Accusations of "insider" betting at daily fantasy sports websites have put the industry under fire, but another potential form of cheating could pose a bigger threat.
Calls for more oversight of the industry increased this week after a DraftKings employee accidentally posted nonpublic information about a contest, fueling concerns that he may have used that information when he earlier won $350,000 at rival site FanDuel. As winnings grow in the unregulated industry, experts see the potential for deeper fraud — including the possibility of pro sports employees selling team secrets.
There is no indication that anyone working for a sports franchise has given or sold confidential data to daily fantasy players. But if the industry does not enact safeguards, that type of fraud could bring permanent damage to the segment, said Daniel Wallach, a sports and gaming attorney at Becker & Poliakoff.
"This type of information is gold for gamblers. In my view, there's no apparatus in place to watch that. That's one of the biggest threats to the industry," he said. (Laws vary by state, but fantasy sports generally are categorized as games of skill, so they're not regulated like gambling is. That said, some industry watchers and casino industry executives including MGM Resorts' Jim Murren have publicly differed with that categorization.)
The National Football League told CNBC it does not ban its employees from playing fantasy sports, but they can't accept winnings of more than $250 in a fantasy football game. Prizes are limited so employees don't appear to have an unfair advantage, the league said.
Major League Baseball, also reached by CNBC, said it bars employees "who potentially have access to confidential information" from playing fantasy baseball.
Daily fantasy games could generate an estimated $2.6 billion in entry fees this year, which would mark a 41 percent increase from last year, according to research firm Eilers Research.
In the fantasy sports, players buy into competitions and can make cash based on the performance of the athletic lineups they pick. Changes to team strategy, the amount of time an athlete spends on the field or an injury status can win or lose daily fantasy players thousands of dollars. Nonpublic information from within a sports franchise could prove extremely valuable to elite fantasy competitors who wager thousands of dollars on daily fantasy games every week, Wallach said.
The concerns at DraftKings and FanDuel have increased calls for transparency and regulation. New York Attorney General Eric Schneiderman this week opened an investigation into whether employees at the sites use confidential information to gain an advantage in contests.
But the current daily fantasy structure is vulnerable to a variety of types of potential fraud, said Chris Grove, editor at Legal Sports Report. With billions of dollars at stake and few mechanisms to combat cheating, daily fantasy competitions seem like an "incredibly attractive" target for fraud, he said.
"No matter how you measure it, there are billions of dollars in play here. Attempted fraud follows naturally, especially when you throw in a relative lack of transparency and accountability," Grove said.
FanDuel and DraftKings said publicly Wednesday that they have permanently banned employees from playing daily fantasy games for money and would not allow employees of rival sites to play in their contests. Both have asked for reviews of their internal practices and standards.
Separately, a FanDuel spokesperson told CNBC that the prospect of pro franchise employees sharing data has "never been an issue." DraftKings did not respond to CNBC's request for comment.
Possible data sharing by team employees would be especially problematic because it isn't illegal. A sports franchise employee — say, a trainer or an assistant coach — would not face any criminal or civil punishment without regulations in place, Wallach added.
"The self-regulation the fantasy sports operators claim to utilize is inefficient. The remedy is regulation. The public and the industry will be better off in the long run," he said.
The accusations this week mark "perhaps the first of many" instances where insider information will come under the microscope in daily fantasy, added Marc Edelman, an associate professor of law at Baruch College, who consults in fantasy sports law.
The National Basketball Association did not immediately respond to a request for comment.
Disclosure: Comcast and NBC are investors in FanDuel.