Draft kings‘The second quarter results also created two potentially serious problems for a leading US sports betting company.
ON Form 10-Q. the US Securities and Exchange Commission Filed on Friday showed that:
- DraftKings received a Subpoena by the SEC following an activist investor’s report on the acquisition of DraftKings SBTech.
- DraftKings is supported by the Internal Revenue Service in connection with the introduction of excise duties on daily fantasy sports.
Both come as disclosures for a publicly traded company, and how much impact either of these disclosures could have on DraftKings’ business is unknown and speculative.
DraftKings and the SEC subpoena
The summons in connection with a report by Hindenberg research about the acquisition of SBTech by DraftKings and, among other things, allegations about its service in black markets. For the pretty complicated backstory, you can check out Legal Sports Report’s overview.
Two class actions have been filed U.S. District Court for the Southern Borough of New York At the beginning of July according to this report. Then came the summons. From the 10-Q:
On July 9, 2021, the company received a subpoena from the SEC requesting documents related to certain allegations made in the Hindenburg Report. The company intends to respond to these inquiries and is cooperating with the SEC’s ongoing investigation.
Here is DraftKings handicap of the situation in 10-Q:
Despite the potential for significant harm, based on the information currently available, the Company does not believe that the outcome of this proceeding will have a material adverse effect on DraftKings ‘financial condition, although the outcome will affect DraftKings’ results of operations for all. could be material for a certain period of time, depending in part on the operating results for that period.
DraftKings and the IRS Audit
We also learned that DraftKings is about to be audited. Again from the 10-Q:
The company is currently undergoing an Internal Revenue Service audit for previous tax years, with key unresolved issues relating to excise taxes from fantasy sports competitions and information reporting and withholding tax. The final resolution of this review and other reviews or litigation may differ from the amounts recorded in these consolidated financial statements and materially affect the Company’s consolidated financial statements in the period or periods in which this determination is made.
This is almost certainly related to the IRS guidelines passed in 2020 that keep daily fantasy sports operators subject to federal excise tax on sports betting. Excise tax is charged at 0.25% of all bets received or, in the case of DFS, competition entries received.
DraftKings, FanDuel and others have long believed that DFS competitions are games of skill and have nothing to do with sports betting.
If excise tax were applied to DFS competitions, DraftKings could theoretically be liable to hundreds of millions of unpaid taxes. DraftKings and FanDuel have raised tens of billions of dollars in DFS competition entries over the past decade.
It is unknown if FanDuel or any other Daily Fantasy Sports operator faces similar trials.