Pennsylvania Senate Takes First Step Toward Removing Attorney General Kathleen Kane From Office

City Hall

I had previously written about the Pennsylvania Supreme Court’s suspension of Attorney General Kathleen Kane’s law license.  (see https://legalviewpoints.wordpress.com/2015/09/21/pennsylvania-supreme-court-suspends-attorney-general-kathleen-kanes-law-license-via-emergency-order/). Kane, of course, is facing multiple criminal charges in Montgomery County arising from allegations that she illegally leaked highly confidential grand jury information to the media in an effort to attack a political rival.  Kane has vigorously denied those allegations, but in September, Pennsylvania’s Supreme Court entered an unprecedented order temporarily suspending Kane’s law license in light of the criminal charges pending against her.  Although the Supreme Court effectively precluded the State’s lawyer-in-chief from practicing law, the Order specifically stated that it should not be interpreted as removing Kane from her public office.  Although the Supreme Court passed on removing Kane from office, it looks like the Pennsylvania Senate is positioning itself to do just that.

The Supreme Court’s September Order suspending Kane’s law license went into effect last week.  At the same time her law licenses was being revoked, Kane’s office released her “plan” explaining how she intended to continue in her position as Attorney General without having the ability to practice law. In short, Kane has taken the position that the vast majority of her job as Attorney General comprises of ministerial functions that she can continue to perform without technically “practicing law.”  A lot has been written about this law-versus-ministerial functions distinction.  Much of it critical and many legal scholars have argued that Kane is ethically barred from continuing as Attorney General without a law license.

But words mean little (sticks and stones and all of that) and the Pennsylvania Supreme Court has clearly signaled that it is not the judiciary’s responsibility to remove an elected official from office.  Enter the Senate.  Late last week state republican Senator Joseph B. Scarnati III, announced that the Senate was forming a bipartisan committee to investigate the “impact” the Supreme Court’s Order will have on Kane’s ability to carry out her duties as Attorney General.  In other words, the State Senate appears skeptical that Kane can actually continue in her role as Attorney General without the ability to practice law.

The Committee will issue a report summarizing its findings within 30 days.  If the Special Committee concludes that it is impractical or impossible for Kane to continue in her position without a law license, many suspect that the next step will be to remove her from office. Under the Pennsylvania Constitution, publically elected officials such as Kane can be removed from office by 2/3 vote of the Senate and confirmation of the Governor.  Governor Wolf has made it clear that he believes Kane should resign from office.

Bipartisan or not, it seems highly unlikely that the results of the Special Committee will be favorable to Kane.  Setting aside the political angle, it is difficult to make a compelling argument that the State’s Attorney General can effectively carry out her office without a law license.  And considering Governor Wolf’s repeated public calls for Kane to resign, it is also a stretch to assume he would veto any 2/3 vote by the Senate to remove Kane.

This is not to say that Kane is in imminent risk of being removed from office. The process of removing Kane will certainly take time.   But make no mistake, the Senate’s appointment of a Special Committee is intended to “get the ball rolling,” and Kathleen Kane’s time as Attorney General appears to running short.

DraftKings and FanDuel Accused of Systemic Fraud and Civil Conspiracy in Class Action Lawsuit

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As I have written on a few occasions, DraftKings and FanDuel, the two heavy hitters in the multi-billion dollar fantasy sports industry, are facing increasing pressure from lawmakers who are finally realizing that these daily fantasy leagues are really unregulated, government sanctioned gambling. But now they also have to worry about the lawyers. And the lawyers are coming in waves.

A number of lawsuits have recently been filed in response to allegations that a DraftKings employee used insider information to win a $350,000 playing fantasy football on the rival FanDuel website.  Each of these lawsuits alleges that executive level employees at DraftKings’ and FanDuel’s exploit their access to confidential customer information to win large sums playing fantasy football for their own account.  Put simply, the lawsuits allege that DraftKings and FanDuel employees are lining their own pockets at the expense of their paying (and quite gullible) customers.

In a recent proposed class action filed in federal court in the Southern District of New York, class representative Adam Johnson made some pretty heavy handed allegations against DraftKings and FanDuel.  The Complaint starts off by alleging that the two daily fantasy giants spent more than $100,000,000 million this year alone to advertise their fantasy platforms.  Although this is not a necessarily a relevant fact (and probably not shocking considering you can’t visit a website or turn on a TV without seeing a fantasy football advertisement), it does highlight just how massive and profitable the fantasy football industry has become.

After briefly describing how DraftKings and FanDuel make money (customers pay a fee to play and the businesses pay out in winnings less than they take in . . . sounds suspiciously like a casino), the Complaint quickly gets down to the brass tacks.   The attorneys for Johnson smartly led off with a strong salvo meant to drive home the theme of the lawsuit – that DraftKings and FanDuel exploit the naiveté of the vast majority of their customers to make money for themselves and few of their best and most favored customers.

The Complaint alleges that DraftKings refers to its new fee paying users as “fish” and “relies on these new users who lack skill to keep its most active users – and therefore profitable” customers happy.  In other words, daily fantasy leagues entice the unsuspecting and unskilled masses to essentially fork over money to play a rigged game they can’t win and that money is split between DraftKings and FanDuels and a few of their top players.  To buttress this claim, the Complaint cites to fantasy baseball statistics and uses these statistics to insinuate that 91% of the profits made playing daily fantasy football are won by just the top 1.3% of players.

