DraftKings Under Investigation by SEC Over SBTech Black Market Allegations

  • The US Securities and Exchange Commission has filed two class action suits against DraftKings
  • The SEC investigation relates to a Hindenburg report, linking SBTech to black market dealings
  • DraftKings has denied all allegations, also claiming the investigation will not affect its finances
  • Five law firms are currently encouraging investors to sue DraftKings over the report’s findings
Under Investigation stamp
DraftKings is under investigation over allegations raised in a short-sellers report which accused SBTech of conducting business in illegal black market gambling. [Image: Shutterstock.com]

SEC investigates Hindenburg claims

US-based sportsbook operator DraftKings is under investigation by the US Securities and Exchange Commission (SEC). The federal body has filed two class action lawsuits against DraftKings over allegations raised by short-sellers Hindenburg Research in relation to the company’s merger with SBTech in 2020.

the SEC issed a subpoeana in July

DraftKings revealed the news during its earnings report on Friday. The firm confirmed that the SEC issed a subpoeana in July, shortly after Hindenburg published a report into the company. The body has alleged that DraftKings committed violations of the Securities Exchange Act. It has requested several documents from the operator to complete its investigations.

Hindenburg’s report, which prompted the SEC investigation, claims that SBTech has involvement in “black-market gaming, money laundering and organized crime.” It alleges that the company, which merged with DraftKings in 2020, made roughly 50% of its revenue from markets in which gambling is illegal.

DraftKings has confirmed that it intends to cooperate with the investigation. However, the company has also professed its innocence, affirming that it will “vigorously defend” against the claims.

A closer look at the allegations

In its report titled “DraftKings: A $21 Billion SPAC Betting It Can Hide Its Black Market Operations,” Hindenburg has suggested that investors were unaware of SBTech’s black market dealings. It described these illegal operations as “long and ongoing,” also implying that SBTech has gone to great lengths to cover up the issues.

Hindenburg claims that SBTech created a “distributor entity” called BTi/CoreTech to serve as a “front” to shield the public company from scrutiny. The report claims to have identified numerous black market clients of BTi/CoreTech through searches on social media and back-end web infrastructure.

The report lists a series of illegal gambling operations which have supposed links to BTi/CoreTech. This includes 22 Vietnamese individuals arrested for operating a “massive illegal online sports bettting ring” in 2019, and an unnamed Asia-focused gambling site with ties to a “triad kingpin.”

DraftKings denied the allegations outright in June. The firm told Fox Business that it had “conducted a thorough review of SBTech’s business practices” and remained “comfortable with the findings.” Added to this, the company told investors this week that it does not anticipate “a material adverse effect” on its finances as a result of the ongoing SEC investigation.

Investors urged to sue

Adding to DraftKings’s list of woes, five law firms have expressed an interest in filing a class action lawsuit against the company if they can get its investors on board. In June, the Portnoy Law Firm, Johnson Fistel LLP, Schall Law Firm, Pomerantz LLP, and attorney Howard G. Smith announced that they have opened investigations into DraftKings.

provided false public statements

The firms claim that DraftKings misled investors on important information related to SBTech in the build up to its merger. They suggest that the latter derived its revenue from “unlawful” and thus “unsustainable” activities. As a result, the legal companies claim DraftKings provided false public statements.

Potential plaintiffs in the case have until August 31 2021 to file a motion in the class action suit. The firms have appealed to anyone who purchased DraftKings securities between December 23 2019 and June 15 2021. 

Positive results in Q2

DraftKings also delivered some good news during its earnings report on Friday. The operator saw Q2 revenue nearly triple year-on-year to a total of $298m. That represents an increase of around 297% from 2020 levels pro forma.

The number of DraftKings users also increased in the second quarter. Monthly unique players rose 281% in comparison with 2020, to an average of 1.1 million paying customers each month. Average revenue per monthly unique player also grew by 26%, to a total of $80.

DraftKings co-founder, CEO, and chairman of the board Jason Robins commented on the successful quarter. He said:”DraftKings had a particularly strong second quarter of 2021, maintaining our impressive financial performance while also advancing into new areas, such as media and NFTs.”