The world of fantasy sports is having to grow up fast.
Everything seemed to be going great for rapidly growing companies whose customers, after paying an entry fee, draft fantasy player lineups from a range of sports for periods as short as a day in the hope of winning big cash prizes. Investors poured money into the top two US companies, DraftKings and FanDuel, ahead of the current National Football League season, the busiest time of the year for fantasy sports.
However, in the past few weeks, the nascent industry has attracted the attention of lawmakers and government officials, and that will mean probes and hearings that could eventually lead to restrictions on how the companies operate. The companies are scrambling to respond by taking on external advisers and law firms, tightening policies and ordering their own investigations.
The companies may have painted big targets on their backs through aggressive advertising and relaxed internal policies that allowed employees to bet on rival sites and become some of the biggest cash winners. That triggered concerns among supporters and critics of the companies that the employees may have unfair advantages over other players because they may have access to non-public decisions by the best-performers.
On Tuesday, New York Attorney General Eric Schneiderman opened a probe into DraftKings and FanDuel after the companies disclosed that a DraftKings employee recently won US$350,000 from a US$25 bet in a fantasy football contest and had other major winnings on rival Web site FanDuel.
A FanDuel spokesman has also confirmed that a FanDuel employee has won significant cash prizes on DraftKings.
Both companies have since announced permanent bans on its employees playing on rival sites, and will try to prevent staff at other fantasy sports companies from playing on their sites.
However, the week’s events caught Washington’s attention. The top Democrat in the US Senate, US Senate Minority Leader Harry Reid, on Tuesday called on Congress to scrutinize the business, saying there was “scandalous conduct” in fantasy sports.
Separately, US Representative Frank Pallone and US Senator Bob Menendez asked the US Federal Trade Commission to look into the employee issue.
Pallone also said the US House of Representatives could hold hearings this fall about the industry.
DraftKings may also be facing blowback from its own investors. Major League Baseball, a two-time investor in the company, sought an explanation from DraftKings on Tuesday about employees being allowed to participate in games.
FanDuel on Wednesday said it had asked former US attorney general Michael Mukasey and his team at law firm Debevoise & Plimpton to evaluate the company’s internal controls and find weak points in standards and practices.
DraftKings said it has hired a team from law firm Greenberg Traurig, led by former US attorney John Pappalardo, to probe the allegations against its employees.
As for other industry participants, a spokesman for Yahoo Sports, which has offered fantasy sports with monetary prizes since July, said it is also evaluating the question of whether employees play on other fantasy sports Web sites.
CBS Corp, which also runs contests for money, did not yet have a comment on the matter.
The Fantasy Trade Sports Association, the trade group representing the industry, hired public relations firm Finsbury about three weeks ago to handle industry policy and public affairs.
The risk is that the wake up call has come too late for the companies and that major damage has already been done to their market positions.
The listing ambitions of DraftKings and FanDuel could also be on the line if the scrutiny builds.
FanDuel chief executive Nigel Eccles said last month that the company was waiting until January, when it will review its financial performance following the NFL season and decide if it wants to raise another private funding round or hire banks for an IPO.
DraftKings also has IPO plans or wants to pursue a merger with FanDuel, CEO Jason Robins said last month.
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