The Fantasy Sports Gamble

>> NARRATOR: Tonight on Frontline: the law... >> Sports betting, by and large, is illegal in this country.

>> NARRATOR: The loophole... >> The United States Congress carved out a piece of legislation that says fantasy sports is not gambling.

I didn't make that decision; they did.

>> NARRATOR: The underground world of online sports betting and the multibillion dollar business of daily fantasy sports.

>> I've made hundreds of thousands of dollars doing this over the past two years now.

>> The core of what we do is about making sports more exciting.

>> NARRATOR: Frontline and New York Times reporter Walt Bogdanich investigate the meteoric rise and new challenges facing daily fantasy sports.

>> It's clear to us that what they're doing is gambling.

There are investigations going on all over the country.

You can't have unregulated gambling without running into problems.

>> BOGDANICH: How much do you estimate you lost?

>> Between $60,000 and $65,000.

>> NARRATOR: Tonight on Frontline, "The Fantasy Sports Gamble."

>> BOGDANICH: So you don't view what you do here as gambling.

>> No.

(baseball commentary playing) >> I found out about FanDuel when I was in high school.

I had played fantasy football for years and whatnot.

I never played daily fantasy.

Now I play probably 450, 500 different games a day.

A typical morning, it's pretty much just me hanging out, poring over baseball stats.

I'll spend between four and five hours a day on it.

So after that, I'm just hanging out doing whatever, just living life as a normal college student as best I can.

>> NARRATOR: We met Bryce Mauro on the last day of his junior year at Indiana's DePauw University.

He's one of the nation's best players on FanDuel, a popular daily fantasy sports site.

There are many ways to play, but basically, you create your own fantasy team made of real professional players, and earn points based on how they do in real-life games that day.

Fantasy sports has been around for decades, but not like this.

>> I wagered about $12,000 this morning.

>> WALT BOGDANICH: That's a lot of money.

>> Yeah, it is.

>> BOGDANICH: You confident?

>> I'm very confident.

I wouldn't be wagering money on this scale if I wasn't very confident in my abilities.

I mean, I lost about $18,000 last night, so it offsets it.

It fluctuates.

I've made hundreds of thousands of dollars doing this over the past almost two years now.

You can see all the games and whatnot.

I've played 249 games.

>> NARRATOR: On this day, Bryce won $11,000 on the afternoon baseball games.

>> The guy has bases loaded, I got the guy that plays as a leadoff hitter... >> NARRATOR: That night, he lost $6,000.

Over the past year, with reporters from the New York Times, we've been investigating the world of online sports betting, and what was behind the explosion of daily fantasy sports.

>> Fantasy sports was traditionally a season-long contest that was something common among coworkers, friends, and family.

>> NARRATOR: For years, players would gather at the beginning of the season, assemble their teams and compete against each other.

>> In the season-long contests, sometime you have to wait three months, four months.

You're devoting hours upon hours a week, and you have to wait until the end of the season to find out who won.

>> NARRATOR: Then the Internet came along.

Today, you can play thousands of opponents at once.

And rather than months, you get results right away.

>> The gratification doesn't get any more instant than in daily fantasy sports.

You have an outcome every single day.

And if you don't like your lineup today and you lost, you get to start over again tomorrow.

>> BOGDANICH: Fantasy sports used to be seasonal.

Now it's being offered on a daily basis.

Who came up with that idea?

>> I never want to claim credit for anything that, you know, I'm sure many people will claim credit for.

Clearly, we were one of the first out there.

Fantasy was a market that was stagnant.

>> BOGDANICH: And FanDuel played a big role in changing that.

>> Exactly.

>> BOGDANICH: And how did that happen?

>> Despite fantasy being a large market, the younger sports fans weren't engaging with fantasy.

And so the insight was, what if we take these mechanics around research and picking players and competing with your friends and put it in a format that's geared towards a very hard-to-reach but very important demographic of kind of millennial 18- to 35-year-olds.

Let's make it mobile first, let's make it faster, and see how that goes.

>> NARRATOR: With that, a new industry was born.

