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DraftKings, FanDuel probe ups daily fantasy doubts

Kam Chancellor of the Seattle Seahawks forces Calvin Johnson of the Detroit Lions to fumble near the goal line during their game at CenturyLink Field on Oct. 5, 2015, in Seattle.
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Kam Chancellor of the Seattle Seahawks forces Calvin Johnson of the Detroit Lions to fumble near the goal line during their game at CenturyLink Field on Oct. 5, 2015, in Seattle.

New York Attorney General Eric Schneiderman has opened an investigation into whether employees at daily fantasy sites (DFS) DraftKings and FanDuel are exploiting proprietary information in order to give themselves an unfair advantage.

Amidst the controversy, both platforms are banning employees from participating in the popular online games.

The probe, which was announced on Tuesday, is a result of recent reports alleging that a DraftKings employee used company data to win $350,000 on rival site FanDuel. As users discover more flaws and loopholes in the game, doubts about the fast-growing industry are growing.

Some experts say there's nothing to worry about: It's all part of the game. And the fact that some players are using tools that others don't have makes the business no different than, say, Wall Street, said Thuuz Sports CEO and founder Warren Packard.

"You're always going to have somebody with faster, better clever algorithms that come out, and they're not going to release the algorithms to the public," Packard, who is the former managing director of venture capital firm DFJ, said. "If you figure out how to win a game of skill, whether it's the financial markets or daily fantasy or whatever, the first thing you think about is how you profit yourself."

According to the Fantasy Sports Trade Association, 42 million adults 18 and older play DFS.

The latest controversy in DFS emerged when Ethan Haskell, a written content manager at DraftKings, accidentally posted data showing detailed information about one of the site's popular contests before it was publicly revealed. The data could give a player a huge competitive advantage.

Haskell admitted to the error on a Rotogrinders forum, but said he was the only person with the data, and was not allowed to play on DraftKings. However, it was revealed that Haskell won $350,000 on rival site FanDuel, leading many to questions whether he was using proprietary information to play DFS. His actions drew comparisons to insider trading.

Haskell did not respond to requests for comment. DraftKings said in a statement that it conducted an internal investigation in cooperation with FanDuel, and discovered that the employee in question did not get the information until 1:40 p.m. ET on Sunday, Sept. 27. FanDuel's player lineups lock at 1 p.m. ET, meaning the employee did not have a chance to change his choices after getting the data.

"This clearly demonstrates that this employee could not possibly have used the information in question to make decisions about his FanDuel lineup," the statement continued. "Again, there is no evidence that any information was used to create an unfair advantage, and any insinuations to the contrary are factually incorrect."

However, The Fantasy Sports Trade Association, DraftKings and FanDuel said in a statement on Monday that they were prohibiting DraftKings and FanDuel employees from playing DFS for cash prizes until the industry came up with a solution.

DraftKings and FanDuel added on Tuesday that it would bar any DFS contest operators from participating in games on its platform. DraftKings has also hired a legal team from Greenberg Traurig, led by former United States Attorney John Pappalardo, to look into its findings regarding the allegations against its employee as well as advise on its future policies and practices.

"DraftKings' explosive growth is a testament to our ability to deepen our fans' engagement with the sports they love," DraftKings company said in a statement. "We are committed toreinforcing the trust and security of our millions of loyal customers."

This isn't the first time access to sports data has made DFS players cry foul. In July, a Sports Business Journal report stated that in the first half of the 2015 Major League Baseball season, 91 percent of DFS winnings were taken home by just the top 1.3 percent of the players. An article on Bloomberg Business further elaborated that the top "sharks" use data algorithms to automatically pick numerous options for the best possible teams and then bet in a large amount of games each week.

Whether or not people are cheating isn't the point. Packard said that what it shows is that DFS isn't gambling, and it involves understanding insights to compete. Like any industry, people are inherently going to have better access to data — and they'll win more because of it.

"This is an information industry, and information is extremely valuable when somebody has information that others don't," he said. "In a way this proves this is a game of skill, not a game of chance."

One industry insider, who asked to remain anonymous pointed out that DFS is an emerging industry — the first DFS site launch launched in 2007. As it grows and more competitive services enter the space, new companies will "democratize" the games and the industry will self-regulate, the source said.

For example, outlets such as Rotogrinders and Daily Fantasy Cafe are offering programs that will crunch numbers and optimize player lineups, and more similar services are expected to launch. Instead of giving an advantage to people who know how to create algorithms, soon everyone will have access to this "insider" information, the source said.

A FanDuel representative acknowledged that the "insider trading" problem was a known issue. However, it was something its company had addressed since the beginning, through working on charters with the Fantasy Sports Trade Association and implementing strict punishments for anyone who was caught misusing information, including termination.

The representative added that FanDuel "has always operated on the basis of trust and integrity, which is paramount to our business and culture. We have always proactively implemented policies to restrict employee access to data, ensuring the integrity of the games we offer for users and protecting our own employees."

DraftKings investor Major League Baseball issued the following statement: "Major League Baseball has a policy that prohibits players and employees from participating in fantasy baseball games in which prize money or other things of value are available to participants. We were surprised to learn that DraftKings allowed its employees to participate in daily fantasy games. We have reached out and discussed this matter with them."

Fox Sports, which also recently invested in DraftKings, said that it was "monitoring the situation."

Packard pointed out that investors are aware of the risks, but it's still worth the gamble to get in on an emerging industry.

"It's a natural progression of an industry that is emerging," said Packard. "There's always going to be folks trying to game the system. It's human nature."

Disclosure: Comcast and NBC are investors in FanDuel.