and forth a little bit.
MATT: And it kind of gets to the greater issue of there’s been a big push in the last year or so to try to legalize sports gambling nationwide. I mean, you can go do it in Vegas to some extent but, you know, they’re trying to get a push to legalize this all around, and this isn’t gambling, just betting on the outcome of a game. This is, you know, selecting players and trying to win money off of it. So, there’s the argument of fantasy sports versus actual physical gambling. It’s a whole slew of issues and I think the gambling issue is going to go. I think that’s why the New York Attorney General is so keen on getting into this – because I think they’re trying to get to the front of this gambling issue and they’re throwing all of this in with that issue.
NASIR: And there’s only a few states that actually consider it gambling, right? It seems like most states have said this is like a game of skill, I guess.
MATT: Yeah, federal law, they’re still okay, and I think all but five states – 45 of the states allow it as a game of skill while five states disagree. I don’t know which five states those are. But, yeah, here’s the thing – and I was getting to this earlier – even if you did know this inside information, it’s part luck. I mean, I guess you’re getting a slight advantage. I just don’t see it as that big of an advantage that he got because, at the end of the day, I mean, there is one selected group of players within the certain salary range that you could pick and that’s going to win no matter whether you had inside information or not.
NASIR: Yeah.
MATT: I think the advantage is much slighter than they’re making it out to be.
NASIR: That’s probably true, too. Like you said, I think it requires quite a bit of luck. By the way, I looked it up – Major League Baseball owns a small equity stake in DraftKings and the National Basketball Association owns a share of FanDuel.
MATT: Okay.
NASIR: A little tid-bit there for you to take home to the bank.
MATT: Can you name any Houston Rockets players from the NBA?
NASIR: Hakeen Olajuwon?
MATT: He’s probably known as maybe their greatest player. There’s the guy with the huge beard. I mean, you have to see that around Houston, right?
NASIR: Oh, yeah, yeah! I’m blanking on his name but, on another day, I probably would have remembered his name.
MATT: That’s fine. James Harden, but it’s okay.
NASIR: Yeah, Harden, yeah, anyway. Don’t ask me anymore sports questions. It just gets more and more embarrassing as the episode goes on.
MATT: Well, the funny thing is our first episode ever we did a Houston Texans player, remember?
NASIR: Was that the very first episode?
MATT: I think so. If it wasn’t, it was one of the first few.
NASIR: Yeah, it was… what’s his name? God, I can’t remember it now.
MATT: He’s still around because he just played I think last week.
NASIR: He’s played, like, hardly any games since we’d covered him.
MATT: He got the Legally Sound Smart Business curse after we discussed him.
NASIR: Oh, that’s a good one. What’s his name? Remind me. I can’t remember now.
MATT: Arian Foster.
NASIR: Arian Foster, yeah. I mean, as far as a take-home, I mean, most businesses don’t have to deal with this but it’s an interesting story, nonetheless.
MATT: I don’t know how much of a takeaway there is for employers on this. The one thing I can think of – the biggest thing, at least – would be having a policy keeping confidential information confidential. But, if they had a policy, I don’t even know if it would violate in this instance.
NASIR: Well, what it does show though is how easy it is for the actions of your employees to all of a sudden get you into trouble, and on a company level, you know? Some real take-home advice, so often do we see as attorneys, if employees do certain things, it can be construed by outside regulatory bodies or even outside litigants that this is a systematic problem, right? Because the management should have taken care of this because, in this case, they should have had a policy that that employee could not play the game of its competitor. I’m not sure how they would have known that but, you know, the point is that every business has susceptibility in some regard from their employees for that matter.
MATT: I like how you said, “If you want some real take-home advice,” like mine was just nothing.
NASIR: Well, you’re talking about sports. You can’t really take that to the bank and deposit it.
MATT: Well, I think that’s it for today.
NASIR: Yeah, thanks for joining us.
MATT: Keep it sound and keep it smart.