♪ ♪ Soon, dozens of companies began offering daily fantasy games, most making their money by taking a cut of the players' bets.

FanDuel and its main rival, DraftKings, are the biggest names in the business, with about 90% of the market.

Both are now valued at over a billion dollars.

>> We have several million paid players, and that's growing every day.

So right now, we're signing up, 20,000 to 30,000 players every day.

>> BOGDANICH: 20,000 to 30,000 every day?

>> Yep.

>> BOGDANICH: What percentage of your daily fantasy players would you say are under the age of 30?

>> Probably about 50% to 60% are under the age of 30.

>> NARRATOR: It's a demographic that appealed to venture capitalists and private equity firms.

They've pumped hundreds of millions of dollars into the industry.

TV networks wanted that audience as well.

>> Full disclosure, 21st Century Fox, our parent company, owns roughly an 11% stake in DraftKings.

>> We should note NBC Sports Group and NBC's parent company Comcast are among the investors in FanDuel.

>> ESPN has an exclusive two-year marketing agreement with DraftKings worth a reported $250 million.

>> NARRATOR: Maybe the most surprising support came from professional sports leagues and teams.

They've long opposed sports gambling, which is illegal in most of the country, saying it fosters corruption.

>> The sports leagues have always been of the view that sports gambling will lead to match fixing.

And it will create a negative perception in the minds of fans that the games are not on the level.

>> NARRATOR: But that didn't discourage them from embracing daily fantasy sports.

The NBA developed a partnership with FanDuel.

Major League Baseball and the NHL struck deals with DraftKings.

New England Patriots owner Robert Kraft and Dallas Cowboys owner Jerry Jones both own stakes in DraftKings, and 28 professional football teams have made deals with one site or the other.

>> The sports teams and the leagues want to make sure that sports is as relevant for today's millennial generation as it was for the generation that is now in their 40s or 50s.

And what they see in FanDuel is an opportunity to engage a younger generation of fans, get people to watch more sports, and then also get them to play more on FanDuel.

>> FanDuel's one-week fantasy football leagues are paying $75 million a week... >> NARRATOR: All that investment money fueled an advertising blitz worth hundreds of millions of dollars in the run-up to this year's football season.

>> Turning a game you love into a lifetime of cash.

>> Use promo code "Kick" to play and get free entry into the millionaire grand final.

>> NARRATOR: On some weeks, FanDuel or DraftKings was the number one advertiser on television.

>> This isn't fantasy as usual.

This is DraftKings.

>> They were everywhere.

I'm not sure that we've ever seen that level of spend for any kind of gaming product, or, frankly, any product.

It's very rare that a marketing campaign achieves a spot in the cultural consciousness, that it becomes a meme, that it becomes the subject of jokes for late night television hosts.

>> These days, it feels like you can't turn on the TV without seeing one of three things: a zombie, a Kardashian, or a fantasy football ad.

>> I can't think of another marketing campaign at least in my lifetime that achieved that kind of cultural status through sheer force of repetition.

>> Over and over and over again.

>> It's not making you want to play?

>> No.

>> NARRATOR: All that advertising also brought some unwanted attention.

>> As the daily fantasy sports industry became more ubiquitous, the questions were inevitable.

Is this something that is legal?

Is this something that should be regulated?

How is this not gambling?

>> Let's be clear, we're talking about millions of people spending billions of dollars to bet on things they can't control.

>> The big question is, is it even legal, and should it be?

>> This comes dangerously close to online gambling.

>> Do they have to pay anything to play, and do they win something?

>> They do.

>> That's gambling.

>> What that advertising spend at the beginning of the NFL season really did was create not only a lack of sympathy, but a vulnerability that didn't exist a year ago.

>> (bleep) you, it's gambling!

>> BOGDANICH: Is what you do gambling?

>> No, it's not gambling at all.

I mean, it's...

I consider it more of investing.

You know, I have a portfolio.

I'm trying to diversify the portfolio by picking players every day.

I'm trying to maximize returns.

I'm trying to optimize my lineup each day.

