With the debate over fantasy sports wagering heating up among regulators in various jurisdictions, it should come as no surprise that New York AG Eric Schneiderman upped the ante on Tuesday, issuing cease-and-desist letters to the largest daily fantasy sports wagering sites, DraftKings and FanDuel. AG Schneiderman indicated that his investigation—which was initiated on allegations of employee misconduct and the unfair use of proprietary information—had determined that the two sites violated New York law by supporting illegal gambling. The letters demand that the sites stop accepting wagers in New York. Moreover, for FanDuel, which keeps its headquarters in New York, the AG's determination might have an even greater effect on business.

The core of the AG's claims is that DraftKings' and FanDuel's business models and operations constitute illegal gambling under both the New York Constitution and New York Penal Law, which generally prohibit a person from staking or risking "something of value upon the outcome of a contest of chance or future contingent event not under his or her control or influence." The AG stressed that the sites are in full and active control of the wagering and derive most of their revenue from fees associated with placing bets. In addition, the AG argues that the sites even promote their services like a lottery.

However, there are also hints of a deceptive practices claim in the AG's allegations; namely that the sites market their product as something anyone can win, but according to the AG's investigation, only a few professional, highly sophisticated players appear to take home "the vast majority of the winnings." With this, Schneiderman may face a bit of a conundrum: if the same people win most of the time, how can the AG argue that there is not at least some aspect that is not under the control or influence of the people making the wagers?

The New York law requires that "chance" play a material role in the outcome in order for a game to be deemed illegal. If there is some element of skill involved, and chance plays only a minor role determining who wins through daily fantasy sports, it will be harder to argue that the business model constitutes illegal gambling. Proponents of Texas Hold 'Em and other poker games have made a similar argument, with some success, seeking to avoid culpability under federal law. See United States v. Dicristina, 886 F. Supp. 2d 164, 225 (E.D.N.Y. 2012) (reversed on other grounds at 726 F.3d 92 (2d Cir. 2013)).

The New York definition of illegal gambling is similar to that of many other states, and thus the outcome of this action will resonate outside of the state (Congressmen from New Jersey are asking the FTC to look into the issue). In addition, a violation of state gambling laws can bring forth federal indictments under the Illegal Gambling Business Act of 1970 (the U.S. Attorney for the S.D.N.Y., Preet Bharara, is allegedly already investigating FanDuel and DraftKings), and could also raise concerns of money laundering and other violations that are tangentially related to criminal activity.

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