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DraftKings earnings report reveals subpoena and audit bombshells

DraftKings’ Q2 earnings included the bombshell news that the sports betting operator is being audited by the Internal Revenue Service (IRS) and was subpoenaed by the Securities and Exchange Commission (SEC) regarding activities undertaken by its recent SBTech acquisition. Both cases have the potential to cause major headaches for DraftKings, though company officials deny engaging in any wrongdoing in both cases.

DraftKings’ subpoena from the SEC is in relation to its recent acquisition of SBTech, and allegations made by some shareholders and Hindenburg Research that the company engaged in black market activities. That story, which is described by Legal Sports Report as, “complicated”, includes allegations that DraftKings hid “black market operations from the investing public”, and that SBTech received as much as 50 percent of its revenue from the black market. SBTech, which also runs the Oregon State Lottery, is under fire in that state for allegedly hiding black market activities from state officials.

Perhaps as a means of distraction from the SBTech story, DraftKings also announced that its daily fantasy sports division was under audit by the IRS. In that case, the IRS alleges that DFS operators are subject to a .25 percent excise tax; the same tax that sports betting operators pay. DraftKings counters that DFS is a game of skill and therefore not subject to the excise tax.

In a statement to the media, DraftKings officials acknowledged the seriousness of the allegations while expressing optimism regarding the outcome of the investigations. “Despite the potential for significant damages, the company does not believe, based on currently available information, that the outcome of this proceeding will have a material adverse effect on DraftKings’ financial condition, although the outcome could be material to DraftKings’ operating results for any particular period, depending, in part, upon the operating results for such period.”