I mean, it's like you're given $1,000 to bet on the stock market in a day.

It's no different than that.

>> BOGDANICH: You told me that FanDuel doesn't like the word "gambling" associated with its brand, and you told the story of they contacted you and asked you not to use that word.

Tell me what happened.

>> I prefer not to answer that.

>> BOGDANICH: Okay, okay.

Because you don't want to get them angry, or...?

>> Because I don't want to do anything to upset the industry.

I mean, that's my job at stake, pretty much.

>> There's a lot of commercials out there, it's not just during the games, it's everything.

You see these daily fantasy commercials.

>> The core of our game is not about the money.

When you ask people why they play, they play because it makes the games more exciting.

When you ask us what we as a company are about, we're about making sports more exciting.

>> BOGDANICH: So you don't view what you do here at FanDuel as gambling.

>> No.

>> BOGDANICH: That's a word that isn't used very much around here, I take it.

>> Nope, because we are... Every time that you talk to our users, what comes through loud and clear is the fact that we're an entertainment product.

>> BOGDANICH: So you see no reason, then, for fantasy sports to be regulated by some government agency?

>> Our product is all about entertainment value.

>> The word "gambling," or the association with gambling, will have immediate negative repercussions for the industry.

They want their product to be as deregulated, as non-interfered with as possible by state and federal government, and the moment the gambling door opens, all that ends.

>> NARRATOR: The fight over the legality of fantasy sports traces back a decade ago to Washington, D.C. Ironically, the daily fantasy sports industry owes its existence to an anti-gambling law: the Unlawful Internet Gambling Enforcement Act of 2006.

It was supposed to stop credit card companies and other payment processors from facilitating bets online.

>> Mr. Speaker, I yield three minutes to the gentleman from Iowa, Mr. Leach.

>> NARRATOR: The bill's sponsor, Iowa Republican Jim Leach, saw online gambling as a threat to young people and gambling addicts.

>> Never has it been so easy to lose so much so quickly at such a young age.

Internet gambling serves no social purpose.

Internet gambling is crack cocaine for gamblers.

You can gamble in the bedroom, in the living room, on a treadmill.

You can get over your head quite quickly.

I yield back the balance of my time.

>> The gentleman yields back the balance of his time.

>> I was one of the leading lobbyists for the opponents of the legislation.

>> BOGDANICH: You were against it-- why?

>> Well, the companies I represented felt that the appropriate path for the U.S. was to license and regulate Internet gaming, not to prohibit it, and preserve the freedom of adults to entertain themselves as they choose.

>> BOGDANICH: How important was the National Football League in securing passage of this bill?

>> Instrumental.

I think it's universally recognized that their advocates were the main strategists for getting it done.

>> NARRATOR: The bill they helped pass targeted online gambling, including websites that had moved offshore.

But it exempted fantasy sports as long as they involved more skill than chance.

And, ultimately, it left the fight over the legality of fantasy sports up to individual states.

>> This is a 15-minute vote.

>> BOGDANICH: If the point of the 2006 law was to stop Internet gaming involving offshore websites, what role did fantasy sports play in this?

>> There was a big grassroots uprising.

Fantasy sports players don't consider themselves gamblers, and I think the sponsors decided it would be easier to enact the law if they did not prohibit fantasy sports.

(gavel pounds) >> The yeas are 409, the nays are two.

>> The daily idea of fantasy sports was not conceived of when the bill was passed, partly under the assumption fantasy sports are kind of a fun activity that were a very modest proportion in size.

But I certainly didn't foresee this sort of activity.

>> NARRATOR: The 2006 law had paved the way for daily fantasy sports to flourish.

As for the law's primary target, the multibillion-dollar online sports gambling industry, our reporting showed it flourished too, but underground.

It's a shadowy world that, for many years, Curtis Coburn called home.

>> BOGDANICH: Were you a successful bettor?

>> They probably beat me on football.

Baseball, I did pretty good on baseball.

>> NARRATOR: By the time the law passed, he had been playing with a gambling ring in Plano, Texas, for about five years.

