Tag Archives: gambling

When To Fold ‘Em

Sports-betting

We are a household of sports fans and this tends to be just about the only live television that we watch. Because we can’t fast forward through the commercials during live games, I have watched commercials about daily fantasy sports. A lot of commercials about daily fantasy sports (DFS). It doesn’t matter whether it is DraftKings or FanDuel, as they both seem just about the same. I have heard about how you can win millions, practically for free, and about how easy it all is. I know nothing about fantasy sports, and I have come away mostly irritated by how ubiquitous the advertising is than wanting to try out the daily fantasy sports scene. I also don’t trust them when they tell me that I could win money for nothing and, instead, I wonder how they could claim to give away so much money for nothing and still pay for the many, many ads that are everywhere we look.

Answers came to me at the beginning of October, when a DFS scandal hit the news. As the story went, a DraftKings employee released key information earlier than he should. This information, if known, would give someone a tactical edge when playing fantasy football. The same employee also won $350,000 betting at FanDuel. Even though this doesn’t look good, DraftKings says they are certain that, even with an extra $350,000 in his pocket, their employee did not act improperly – he merely made a mistake. As I read the story, I shook my head in disbelief. I was surprised by several things. First of all, I was surprised to discover that Daily Fantasy Sports betting is not considered to be gambling. Now, I know hardly anything about daily fantasy sports, so it may indeed be a game of skill and not luck. However, especially with terms like “betting” used when talking about it, it sure does look a lot like gambling. That said, interviews that I have seen and read show those who spend a lot of money on DFS referring to it as investing. Nevada recently shut down DraftKings and FanDuel, declaring that DFS is gambling and that the two companies need licences before they can operate in that state. So, in that regard, let’s go with more and more people are agreeing with me on the whole “is it gambling” question.

More surprising, though, was the employee betting. To have a company that runs the betting allow its employees to bet as well smacks of impropriety, regardless of whatever steps the companies claimed they took to keep things on the up and up. Both FanDuel and DraftKings would not let their employees bet with them but those same employees, armed with whatever insider information they might (or might not) have, were able to go to competitor sites and bet there. And bet they did and how surprised are we to find out that the top winners in daily fantasy sports tended to be employees of DraftKings and FanDuel (though never from their own employer, of course).

As I read articles and watched news pieces on what was going on in the Daily Fantasy Sports realm, I kept exclaiming, to anyone within earshot, “who thought this was okay? How could they think it was okay?”

I couldn’t believe that management at this company could look at the set up was acceptable. Maybe they did, or maybe they just thought they could get away with it but it has me wondering about what operation and control policies other entities have in place that either do not protect them and their assets, or even put them at greater risk. Just because you institute a rule, it does not mean that it is a good or useful rule. For instance, DraftKings employees, with all the inside information they potentially had access to, could not place a bet with their employer, DraftKings. However, they could log into FanDuel, their competitor and use their edge when placing bets there. And the policy was mirrored by FanDuel. Looking in from the outside, both companies appeared to be acting unethically, and just about always, perceptions are as powerful as reality. If it looks as though someone is having a $350,000 party with your money, the facts will matter very little to you.

It might feel very managerial to make rules in your organization, but if all they serve to do is fill operations manuals and make you feel good, they are achieving less than nothing. It is worse than not making rules at all because, at least when you don’t have regulations, you have no illusions about whether or not you are protected. On the other hand, creating a free for all entity may make you feel like the cool kid and may even have people clamoring to work for you. However, among those clamoring, it is almost guaranteed, will be those seeing ample opportunity to commit fraud and perhaps lay waste to your business. There are very important reasons why people like me preach setting up your business in ways that prevent and detect fraud and two of these reasons are protecting your assets and protecting your reputation.

Now, FanDuel and DraftKings are finding themselves on the defensive and being given the cold shoulder by entities who do not want to be tainted by the growing scandals. They are being investigated by state and federal authorities, and are now scrambling to clean up an image that would never have been sullied if they had formed their operating and control structures correctly and ethically, in practice and appearance, from the get go. Now they are tripping over themselves, doing things like creating self-regulatory bodies in order to regain the trust of the public. Judging from what I have read, that is not working very well – something that happens when a company has betrayed the public’s trust. Instead these companies are being put under the microscope and their reputation is taking a beating. They are on the defensive now and all of this could have very easily been avoided. If you are running a business, you should ensure that you consult with a qualified professional to avoid issues such as:

  • Conflict of interest in perception and reality;
  • Approaches that compromise your reputation; and
  • Procedures that may cross legal lines.

