The $14 billion daily fantasy sports industry is 'erupting' in scandal

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Rob Gronkowski, tight end for the New England Patriots.

News just broke about scandal in the booming daily fantasy sports industry. 

According to a New York Times report posted Monday, DraftKings and FanDuel are mired in "what amounted to allegations of insider trading, that employees were placing bets on information not available to the public."

Here's more from New York Times reporters Joe Drape and Jacqueline Williams: 

Last week, a DraftKings employee admitted to inadvertently releasing data before the start of the third week of N.F.L. games, a move akin to insider trading in the stock market. The employee - a midlevel content manager - won $350,000 at rival site FanDuel that same week.

The incident has raised questions about who at daily fantasy companies has access to valuable data, how it is protected and whether the industry can - or wants - to police itself.

The stakes are huge. 

As explained by Chris Grove at LegalSportsReport, the narrative of the scandal goes like this: a DraftKings employee "inadvertently released data" about DraftKing's biggest tournament before the NFL games started, which showed "the prevalence of particular players across all submitted lineups for the contest." This is huge because to win in DFS, you need to pick players that nobody else has. 

"Access to this kind of data prior to the start of a contest would provide a DFS player with a massive edge over players lacking such data," Grove writes.

DraftKings and FanDuel are the two biggest companies in daily fantasy sports, the hyperactive cousin of fantasy football that insiders refer to as "DFS."  In DFS, as in regular fantasy sports, you "draft" a team of real players and get points for how they perform on the field. If your collection of players gets better statistics than your opponents' players, you win.

The difference is that in many popular DFS formats, you're sometimes playing against hundreds of people in large tournaments for different payouts based on how much money everyone put in. And rather than stretching out for the whole season, it's just one day (or one week's worth of football). 

The Times quotes industry analyst Eilers Research, which estimates that daily fantasy sports companies will bring in $2.6 billion in entry fees in 2015 and climb to over $14 billion in 2020. 

The DFS commercials show users who have won between $300 and $2 million playing the game. "On my third week of playing, I won $15,000 off of a $5 entry," says user Scott H. in a testimonial for FanDuel.

As we've reported before, DFS has quickly become incredibly popular. Some people risk $5, others more than $100,000. On the whole, fantasy football is valued at $11 billion, and DraftKings and FanDuel have both raised over $300 million at over $1 billion valuations, as Bloomberg reports.

While online gambling is illegal in most US states, fantasy sports are legal because they're considered games of "skill" instead of "luck," per a 2006 federal law - though a New Jersey congressman wants a hearing to reconsider the relationship between fantasy sports and gambling.

FanDuel PR rep Justine Sacco previously told Tech Insider that "more of our users are sports fans than anything else and they play because it is a sports entertainment product."

FanDuel has posted the below statement on its site: 

While there has been recent attention on industry employees playing on FanDuel and DraftKings, nothing is more important to DraftKings and FanDuel than the integrity of the games we offer to our customers. Both companies have strong policies in place to ensure that employees do not misuse any information at their disposal and strictly limit access to company data to only those employees who require it to do their jobs. Employees with access to this data are rigorously monitored by internal fraud control teams, and we have no evidence that anyone has misused it.

However, we continue to review our internal controls to ensure they are as strong as they can be. We also plan to work with the entire fantasy sports industry on this specific issue so that fans everywhere can continue to enjoy and trust the games they love.

This story is developing. Check back on Tech Insider for further coverage.