-- New York attorney general Eric Schneiderman declared Tuesday that daily fantasy sports constitute illegal gambling in his state and sent cease-and-desist notices to game operators DraftKings and FanDuel in a significant blow to the embattled, billion-dollar industry.
Schneiderman demanded DraftKings and FanDuel, the two industry giants, stop accepting "wagers" from New York residents. He is not, at this point, asking the companies to discontinue their operations in the state.
"Our review concludes that DraftKings'/FanDuel's operations constitute illegal gambling under New York law," Schneiderman wrote in the letter obtained by ESPN's David Purdum and Darren Rovell and ABC News.
During their rampant growth, daily fantasy sites have pointed to the Unlawful Internet Gambling Enforcement Act of 2006 to defend their legality and have claimed they offer games of skill. But Schneiderman found that "each DraftKings/FanDuel wager represents a wager on a 'contest of chance' where winning or losing depends on numerous elements of chance to a 'material degree.'"
Using that criteria, Schneiderman reasons the customers of the two largest daily fantasy sites, which have said they would award more than $3 billion combined in prizes in 2015, "are clearly placing bets on events outside their control of influence, specifically on the real game performance of professional athletes."
The attorney general's office has said it is not looking to get money back from New Yorkers who had won on daily fantasy sites.
"Fantasy sports is a game of skill and legal under New York State law," FanDuel said in a statement. "This is a politician telling hundreds of thousands of New Yorkers they are not allowed to play a game they love and share with friends, family, coworkers and players across the country. The game has been played -- legally -- in New York for years and years, but after the Attorney General realized he could now get himself some press coverage, he decided a game that has been around for a long, long time is suddenly now not legal. We have operated openly and lawfully in New York for several years. The only thing that changed today is the Attorney General's mind."
DraftKings has not responded to ESPN's request for comment.
"Our investigation has found that, unlike traditional fantasy sports, daily fantasy sports companies are engaged in illegal gambling under New York law, causing the same kinds of social and economic harms as other forms of illegal gambling and misleading New York consumers," Schneiderman said in a statement. "Daily fantasy sports is neither victimless nor harmless, and it is clear that DraftKings and FanDuel are the leaders of a massive, multi-billion-dollar scheme intended to evade the law and fleece sports fans across the country. Today we have sent a clear message: not in New York and not on my watch."
Schneiderman said in the letters that he has been "concerned to learn from health and gambling experts that daily fantasy sports appears to be creating the same public health and economic problems associated with gambling, particularly for populations prone to gambling addiction and individuals who are unprepared to sustain losses lured by the promise of easy money."
Schneiderman gave the two companies five days to reply to the civil action as to why he shouldn't go through with his cease-and-desist orders.
In October, the Nevada Gaming Control Board and the state's attorney general ruled daily fantasy meets the definition of sports gambling and requires a license to operate within the state. Both companies immediately stopped doing business in Nevada.
FanDuel is headquartered in New York and just opened a 40,000-square foot office. Although DraftKings is set up in Boston, it also has a new, 21,000-square foot satellite office in Manhattan.
Both companies want to protect their New York customer base. According to industry research firm Eilers Research, New York has the most daily fantasy participants of any state.
Advertising for DraftKings and FanDuel can be prominently seen throughout New York City, including in subway stations and on street vendors. New York is also the site of some of the biggest team sponsorship deals. DraftKings has a sizable deal with Madison Square Garden that includes on-court signage at Knicks and Rangers games as well as a fantasy lounge. The deal gives DraftKings the main sponsorship on the WNBA's New York Liberty jersey.
DraftKings also has deals with the New York Giants and New York Yankees, whose hospitality company Legends is an investor in the business. FanDuel has advertising deals with the Brooklyn Nets, who have the company's logos plastered on the floor by the bench and behind the players, as well as the New York Jets.
"We have not yet seen the order and will have further comment once we have the opportunity to review," Major League Baseball spokesman Pat Courtney said.
The NBA did not immediately respond to request for comment.
While the two daily fantasy sites thrived using UIGEA as the justification for their legality, state law takes precedence over federal law in this case. Media investors such as Fox (DraftKings), Time Warner, NBC Sports Ventures and Comcast Ventures (FanDuel) poured hundreds of millions of dollars into these companies, as did heavyweights KKR and Google Capital. ESPN accepts advertising from FanDuel and DraftKings but does not own equity in either company.
Although the major sports have anti-gambling policies, Major League Baseball, the National Hockey League and the NBA all took equity positions in daily fantasy. The NFL does not have a stake in any daily fantasy company, but two of its owners, Robert Kraft of the New England Patriots and Jerry Jones of the Dallas Cowboys, own an interest in DraftKings.
Both sites were virtually free from scrutiny until this fall, when they flooded the TV market with advertising at the start of the football season. The scrutiny escalated when Ethan Haskell, a DraftKings employee, won $350,000 by finishing in second place in an NFL contest on FanDuel. Although a third-party investigation commissioned by DraftKings found Haskell did not have proprietary information to pick his winning lineup, the revelation that employees could play daily fantasy for money caught many off-guard, including Major League Baseball, a DraftKings investor.
Employees with both companies have since been banned from competing in games for money on other sites, but many still weren't satisfied. Over the past month, 34 lawsuits have been filed in 13 states, alleging the games are unfair, illegal or both. Twelve lawsuits, more than in any other state, have been filed in New York, including the first suit, which was filed Oct. 8.
Amid the pressure, the Fantasy Sports Trade Association (FSTA), which represents the interests of sites such as DraftKings and FanDuel, hired former acting Secretary of Labor Seth D. Harris to help guide a program of self-regulation. That strategy seemed to fall on deaf ears, as executives for both daily fantasy giants quickly acknowledged they would be willing to accept outside regulation.
Plenty of other states have also been active in figuring out the future of daily fantasy. Last month, a representative in Illinois put forth the first daily fantasy regulation bill, and officials from New Jersey and Pennsylvania each held hearings on daily fantasy sports this week. A federal grand jury has convened in Florida, according to multiple legal sources. Arizona, Iowa, Louisiana, Montana and Washington prohibit fantasy sports for money. Several additional states do not allow some forms of daily fantasy.