How to Avoid Criminal Charges on Fantasy Sports Sites
For many Americans, Sundays are special days. Not only is it a day of worship for many different faiths, but it also involves a couch, a TV, and the National Football League.
With the rise of fantasy sports, a day of watching football is not just a way to relax, but it is also a way to make money. Billions of dollars are won and lost on fantasy sports betting sites like FanDuel and DraftKings every year, meaning more and more football fans have something on the line other than just pride. The NFL allows these sites to advertise during its television broadcasts. Betting on football has become a significant part of the fan experience.
Recently, however, FanDuel and DraftKings found themselves embroiled in major scandals, drawing the attention of federal law enforcement and Congress. Allegations of “insider trading” have arisen in the largely unregulated world of fantasy sports betting sites, involving employees of the two companies using information not available to the public about weekly betting trends to place their own bets. Using that information, a mid-level manager at DraftKings placed a bet on FanDuel and won $350,000.1
How Insider Trading Works
Normally, when we hear the term “insider trading,” we think of the stock market and the buying and selling of securities. The Securities and Exchange Commission (SEC) regulates trading on the financial markets, and promulgates many rules and regulations that govern insider trading.
Under SEC Rule 10b5, it is unlawful for any person, in connection with the purchase or sale of any security, directly or indirectly, through the use of any means of interstate commerce, to:
- Employ any device, scheme, or artifice to defraud
- Make any untrue statement of material fact or omit to state a material fact; or
- Engage in any act, practice, or course of business that would operate as a fraud
Penalties for insider trading can be severe. Violations of federal securities laws can be punished by a $5 million fine and up to 20 years in federal prison. In addition, California could impose its own penalties for market manipulation and insider trading.2
It is worth noting that not all insider trading is illegal. Rule 10b5-1 states to be liable for insider trading the person making the unlawful transaction must be aware that the material information is not available to the public. In addition, it is not insider trading if you manage to discover non-public information without having any special relationship to the company selling the securities; or if you can demonstrate that the trades were conducted as part of a pre-existing contract or written binding plan for trading in the future.
Does Insider Trading Law Apply to Fantasy Sports Betting?
The third prong of Rule 10b5 concerning acts operating as a fraud is the most likely candidate to pose a problem for those who use inside information to place fantasy bets. In the case of DraftKings and FanDuel employees, it is alleged that many of them made their bets based on data revealing which athletes were used most often in bets. This reportedly gave the bettors access to a knowledge base that allows them to more accurately predict the outcome of their own bets. This information is generally not available to the public until after the deadline for submitting a fantasy roster has passed. Thus, the bettor with access to this inside information stands a higher chance of prevailing in a contest against a person who does not have that information, and may be said to have committed a fraud against other bettors.
The real question for law enforcement is to determine whether these bets fall under the definition of “securities,” which is a difficult term to define. For example, California’s definition of “security” is more than 500 words long.3 Generally, however, a security is a form of an ownership interest in something, such as when a person buys stock in a company. Federal and state law are not yet clear on whether a bet qualifies as a security.
Avoiding Charges for Insider Trading
The law is not yet settled on whether these bets are insider trading, but you should still be careful when placing bets on fantasy sports sites. There are a number of ways to ensure your bets will not bring law enforcement officers to your door.
- Always use publicly available information when selecting your rosters.
- Use trusted media sources for information about player injuries and performance.
- Document the sources you use to pick your teams.
The bottom line is that your best defense to an insider trading charge is to show that your bets were made with the same information that was available to anyone else who was interested in making bets on that day.
Contact the Fraud Attorneys at Wallin & Klarich
If you find yourself facing charges under California or federal law, it is critical that you contact a criminal defense attorney as soon as possible. Contact one of the experienced criminal defense attorneys at Wallin & Klarich. Our skilled attorneys have over 40 years of experience successfully defending clients like you against fraud charges. We will work tirelessly on your behalf to provide you with the best outcome possible in your case.
With offices located in Los Angeles, Sherman Oaks, Torrance, Orange County, San Diego, Riverside, San Bernardino, Ventura, West Covina and Victorville, there is an experienced Wallin & Klarich criminal defense attorney available to help you no matter where you work or live.
Call us today at (877) 4-NO-JAIL or (877) 466-5245 for a free, no obligation phone consultation. We will get through this together.
1. [Joe Drape and Jacqueline Williams, “Scandal Erupts in Unregulated World of Fantasy Sports,” New York Times, Oct. 5, 2015, available at http://www.nytimes.com/2015/10/06/sports/fanduel-draftkings-fantasy-employees-bet-rivals.html?smid=tw-bna&_r=1]↩
2. [See Corporations Code 25540(b)]↩
3. [See Corporations Code section 25019 for the full definition.]↩
