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Could An FBI Investigation Of DraftKings Implicate Major League Baseball?

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(Disclosure:  The author consults for a fantasy sports provider that is in current litigation against DraftKings)

In recent weeks, news reports have leveled serious allegations against the daily fantasy sports operator DraftKings.  These allegations range from claims that DraftKings executives have allowed mid-level employees to access "insider information" (see here) to claims that DraftKings allows customers to enter contests from impermissible jurisdictions (see here and here).

The Wall Street Journal and ESPN have reported that the FBI may soon launch a formal investigation against DraftKings.

But could this investigation go even further?

Based on a special business relationship between DraftKings and Major League Baseball, it is possible that an FBI investigation of DraftKings might implicate not only DraftKings executives, but also team owners and executives involved with America's national pastime.

Although rarely discussed, the story behind DraftKings' rapid rise to prominence is inextricably intertwined with its financial relationship with Major League Baseball.

Indeed, DraftKings was a relatively small company with only $1.4 million in seed capital when 34-year old C.E.O. Jason Robins was able to land a meeting through a mutual contact with Robert Bowman and Kenny Gersh from MLB Advanced Media.  After that April 2013 meeting, everything changed for both enterprises.

The first noticeable change in Major League Baseball was the way it described daily fantasy sports.  Specifically, Robert Bowman went from describing daily fantasy sports as "akin to a flip of the coin" to endorsing the continued growth of the budding industry. By late 2013, Major League Baseball had begun to use its name and logos in conjunction with a free DraftKings game.  Meanwhile, by Opening Day 2014, DraftKings had become "the Official Mini-Fantasy Game of MLB.com."

Major League Baseball also quietly gained a financial stake in DraftKings.

Although never publicly disclosed at the time of acquisition, an Adam Kilgore article in the Washington Post concluded that "Major League Baseball purchased a financial stake in DraftKings" during the 2013 season. Meanwhile, a recent Wall Street Journal article purports that Major League Baseball received free shares in DraftKings in exchange for helping to endorse DraftKings' products.

Once DraftKings aligned its financial interests with those of Major League Baseball, both entities benefited.  For DraftKings it became far easier to raise funds from venture capital companies and other entities.  Between April 2013 and October 2015, DraftKings' total financing increased  from under $2 Million to nearly $300 Million.

For Major League Baseball the benefits entailed a share of the online gaming company's future revenue streams.

Does all of this indicate more than a passive investment by Major League Baseball into DraftKings?  Very possibly.

Given the special relationship between Major League Baseball and DraftKings, it seems highly unlikely that the $36 Billion sports league would let the startup daily fantasy sports company that used its logos in advertisements make major decisions without league oversight.  Indeed, one would expect that Gersh -- himself trained as a a lawyer -- would want to keep a careful eye on DraftKings' business decisions to ensure that Major League Baseball's new business partner did not become associated with illegal gambling.

Although there is no public evidence that Major League Baseball pulled the strings behind DraftKings, it would seem improbable -- if not  impossible -- that DraftKings would be allowed to determine its states of operation and style of contests without some level of Major League Baseball oversight.  As both a shareholder and marketer of DraftKings, one would also assume Major League Baseball would have the clout to make DraftKings cancel its more legally risk contests such as single-tournament fantasy golf.

In addition, one would expect that prior to becoming an investor in DraftKings, Major League Baseball's lawyers would have carefully researched every detail about DraftKings' internal business practices, including, for example, policies for employee data access and participation in rival contests.

As a result of these logical expectations, one would presume that any FBI investigation into DraftKings could lead to an inquiry of the conduct of Major League Baseball and its high level executives.  While such inquiry would probably begin with Major League Baseball Advanced Media employees, an inquiry could theoretically reach as high as the league commissioner's office.

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Marc Edelman is an Associate Professor of Law at the City University of New York’s Baruch College, Zicklin School of Business, where he published “A Short Treatise on Fantasy Sports and the Law” and has recently released "Navigating the Legal Risks of Daily Fantasy Sports."  He also is a fantasy sports attorney and legal consultant for a wide range of sports and gaming companies.  Nothing contained in this article should be construed as legal advice. Follow him on twitter at @MarcEdelman