New York expands inquiry of fantasy sites to Yahoo

By Joe Drape, New York Times News Service

Wednesday, Nov. 18, 2015 | 12:23 a.m.

The New York state attorney general has expanded his investigation into daily fantasy sport sites, with measures including the issuance of a subpoena to the online media company Yahoo, according to a person familiar with the inquiry.

The attorney general, Eric T. Schneiderman, sought an injunction in state court Tuesday to prohibit the two most prominent daily fantasy sports websites, FanDuel and DraftKings, from operating in the state, saying they were “plainly illegal” and “nothing more than a rebranding of sports betting.”

Yahoo, which is based in Sunnyvale, Calif., and has been gaining ground on FanDuel and DraftKings, has continued to allow New Yorkers to play daily fantasy games, according to an article on its website.

Yahoo, which expanded from season-long fantasy sports into daily games in July, said it was continuing to take bets from New York users. Yahoo has established itself the clear No. 3 option behind FanDuel and DraftKings in terms of participation, according to SuperLobby, an independent site tracking the industry’s guaranteed-prize games.

‘‘Yahoo does not comment on legal matters,” a spokesman said in a statement. “We are monitoring industry trends and events closely and believe that we offer a lawful product for our Daily Fantasy Sports users.”

Schneiderman, in court papers, leveled a range of accusations against the companies, stating that they had close ties to the gambling industry, collected user fees from contestants in states where the sites are barred, and raised false hopes of winning when nearly 90 percent of players lost money.

It was the latest escalation in the legal battle between Schneiderman and the sites, which are the market leaders in an unregulated multibillion-dollar industry. The companies have come under scrutiny from investigators and regulators in several states for their aggressive recruiting of contestants, their handling of inside information and questions over whether they are a form of prohibited illegal gambling.

The move by New York, however, appears to be among the more aggressive ones against the sites.

Last week, the attorney general’s office issued letters to FanDuel and DraftKings demanding that they stop their games in New York. A state court on Monday denied the two companies’ requests for temporary restraining orders but scheduled a hearing for next Wednesday, when the injunction is expected to be considered.

“While irresponsibly denying their status as gambling companies, the DFS sites pose precisely the same risks to New York residents that New York’s anti-gambling laws were intended to avoid,” the attorney general’s office said in a statement.

Customers pay an entrance fee to each site, assemble rosters of hypothetical teams using actual players and win cash prizes based on how players perform in real games. The payouts are typically more than $20, but some have been in six figures.

DraftKings, which is based in Boston, said it would continue to take entries for customers in New York.

“We believe the attorney general’s view of this issue is based on an incomplete understanding of the facts about how our business operates and a fundamental misinterpretation and misapplication of the law,” it said in a statement.

FanDuel, based in New York, later said that it would temporarily prevent New York customers from playing.

“We maintain, unequivocally, that FanDuel has always complied with state and federal law,” the company said in a statement. “We look forward to vindicating our position in court next week.”

Schneiderman took aim at an exemption to a 2006 federal law that has allowed the fantasy sites to operate. The law banned Internet gambling but permitted fantasy sites because they were deemed games of skill, rather than chance.

But in the court papers, Schneiderman said skill was not the overriding factor in daily fantasy sports.

“Here, chance plays just as much of a role (if not more) than it does in games like poker and blackjack,’’ he wrote. “A few good players in a poker tournament may rise to the top based on their skill; but the game is still gambling. So is DFS.”

In the filing, the attorney general’s office says both companies have pitched themselves to investors as gambling concerns. FanDuel told an early investor that its target market is the male sports fan who “cannot gamble online legally.” The DraftKings’ chief executive, Jason Robins, said his company was in the gambling space, according to the complaint, and called daily fantasy sports a “mash-up between poker and fantasy sports” and said its revenue model was “identical to a casino.”

Among the findings and claims in the court filing:

— In 2014, DraftKings received $484,897 in entry fees from player accounts in states where daily fantasy is illegal (Montana, Arizona, Washington, Louisiana and Iowa). The filing does not say whether possession of the money constitutes a violation of New York law, but “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.’’ Last week, The New York Times reported that users in the six states where daily fantasy games are prohibited, including Nevada, could make bets on DraftKings using an easily accessible service for disguising a computer’s true location.

— Both companies encouraged their employees to play on each other’s platforms and against regular customers. “FanDuel recognized that this policy would be ill-received, instructing employees to minimize their public presence ‘so users are less likely to be suspicious or angry’ and avoid becoming ‘among the top five players by volume’ because ‘top players frequently become targets for accusations.’”

— The vast majority of players are net losers, losing far more money playing on the sites than they win. DraftKings data show that 89.3 percent of DFS players had an overall negative return on investment across 2013 and 2014.

— Despite the sites’ rejection of the label “gambling,” the sites employ an “overt strategy of recruiting gamblers.” FanDuel hired a former top executive from Full Tilt, an online poker company, and is affiliated with Vegas Insider and BetVega, which are sports betting and handicapping websites. DraftKings entered sponsorships with gambling ventures like the World Series of Poker and the Belmont Stakes.

— DraftKings embedded gambling keywords into the programming code for its website like “weekly fantasy basketball betting” and “weekly fantasy college football betting” to drive traffic to its website from people looking to gamble on search engines like Google.

— The sites harm the community by fostering gambling addiction. The filing cites DraftKings’ own records of pleas from customers to close accounts and permanently ban them from the site, with subjects like “Gambling Addict do not reopen.”

“FanDuel and DraftKings’ current denials about DFS constituting gambling are belied by how the sites depicted themselves in the past and how they portray themselves behind closed doors,” the filing said.

New York is not only the industry’s largest market — with 12.8 percent of total daily fantasy sports users — but also its most influential because it is the headquarters of the major sports leagues and of many of the media companies and hedge funds that have invested and partnered with FanDuel and DraftKings to help power their explosive growth. What happens in the state may affect the decisions of lawmakers in nearly a dozen other states that are considering fantasy sports legislation.