>> They had a large amount of bettors all over the United States.

They had bookies in Vegas, New York, you name it.

>> And it looks like Gregg is gonna bump it up, makes it $600 to go.

>> NARRATOR: Coburn's bookie, the guy who handled all his money, was Gregg Merkow, a big-time poker player with over a million-and-a-half dollars in winnings.

>> After a while, after talking to him, he asked me if I was a cop, and I told him no, and he said, "Well, I'll hook you up," and I was betting that night.

>> NARRATOR: But, in fact, Coburn was a cop, an undercover detective for the Plano PD.

>> Where are you at now?

>> Our target just showed up.

>> NARRATOR: He was wired with a hidden camera that recorded hours of betting transactions.

>> How you doing?

>> Good, how are you?

>> I had a fake name.

I went by Carl Cannon.

I had a checking account, credit cards, different address.

I had a completely different cover.

Thank you, sir.

I may just give it back to you next week just like it is right here.

It was a lot of chasing the money, following the money.

>> NARRATOR: Although the money was handled in person, much of the actual betting took place online, on an array of two dozen websites based not in Texas, but offshore, on the tiny Caribbean island of Curacao, which the bookies used to process bets around the clock.

>> They were taking in about a billion dollars' worth of wagers a year.

>> BOGDANICH: A billion dollars a year.

>> Federal agents and the Plano Police Department have shut down what they say was a $5 billion illegal sport gambling ring.

>> NARRATOR: When they finally broke up the ring, they confiscated over $10 million.

Though the Plano ring had been stopped, reporters at the Times were seeing gambling rings proliferating.

We began digging deeper into how these online gambling operations work.

James Glanz is an investigative reporter with a PhD in physics.

Augie Armendariz works in the computer-assisted reporting unit.

Though many gambling websites refuse to take bets from American customers, we managed to set up an account with a Panamanian website called BetOnline.

Its motto is "Because you can," and that turns out to be absolutely true.

>> That's my credit card information right there.

You can see my available balance up here, it's $139.

Got a pending wager, ten bucks on Chelsea.

>> All right, let's bet on the All-Star game.

I'm an American League guy.

Let's put ten bucks on the American League.

>> Sure.

Do a straight bet.

>> Okay.

>> Then I can place my bet, confirm it.

And watch out for the tweet button.

>> So we just sat in the middle of Manhattan and made an online bet with a company in Panama.

>> Panama.

After I set up the account, I couldn't quite figure out how to deposit money when I got a phone call on my cellphone, and a guy walked me right through how to put money on the book using my credit card.

>> You didn't ask for help.

>> No, just got the call.

>> You just got a call.

>> Yeah, and he just assured me that there wouldn't be anything on my credit card statement that said "BetOnline."

And sure enough, this is the company that eventually showed up on my credit card statement.

>> A company that sells safety goggles and gloves and hard hats?

>> That's the one.

>> NARRATOR: So we tried to order some work boots.

>> BOGDANICH: Is this Moser Safety?

>> NARRATOR: But the woman who answered there said it was actually "a third-party payment support service for gaming and betting sites."

>> BOGDANICH: Is your company helping an online gambling ring evade U.S. law?

>> NARRATOR: She said she wasn't sure.

>> BOGDANICH: Because it would appear that that's the case.

So, if I wanted to buy workwear and clothing and safety boot and shoes, I'm not gonna get that, am I?

>> NARRATOR: The answer was no.

>> BOGDANICH: Okay, well, thank you very much.

>> NARRATOR: When we checked recently, mosersafety.com was no longer online.

Fraudulent billing is just one way sports betting rings try to get around the law.

>> Many arrested this morning in a nationwide bust.

>> ...happened in homes in California, New York, Nevada... >> The alleged gambling ring... >> NARRATOR: Probably no office has worked harder to stop them than the district attorney in Queens, New York.

Using the state's anti-gambling laws, prosecutors indicted 17 people from an international sports gambling ring just a few months ago.

>> You're serving 250-20 notice, demand notice for alibi, 240-30 notice.