Spending time and resources doing things property in the first place is less costly, in dollars and reputation, than trying to clean things up after the damage is done. That kind of disaster can be very difficult to come back from. Is it something you are ready to bet on?

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Step Away From The Dice

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I just spent a lovely weekend in Atlantic City, celebrating a friend’s birthday. During this time I ran past several casinos, I walked through a casino but, happily, I did not spend any time at all gambling at the casino. I say happily because I am a terrible gambler. The mere thought of gambling fills me with anxiety because I have no idea what I’m doing out there. The only thing I do know is that the odds are stacked against me, more so because I don’t know what I am doing. I never learned how to play poker, beyond yelling “big money, big money” I don’t know the rules of roulette and even when sitting in front of a one-armed bandit, I am pretty sure that I am not quite doing it correctly.  The one thing I do know, when I am in a casino, is who to NOT consult for help. The pit manager. Because the allegiance of pit managers is to the casino so I know that helping me win money is not a priority for them. In fact, in order for the pit managers to keep working, we the gamblers need to lose more than we win.

This brought to mind an article I read about Philip Ramatlhware who walked into a Philadelphia Citibank branch to open a regular bank account where he could deposit the proceeds from a settlement with Greyhound. He had been injured in a bus accident and received $225,000 and wanted to keep his money safe. All he wanted was a savings account but he was referred to a broker who assured Mr. Ramatlhware, a man with limited English skills and without a college education, that his money was going into “guaranteed” funds. Instead, in less than six months, he lost $40,000. This is not an isolated case. Digging into the archives of the Financial Industry Regulatory Authority (FINRA), which is an independent regulator of security firms doing business with the public, you can find several cases where individuals walked into commercial banks, seeking a safe, FDIC insured place to put their savings and ended up losing money through risky investments that they could not understand. That they could not understand the risky investments was not only because these investments were complex ones but also because the brokers they met with misrepresented the risks involved and was not clear about where the money was going. It is, to a certain extent, understandable that these customers were easily misled – they believed they were going to a commercial bank and not an investment bank.

Back in 1933, the Banking Act of 1933 was enacted and it included four provisions that are what is generally meant when people speak of  the Glass-Steagall Act. The provisions served to, in essence, separate commercial banking and investment banking. They kept commercial banks from dealing in securities for their customers. The funds that customers deposited into commercial banks, as I mentioned before, were insured by the FDIC and were not to be used for speculation. They were to be considered safe by the banks’ customers. Conversely, risk-taking investment banks were not to take in deposits. So, you may be wondering how, with Glass-Steagall in effect, Mr. Ramtlhware and walked into a commercial bank and ended up investing with an investment bank broker. This is because Glass-Steagall was repealed in 1999, leaving banks able to deal in both commercial and investment banking at the same time. This means that investments that are complicated and very risky and should be reserved for so-called sophisticated investors are being marketed and sold to people who think they are dealing with the relatively safe offerings of a commercial bank, do not fully comprehend what they are getting into and who generally cannot afford to lose the money they end up investing in risky offerings.

As long as the wall between commercial and investment banks continues to be virtually non-existent, potential customers walking into commercial banks are going to have to start asking more questions at the bank:

  • Is my deposit insured by the FDIC?
  • Are you a broker?
  • If I am just depositing money into a risk-free guaranteed account, why does it come with all of this complicated paperwork?

Should you find that you have been taken for a ride by your bank, know that you have resources you can turn to in order to have your case heard. FINRA offers advice to investors that probably will not turn you into a sophisticated investor but may go a long to helping you recognize some of the strategies an unscrupulous broker may employ. Also you can take your case to FINRA or, in the case of fraud, the Department of Justice. Though you may believe that you are walking into a commercial bank and dealing with a customer service representative who wants to help you, you should be careful in the banks for sometimes you may come across a pit manager who is trying to make as much money as possible for the investment bank casino.

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