“The French don’t care what they do, actually, as long as they pronounce it properly.”
– My Fair Lady
An online sportsbook can report taking millions of dollars in bets from gray and black markets, as long as the numbers they report are accurate. This is the startling decision of New York federal district court judge Paul A. Engelmayer: “disclosing the fact of operations in Asia “‘did nothing more than’ accurately ‘characterize statistical facts.’”
I have taught International Gaming Law as a Visiting Professor at the University of Macau almost every summer since 2007, and often act as a consultant and expert witness for governments and industry. But you don’t have to be a Law Professor to know that gambling, especially internet sports betting, is illegal in almost every jurisdiction in Asia.
Judge Engelmayer ruled that that doesn’t matter. A company reporting hundreds of millions of dollars in wagers from “Asia,” “did not oblige it to address different subjects: the particular jurisdictions in which that revenue was earned, or the allocation of that revenue to non-black-market, versus black-market, jurisdictions.”
To be clear, black market means it was illegal, which means it was a crime under the local law. But, again, Judge Engelmayer: “No actionable omission where financial reporting was accurate, even where it did not disclose revenue sources relating to uncharged criminal conduct.”
The case was an attempted class action against DraftKings, involving its acquisition of a company, SBTech (Global) Limited, which DraftKings acquired in the course of going public. The Complaint, dismissed by Judge Engelmayer, alleged that SBTech “had secretly operated in ‘black-market’ jurisdictions — that is, ones in which gambling was illegal.”
DraftKings, SBTech and every other defendant have denied all of the allegations.
The decision raises an interesting question of whether there is actually this great a difference between securities laws and gambling laws. No regulator or judge would dismiss allegations of criminal gambling operations like these if a company were seeking a gambling license. At the very least, a licensed sports book would have to explain where it took online bets and whether those bets were legal. It couldn’t just say, “Asia.”
Judge Engelmayer based his decision not on gambling law, but rather on securities laws. The suit alleged that the defendants had committed securities fraud. Judge Engelmayer ruled that the Complaint did not adequately spell out the alleged fraud. But he then went further: The defendants had been under no obligation “to identify its alleged operations in black-market jurisdictions.” He ruled that under securities law, there is “no duty to disclose” such information “merely because a reasonable investor would very much like to know” such information.
It is, of course, possible that Judge Engelmayer was wrong. I am not an expert on securities laws. But I also worry about one of his other decisions.
Securities fraud requires “scienter,” basically meaning the defendants had bad motives. This “can be established with allegations that a defendant made unusual insider sales at a time when he withheld material information from the investing public.”
Here, one of the defendants sold $601 million in stock. Or maybe I should say “only” $601 million. Because Judge Engelmayer ruled that that insider’s profits did not sufficiently allege scienter, because the defendant could have sold even more!
And anyway, the numbers were accurate.
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