>> There's value in going after criminal enterprises which, you know, really prey on people.

>> That would be $50,000 cash or bond.

>> Organized crime has found gambling enterprises to be extremely profitable.

One of the most lucrative rackets, if you will, is syndicated sports betting, second only to narcotics trafficking as a source of revenue for the mob.

>> BOGDANICH: And all of this is made possible because of the Internet.

>> Because of the Internet, absolutely.

>> NARRATOR: But collecting bets and paying winners still has to be done the old-fashioned way.

>> They can't use electronic wire transfers, they can't use credit cards because that's prohibited by federal law, so they have to have boots on the ground, so to speak.

They have to settle up in person.

>> NARRATOR: It's a system that sometimes operates right out in the open, as Brave's investigators saw a few years ago, in the middle of the day on Fifth Avenue in Manhattan.

>> Fella walks up, meets some person, "Here's your money."

Our detectives were in a position to observe it and take pictures of it.

And this is the way business is done in these kind of criminal enterprises.

>> NARRATOR: The courier, whose codename was "Mr. Gold," handed over a bag stuffed with $350,000.

But the recipient of the money was a surprise: Joy Tomchin, a New York real estate developer and philanthropist.

She told investigators that she was merely holding the money for her brother Stanley, the top oddsmaker for Pinnacle Sports, one of the biggest and best known offshore gambling websites.

Pinnacle has been based on the island of Curacao since the 1990s.

At its peak, it was handling as much as $12 billion a year and was a household name-- in certain households, anyway.

>> What price they give you on Alvarez?

>> $350.

>> Who you place your action with?

>> Pinnacle.

>> Online?

>> NARRATOR: After the 2006 law, Pinnacle said it stopped taking bets from the United States.

Within two years, its business dropped in half.

>> BOGDANICH: Did they come back?

>> Well, our investigation revealed that they did, and they were very extensively involved in accepting wagers that originated from the United States.

>> NARRATOR: In that particular case, authorities recovered about $10 million and arrested 25 people in five states, including Stanley Tomchin, who pled guilty to a misdemeanor.

We wanted to speak to Pinnacle Sports directly, so we went to Curacao, about 40 miles off the coast of Venezuela.

>> I think that one of the attractions of these zones here is that they have great tax rates.

>> BOGDANICH: And also the tolerant government.

>> NARRATOR: The billion-dollar company's offices were here, in a beachside budget hotel.

We'd requested an interview and were waiting to hear back when there was commotion at the hotel.

>> BOGDANICH: I was sitting in the lobby this morning and I noticed a whole horde of workers descending with a lot of equipment coming out of the Pinnacle office, and now they're pulling out in the truck.

I guess one of the questions that occurs is, did our arrival have anything to do with their departure?

Coincidence?

Who knows?

>> NARRATOR: We followed them across town, where they were moving into a new office, a building that also houses Curacao's economic development ministry.

>> BOGDANICH: Hey, he's talking our picture.

How you doing?

Good.

What's your name?

>> Amali.

>> BOGDANICH: Hi, and you're with Pinnacle?

>> Yes.

>> BOGDANICH: What's going on here?

>> We're moving.

>> BOGDANICH: You're moving?

>> Yes.

>> BOGDANICH: You didn't like the Holiday Beach Hotel?

>> No, they didn't treat us well.

>> BOGDANICH: They didn't treat you right?

The question is, am I gonna ever have an opportunity to talk to somebody on camera?

>> NARRATOR: So we went back to the Holiday Beach Hotel to make one last attempt at talking to someone at Pinnacle.

>> BOGDANICH: Can we do an interview with anyone from Pinnacle to ask about their operation and why you guys moved this morning?

>> No.

Excuse me, don't take my picture.

You guys are trespassing as far as I'm concerned.

>> BOGDANICH: So we should leave?

>> You should leave.

>> NARRATOR: We asked to speak to other gambling companies, but they wouldn't talk either.

Nor would officials in Curacao who oversee the gambling industry: the governor's office, which issues gaming licenses, and the justice ministry.

