By Steve Bainbridge
The New York Times reports:
A major scandal is erupting in the multibillion-dollar industry of fantasy sports, the online and unregulated business in which players assemble their fantasy teams with real athletes. On Monday, the two major fantasy companies were forced to release statements defending their businesses’ integrity after what amounted to allegations of insider trading, that employees were placing bets using information not available to the public.
Last week, an employee at DraftKings, one of the two major companies, admitted to inadvertently releasing data before the start of the third week of N.F.L. games. The employee — a midlevel content manager — won $350,000 at a rival site, FanDuel, that same week.
“It is absolutely akin to insider trading,” said Daniel Wallach, a sports and gambling lawyer at Becker & Poliakoff in Fort Lauderdale, Fla. “It gives that person a distinct edge in a contest.”
“Akin”? Maybe in the way that second cousins once removed are kin.
Black’s Law Dictionary defines “insider trading” as “The use of material, nonpublic information in trading the shares of a company by a corporate insider or other person who owes a fiduciary duty to the company.”
Obviously, no shares were traded here. Was there an equity security of some other sort? No. Was there any kind of security on these facts? No.
So why are people rushing to throw around terms like “insider trading”? Because they either want to regulate the DFS industry, sue the industry, or ban the industry. They figure calling what happened “insider trading” gives their private anti-industry agendas a leg up.
What we have here is a very simple breach of agency law. As Restatement (Third) of Agency § 8.05 explains:
An agent has a duty … not to use or communicate confidential information of the principal for the agent’s own purposes or those of a third party.
In sum, let’s not make a federal case out of this mess.
Update: Another website claims that having access to ownership data is the “functional equivalent” of insider trading. Wrong. Set aside the fact that there is no security here. Having access to DFS ownership data is helpful. Avoiding players who are owned by half the pool is often a good strategy. But it doesn’t guarantee that you’ll cash. In most cases, by way of contrast, insider information locks in a profit.
Stephen M. Bainbridge is the William D. Warren Distinguished Professor of Law at the UCLA School of Law and author of the blog www.professorbainbridge.com