Building on its allegations that the vast majority of daily fantasy players are being snookered, the Complaint then turns to the recent scandal involving a DraftKings employee who is alleged to have used inside customer information to win large sums playing fantasy football at rival FanDuel.

The Complaint notes that “Because the goal is to beat other players, a player with statistical data about ownership percentages of competitors would have an edge over players without this data.”  It then points out that in Week 4 of the NFL season, a DraftKings employee “accidentally” released confidential player ownership information and, as it would happen, that very same week another DraftKings employee beat out 229,883 other competitors and won $350,000 playing fantasy football with FanDuel.

Again, the theme being insinuated here is that these daily fantasy leagues are a fraud and employees are given a huge advantage over paying customers by exploiting inside information.  To give some additional meat to this allegation, the Complaint alleges that the daily fantasy performance of the employee who won $350,000 improved dramatically after he took a job at DraftKings, specifically stating: “An analysis of this employee’s previous [daily fantasy] history shows a remarkable increase in winnings since moving from a job with rotogrinders.com . . . to . . . DraftKings.”  In fairness to the employee, the Complaint did not divulge the purported source or methodology underlying the “analysis.”

Ultimately, the Class Action Complaint alleges that the proposed class representative never would have spent money playing fantasy football if he had known he couldn’t win.  If he had known DraftKings and FanDuel operate and exist for the sole purpose of exploiting the gullibility (and pocketbook) of the little guy.  In essence, the Complaint alleges that DraftKings and FanDuel are fraudulent enterprises that use a rigged game to make a few select people a lot of money while taking everyone else for a ride.

It’s not clear if the Johnson Complaint will ever survive a motion to dismiss.  It looks like DraftKings and FanDuel were smart enough to make their users sign mandatory arbitration provision, essentially waiving their right to access the court system.  The Complaint tries to avoid this issue by claiming that it would be unconscionable to allow DraftKings and FanDuel to enforce the arbitration agreement considering the agreement was premised on a fraud.  But, federal courts have been extremely aggressive in enforcing arbitration agreements and it seems like a longshot that District Court judge ruling on the Johnson Complaint would make an exception here.

Even so, DraftKings and FanDuel are now facing mounting pressure on all fronts.  How they navigate these challenges will likely determine if they can continue to operate as independent enterprises, or whether by legislative edict they will be swallowed up by Las Vegas casinos. Either way, change is coming and coming soon.

Photo credit: FreeImages.com Nikki Johnson

The Fix Is In? Draft Kings “Insider Information” Scandal and Impending Regulation

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Last week I wrote an about the inevitability of Congress regulating fantasy football (see link below).  In a nutshell, classifying fantasy football as anything other than gambling is absurd and intellectually dishonest.  Yet, a carve out in federal law has allowed a multibillion dollar fantasy football industry (i.e. gambling industry) to operate free from any government oversight or regulation.

There is no legal or logical principle that would explain why fantasy football should be treated differently than other for-stakes contests, such as poker.   The point of my earlier post was that legal observers (and Congress) are finally taking note of this arbitrary exception, mostly because the larger fantasy football outfits such as DraftKings and FanDuel are aggressively advertising million dollar payouts.  That sort of money will inevitably draw the attention of the government and rightfully so.

But the sure-fire fastest way for a large, big money industry to become regulated is to give the appearance that it is rigged (see Wall Street…it is still rigged, but regulated).   Earlier this week, DraftKings took a big step in that direction.

On Monday, DraftKings released a statement after one of its employee’s won $350,000 playing fantasy football at rival FanDuel.  The controversy arose because the employee won that hefty amount immediately after it was discovered that confidential inside information regarding week three’s most utilized players was accidentally released by DraftKings.  Having inside information about which players are being played the most gives fantasy football participants a huge competitive advantage. And really, its not much different than insider trading which has been illegal and aggressively prosecuted for decades.

DraftKings released a statement Monday claiming it conducted an internal investigation and found no evidence that its employee used insider information to his advantage (“trust us guys”).  Nevertheless, it  has temporarily prohibited its employees from participating in online fantasy football leagues.

Even if the DraftKings employee didn’t use insider information, the optics certainly don’t look good. It gives the appearance that the game is rigged.  The fact that sensitive information capable of exploitation was released in the first place underscores the need for regulation.  And with stakes as high as $1 million, the temptation to access and use this insider information is enormous.  So is the risk of being targeted by computer hackers.

This weeks “insider information” controversy may be a tempest in a teapot, but it really  highlights why the fantasy football industry needs regulation and ultimately will be regulated.

Rather than wait for a big scandal to erupt and have draconian regulations thrust upon it, it may be wise for DraftKings and FanDuel to get a head of the curve and control the process. If the industry voluntarily agrees to regulations and works with lawmakers now, it has a much better shot of securing favorable laws.  Today it still has some leverage, which means it is the ideal time to negotiate.  But once the next scandal hits, that leverage will be gone and Congress may very well regulate the industry into extinction, or perhaps  into the waiting arms of Las Vegas casinos.

https://legalviewpoints.wordpress.com/2015/09/30/its-just-a-matter-of-time-before-congress-regulates-fantasy-football/

Photo credit: FreeImages.com Nikki Johnson