The FBI and US Justice Department are looking into DraftKings and FanDuel
The investigation comes just a week after the two major daily-fantasy outfits, DraftKings and FanDuel, became embroiled in a scandal over whether employees were using inside information to win on competitor sites.
The investigations, which have only just begun, are looking into whether the business model of such sites violates federal law.
In 2006, Congress passed the Unlawful Internet Gambling Enforcement Act, which prohibited gambling businesses from accepting payments from people for bets or wagers online. As a result, numerous online gambling sites were shut down. Notably, the law exempted skill-based games, which fantasy sports have been assumed to fall under.
The Justice Department is trying to figure out whether FanDuel and Draft Kings' contests constitute gambling or whether they fall within the exemption.
It was only a matter of time before the Department of Justice looked into the companies, despite the bad publicity generated by last week's scandal.
Daily fantasy websites weren't prominent when the UIGEA originally passed. In recent years, the websites have become huge businesses. FanDuel and DraftKings have paid for more than $200 million worth of ads so far this year combined, according to CNN Money.
DraftKings and FanDuel will pay out more than $1 billion in prize payouts this year, according to The Washington Post.
FanDuel reportedly brought in about $57 million in 2014 by taking a small percentage of the bettors' entrance fees. Revenue this year looks to be considerably more.
DraftKings admitted that the investigation was expected.
"It is entirely predictable that the government would follow up on the misleading reports about our industry," a DraftKings spokeswoman told The Journal in a statement. "We have no knowledge of the specifics of any federal investigation but strongly disagree with any notion that our company has engaged in any illegal activities."
FanDuel and DraftKings have hired investigators to conduct internal reviews of their companies. In addition, the New York and Massachusetts attorneys general offices are looking into the companies.
As far as the website's legality, the premise that daily fantasy sports is a game of "skill" is a debatable one. In fantasy sports, users put together their own teams using real players. The outcome of the game is determined by how each player on a user's team performs, accumulating points based on real-game performances.
The law is classifying this as a form of game in which actual skills matter to win.
Here's how Draft Kings explains its legality on its website:
The legality of daily fantasy sports is the same as that of season long fantasy sports. In 2006, the US Federal Government passed a law called the Unlawful Internet Gaming Enforcement Act (or UIGEA), which was designed to prevent gambling over the internet. The law included a carve out that clarified the legality of all fantasy sports...Daily fantasy sports is a skill game and is not considered gambling.
Last week, a user on a fantasy-sports forum noticed that a DraftKings employee released data on player ownership for DraftKings' Millionaire Maker contest before all NFL games involved in the contest had begun.
Ethan Haskell, the DraftKings employee responsible for the accidental leak, won $350,000 the same week on rival site FanDuel.
The timing of the leak and the employee's winnings on the rival site led critics to fear that unregulated early access to this information could be a threat to the integrity of daily fantasy sports.
There is currently no concrete evidence that DraftKings or FanDuel employees are using inside information to gain an advantage in daily fantasy games.