by Bruce Marshall, Goldsheet.com Editor

we knew we were jumping into a hot topic last week with our part one of “Fantasy Facts and Fiction.” But even Nostradamus might have had problems predicting the sudden tidal wave of fantasy coverage that has recently dominated the news cycle.

How did the tectonic plates beneath the fantasy industry shift over the past week? On Tuesday, U.S. Senator Bob Menendez and Congressman Frank Pallone, Jr., both New Jersey Democrats, argued for new safeguards after cheating allegations surfaced against a DraftKings employee. A day later, the Wall Street Journal reported that the FBI and Justice Department had opened an investigation into whether daily fantasy sports sites violate federal law. By the end of Thursday, Nevada authorities had told daily fantasy sports companies they had to cease operations in the state and seek gaming licenses. All of this after New York Attorney General Eric Schneiderman fired the first salvo the previous week and opened his own inquiry.

Meanwhile, the national media decided to join in the party. One of most detailed reviews of the fantasy industry over the past week was a New York Times piece written by Walt Bogdanovich (whose work has been noted on these pages in the past), James Glanz, and Austin Armendariz, entitled Cash Drops and Keystokes, which also made pointed reference to the flawed process that allowed UIGA (the Unlawful Internet Gaming Act of 2006) to become federal law. Remember, last week we thought it important to put the fantasy topic into some context by recalling how UIGA would dubiously come into existence nine years ago, attached at the last second to the “SAFE Port” bill by then-Senate Majority leader Bill Frist (R-Tenn.).

The NYT story cited Chris Grove, the author of an influential blog, Legal Sports Report, on whether UIGA’s authors even knew what they hoped to accomplish. “You’re talking about a law that was passed with no input, that was passed with no consideration, no deliberation, no debate,” said Grove.

A subsequent story from Bloomberg Business, written by Ira Boudway and Joshua Brustein, would further put the fantasy industry under the microscope. In particular, the exemption granted by the 2006 UIGA that effectively legalized fantasy sports.

“FanDuel and DraftKings interpreted this (UIGA) as an exemption from gambling laws and designed their games to adhere to this definition of fantasy sports,” said the Bloomberg piece, which pointed out that such an interpretation didn’t sit well with Jim Leach (R-Iowa), the former congressman who drafted the initial law.

“It is sheer chutzpah for a fantasy sports company to cite the law as a legal basis for existing,” said Leach in a recent interview with AP. “Quite precisely, UIGA does not exempt fantasy sports companies from any other obligation to any other law.”

Boudway and Brustein, however, had more to say in their Bloomberg piece. “(Senator) Menendez suggested that UIGA has created a ‘regulatory vacuum’ and said Congress should reexamine the lack of federal oversight. Along with (Congressman) Pallone, he has called for the FTC to examine how it might regulate fantasy sport.

“If UIGA no longer serves as a shelter for DraftKings, Fan Duel, and other daily fantasy sites, they would face an existential crisis.”

Therein, the Bloomberg story claims, could develop a real problem for the fantasy industry.

“Even without changes in the federal law or its interpretation, the legal landscape for these sites is quickly getting complicated. The main front is probably going to be state governments, not Washington, according to I. Nelson Rose, a leading expert on gambling law. UIGA doesn’t prevent states from passing more restrictive measures, and fantasy sports were already outlawed in five states before Nevada’s action on Thursday.”

The Bloomberg story would also point out that it would seem increasingly unlikely that states would continue to treat these companies as nothing more than online retail startups. “No way,” said Richard McGowan, a professor in the finance department at Boston College’s Carroll School of Management, who focuses on the gambling industry. “They have reputational issues right now.” McGowan would continue and say that at the very least, the states will want to tax daily fantasy operators they way they currently tax casinos... which is to say, heavily.

“FanDuel and DraftKings probably pay few if any taxes at the moment because most of their profits have been offset by monster marketing costs,” said the Bloomberg story, which reminded that gambling taxes are levied against gross gaming revenue, not profit, at rates of up to 70 percent in some states. “Gaming licenses come with a number of other unwieldy burdens. Casinos have to pay for state overseers to watch them count money, which raises the possibility of 45 different sets of monitors looking over shoulders at DraftKings and FanDuel.”

To get a better feel about how fantasy sports might have gotten to this point, and where it might be heading, we sought opinions from some gaming industry insiders. Randy Haynes, president of London-based Randy Haynes Associated Ltd and one of the most respected gaming-industry operatives in Europe, and Dave Malinsky, a friend of TGS since the 1980s and an articulate spokesman for the industry after serving in a variety of different roles within the sports gaming marketplace, provide unique observations gained from different, though related, perspectives.

Haynes, quoted on these pages in a 2012 editorial dealing with New Jersey’s attempts to legalize sports gaming, pulls no punches concerning his dismay at the US gaming market and the indirect manner in which it created the fantasy sports explosion. “The current fantasy surge in the states is a reflection of existing inefficiencies within the sports gaming marketplace,” says Haynes. “It simply fills a void that traditional sports gaming should occupy.”

Malinsky believes that the legalized Nevada sports gaming industry would inadvertently have much to do with the fantasy eruption. “Fifteen or so years ago,” says Malinsky, “Nevada made a conscious effort to de-emphasize the sports books. They missed the boat almost entirely on an emerging generation of sports-rabid millennials who would instead help fuel the fantasy explosion.”

(As we began to realize last week, this report requires a part three, in which commentary from Haynes, Malinsky, and others will expand, and we can review any other upcoming developments in this fast-moving storyline while trying to close the circle on topics discussed. That, however, will wait and appear in TGS Issue No. 10 after we provide our NBA “Season Wins” preview next week in anticipation of the first TGS Basketball issue on October 26.)

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