Fantasy Sports and Other Strange Gaming Tales

SMITH BRAIN TRUST — Tax attorneys will be busy in April looking for creative workarounds and exemptions to keep their clients legal. Something similar happens year-round in the gaming industry, where a complex patchwork of laws leaves ample room for interpretation. Fantasy sports contests benefited from one such loophole in the Unlawful Internet Gambling Enforcement Act of 2006, created to plug other loopholes in previous laws.

The clarifying language ensured a safe haven for gaming entrepreneurs to innovate in the fantasy sports space. Fan Duel emerged in 2009, DraftKings joined the field in 2012, and Yahoo entered in 2015. Steve Heston, a finance professor at the University of Maryland’s Robert H. Smith School of Business, says the market quickly evolved into something much different than the earliest leagues organized by recreational players. “They turned it into something that was not envisioned initially for fantasy sports,” he says.

Professional fantasy team managers now use complex systems to identify undervalued athletes and play them in multiple combinations. “Happy-go-lucky participants have little understanding of the statistical complexity,” says Heston, an expert on the mathematics of gaming and author of two books on tournament poker.

The original rationale for the fantasy sports loophole centered on the notion that contests involved skill. Fans at home could increase their odds of winning by studying sports trends and individual players. But Heston says sophisticated algorithms have changed the playing field. “It’s clearly evolved to resemble gambling more than a skill game like chess,” he says.

The evolution is one reason that New York and other states have started challenging the legality of fantasy sports in their current form. Fan Duel, DraftKings and Yahoo all announced suspension of their New York activities this week. A potential ballot measure would let Maryland voters decide the issue in November.

Besides the legal challenges, the rise of corporate players threatens to shrink the fan base. Heston says something similar happened to the online auction site eBay, when professional buyers and sellers started encroaching on estate sales. “If you know someone else is going to get in before you, you’ll stop going to these estate sales,” he says. “Whenever large-volume players win, the recreational players lose.”

Recognizing the threat, Yahoo Sports Daily Fantasy announced a new initiative on Tuesday called Fair Play. Self-imposed regulations will attempt to level the playing field by limiting entries per player, identifying veteran players with a badge, and banning the use of scripting tools to upload or edit entries.

THREE STRANGE BUT TRUE TALES

Fantasy sports is not the only gaming business that has evolved to fit within the changing regulatory landscape. Heston cites three other examples:

Boats that don't float: People normally think of riverboats as vehicles that actually float and move. But casino operators got creative when Missouri legalized gambling “on the water” in 1992. Stationary barges eventually replaced working riverboats. Later iterations were more like buildings surrounded by moats filled with piped in river water to meet minimum legal requirements. Regulators eventually gave up on the nostalgic Mark Twain fantasy, allowing full-service Vegas-style resorts along the banks.

A resurrected tribe: The Mashantucket Pequot tribe had been extinct — at least on the rolls — for more than 300 years when the U.S. Supreme Court ruled in 1987 that sovereign Native American nations could control their own gaming. Nearly 30 years later, the tribe has more than 1,000 registered members who all own a stake in one of the world’s most profitable casinos. With backing from a Malaysian billionaire, Foxwoods has emerged and expanded on the small Mashantucket Pequot reservation in Connecticut.

The inventor of Madness: Jody Haggerty might be the inventor of March Madness. The owner of a Staten Island tavern called Jody’s Club Forest organized his first bracket competition in 1977 with 88 participants vying for a winner-take-all pot of $880. In the decades that followed, the contest grew into one of the largest NCAA basketball pools in the country. About 150,000 participants contributed to a $1.5 million pot in 2006, the last year of operation. The legality of office pools remains debatable, but Haggerty took steps to protect himself. He avoided digital transactions — forbidden in the Interstate Wire Act of 1961 — and he never took a commission or charged an entry fee. All of the money collected went back to the winners. Federal agents got Haggerty instead for federal tax evasion. Fortunately, a deathbed letter from a former Staten Island prosecutor saved him from jail.

Read more: Bobby Kennedy's War on Fantasy Sports