The world of fantasy sports is having to grow up fast.
Everything seemed to be going great for rapidly growing companies whose customers, after paying an entry fee, draft fantasy player lineups from a range of sports for periods as short as a day in the hope of winning big cash prizes. Investors poured money into the top two U.S. companies, DraftKings and FanDuel, ahead of the current National Football League season, the busiest time of the year for fantasy sports.
But in the past few weeks the nascent industry has attracted the attention of lawmakers and government officials, and that will mean probes and hearings that could eventually lead to restrictions on how the companies operate. The companies are scrambling to respond by taking on external advisers and law firms, tightening policies and ordering their own investigations.
Now New York Attorney General Eric Schneiderman is investigating the companies, and on Wednesday, FanDuel joined rival DraftKings in banning employees from participating in the contests.
The companies may have painted big targets on their backs through aggressive advertising and relaxed internal policies that allowed employees to bet on rival sites and become some of the biggest cash winners. Even supporters of the companies threatened to walk away because the employees could have unfair advantages over other players and insider information.
Schneiderman's probe came after the companies disclosed that a DraftKings employee recently won $350,000 from a $25 bet in fantasy football contest and had other major winnings on rival website FanDuel. A FanDuel spokesman has also confirmed that a FanDuel employee has won significant cash prizes on DraftKings.
FanDuel said in a Wednesday statement that there is no evidence showing the contest was compromised or that nonpublic information was used to gain an unfair advantage. But the New York-based company said it doesn't want to rely only on what it knows right now and wants to rebuild trust with its players.
The company has hired former U.S. Attorney General Michael Mukasey to evaluate its internal controls. It is also creating an advisory board led by Michael Garcia, a lawyer who led the investigation into the 2018 and 2022 World Cup bid process then resigned from the FIFA ethics committee in protest over the handling of his findings.
DraftKings said it has hired a team from law firm Greenberg Traurig, led by former U.S. Attorney John Pappalardo, to conduct an investigation into the allegations against its employees.
The week's events also caught Washington's attention. The top Democrat in the U.S. Senate, Harry Reid, on Tuesday called on Congress to scrutinize the business, saying there was "scandalous conduct" in fantasy sports. Separately, Rep. Frank Pallone and Sen. Bob Menendez, both New Jersey Democrats, asked the Federal Trade Commission to look into the employee issue. Pallone also said the House of Representatives could hold hearings this fall about the industry.
DraftKings also could be facing blowback from its own investors. Major League Baseball, a two-time investor in the company, sought an explanation from DraftKings about employees being allowed to participate in games.
"We're battling the public perception here. The oversaturation of advertising has made daily fantasy a target. The companies need to come out saying we will do everything in our power to say our games are fair," said Dan Back, co-host of the daily RotoGrinders show on SiriusXM Fantasy Sports Radio.
As for other industry participants, a spokesman for Yahoo Sports, which has offered fantasy sports with monetary prizes since July, said it is also evaluating the question of whether employees play on other fantasy sports websites. CBS Corp., another operator, did not yet have a comment on the matter.
The Fantasy Trade Sports Association, the trade group representing the industry, hired public relations firm Finsbury about three weeks ago to handle industry policy and public affairs.
The risk is that the wake-up call has come too late for the companies and that major damage has already been done to their market positions.
Andrew Lowenthal, a former financial services lobbyist, said the issues revealed this week exposed a potential weakness in the system, not that different from when brokers "front run" trades, or act with advance knowledge of another investor's upcoming transaction.
Both DraftKings and FanDuel have ambitions for initial public offerings that could be on the line if the scrutiny builds.
Gaming sector investor Jason Ader, who runs investment firm SpringOwl and is one of the largest shareholders in British gambling firm Bwin. Party Digital Entertainment PLC, is skeptical either company could go public without a regulatory framework in place.
The Associated Press contributed to this report.