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It's No Good! DraftKings, FanDuel Deemed Illegal in New York.

New York Attorney General Schneiderman is no fan of daily fantasy.

New York State Attorney General Eric Schneiderman just handed FanDuel and DraftKings their biggest loss yet.

Schneiderman completed a month-long investigation into daily fantasy sports on Tuesday, an industry dominated by DraftKings and FanDuel. Schneiderman determined that the daily fantasy business — where people can win cash prizes in fantasy sports competitions — is an illegal form of gambling, not a game of skill as the companies have argued. Both DraftKings and FanDuel operate in a number of states under this premise.

The attorney general sent cease-and-desist letters to both companies demanding that they stop “illegally accepting wagers in New York State.” The New York Times first reported the news.

Here’s a statement from Schneiderman on the investigation:

“Our investigation has found that, unlike traditional fantasy sports, daily fantasy sports companies are engaged in illegal gambling under New York law, causing the same kinds of social and economic harms as other forms of illegal gambling, and misleading New York consumers. Daily fantasy sports is neither victimless nor harmless, and it is clear that DraftKings and FanDuel are the leaders of a massive, multi-billion-dollar scheme intended to evade the law and fleece sports fans across the country. Today we have sent a clear message: not in New York, and not on my watch.”

As expected, DraftKings and FanDuel are not happy with the decision. Here’s part of a statement from DraftKings (you can read the full version below) that was shared with Re/code:

“We strongly disagree with the reasoning in [Schneiderman’s] opinion and will examine and vigorously pursue all legal options available to ensure our over half a million customers in New York State can continue to play the fantasy sports games they love.”

And here’s a spirited one from FanDuel:

“Fantasy sports is a game of skill and legal under New York State law. This is a politician telling hundreds of thousands of New Yorkers they are not allowed to play a game they love and share with friends, family, co-workers and players across the country. The game has been played — legally — in New York for years and years, but after the attorney general realized he could now get himself some press coverage, he decided a game that has been around for a long, long time is suddenly now not legal. We have operated openly and lawfully in New York for several years. The only thing that changed today is the attorney general’s mind.”

The AG’s investigation was spurred, in part, by an incident in which a DraftKings employee had access to internal company data that might give a person a leg-up in pay-to-play competitions. A company review found that this employee didn’t abuse the data, but that didn’t change the perception — or concern — from outsiders who felt that employees might be getting an unfair advantage. At the time, company employees for both DraftKings and FanDuel were playing in these contests, but have since been banned from doing so.

The walls started to come down for both companies shortly afterward. Schneiderman announced his office was investigating the industry. The New York Times reported that the FBI was, too. Nevada regulators found daily fantasy to be a form of gambling, banning it statewide. Some partners, like ESPN, even temporarily pulled some sponsorship opportunities.

In short, it has been a string of unfortunate events for both DraftKings and FanDuel, the clear leaders in the space that has been growing like gangbusters ever since the NFL season kicked off in early September. The investigations, coupled with hundreds of millions in television ad spending over the past few months, have led to a lot of attention for both companies.

Unfortunately for DraftKings and FanDuel, regulators were also paying attention. Schneiderman in particular has a reputation for being one of the tougher attorneys general in the country. He is currently pursuing legal action against ExxonMobil, and he has previously gone after high-profile tech startups including Airbnb and other “sharing economy” darlings.

Below is the full DraftKings statement:

We are very disappointed that New York Attorney General Eric Schneiderman took such hasty action today, particularly since he did not take any time to understand our business or why daily fantasy sports are clearly a game of skill. We strongly disagree with the reasoning in his opinion and will examine and vigorously pursue all legal options available to ensure our over half a million customers in New York State can continue to play the fantasy sports games they love.

We continue to see a number of other officials, including Senator Negron in Florida, Representative Zalewski in Illinois and the Federal Trade Commission, take a reasoned, informed and measured approach to the daily fantasy sports business. We hope this trend continues along with due consideration for over 56 million sports fans across the country who enjoy playing fantasy sports. We remain committed to working with all relevant authorities to ensure that our industry operates in a manner that is transparent and fair for all consumers.

New York’s actions today are an unfortunate example of a state government stifling innovation, technology and entrepreneurship and acting without full and fair consideration of the interests of consumers.

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