We finally received a statement from Pinnacle's new neighbor, the economic development ministry.

>> BOGDANICH: "I graciously thank you "for your interest in this industry, "but considering the U.S. position towards online gaming, "there is no benefit to further deepen this topic "for the benefit of the U.S. TV viewer.

"I can only refer you to Mr. Campbell from the Gaming Control Board."

>> NARRATOR: So we called Mr. Campbell, who said that while the Gaming Control Board was expected to gain authority over online gambling in the future, for now, it only regulates casinos.

He wouldn't agree to an interview, but said he'd provide a statement if we came to his office.

It took less than 15 minutes, but when we arrived, he wasn't there anymore.

Before we came down here, an industry consultant said that getting someone to talk about online gambling in Curacao would be like chasing a ghost.

He was right.

>> BOGDANICH: This is a legal, allegedly regulated industry in Curacao.

Why doesn't anyone want to talk to us about it?

>> That's a difficult question for me to answer.

Curacao believes very much on self-regulation in order to protect their companies.

>> BOGDANICH: Are they doing a good job of self-regulating?

>> Some are, and some are not.

>> BOGDANICH: American prosecutors say they are unable really to dismantle these rings because the offshore online betting sites are beyond their jurisdiction, and they can't reach them.

Is that really the case?

>> Certainly, it is very difficult for them to catch them.

Today, these systems are in the cloud, so nobody knows exactly where the actual servers physically are located.

But certainly, there is an operation somewhere, and that is what you have to discover in order to try to stop it.

>> NARRATOR: To try to find these sites, we turned to a company in Manchester, New Hampshire, called Dyn, which helps online businesses move their data around the Internet as fast as possible.

They explained that most websites actually aren't just based out of one location, like Curacao.

Instead, they use a network of data centers and servers spread around the world, allowing them to communicate quickly with potential customers.

>> We sort of had the implicit understanding that they were where they said they were, but you're saying it actually is coming from servers sitting in different places geographically.

>> If you're a provider or content provider of any means, whether it's gambling or otherwise, you want that to perform well.

So you'll tend to see these providers go to get closer to where their actual... >> Closer to the consumer?

>> To the consumer.

>> If you're accessing a website, part of it may exist in a data center in New York, part of it may exist in somebody's corporate data center, in an office in Columbus or St. Louis.

>> If you know where to look, you can start... >> BOGDANICH: You know where to look?

>> We know where to look, and we know how to look.

>> NARRATOR: They can track websites' different locations using Internet data and a technique called trace routing.

We asked Dyn's top analyst, Doug Madory, to try to find out if the Pinnacle Sports website was coming from anywhere other than Curacao, which is where it is registered.

>> Well, the registration for a domain can be anything.

It could be the moon, for all we care.

That address doesn't relate to how it is actually hosted or routed.

This is a tool that we use for researching where has this site been seen, and then look up where has the site resolved to.

Here, we typed in pinnaclesports.com.

So if we zoom in, this is gonna tell us where is this website hosted.

>> I see some dots in the United States.

>> Yeah, they're in the United States.

It looks like New York; Chicago, Illinois; San Jose; and Los Angeles.

>> And it was considered outside of the reach of law enforcement because it's registered overseas.

>> Right.

>> But when someone in the United States types in that domain name... >> A user in New York City would be directed to the data center in New York City within a couple miles of where they reside.

>> BOGDANICH: Regarding Pinnacle, we've tracked one of their servers to a data center in New York City.

Is that of concern to you?

>> Absolutely.

>> BOGDANICH: Why?

>> Well, for them to knowingly collect data in New York for the purpose of furthering a bookmaking enterprise, if that's what they're doing, that would be a significant exercise of brazenness on their part.

That would be very interesting to us, and we would certainly be looking into that.

>> NARRATOR: We wanted to speak to Pinnacle about what we discovered.

In a statement, the company said it only uses data centers in the U.S. to help accelerate its Internet traffic, and is fully in compliance with U.S. laws.

Their website says they don't take bets from the U.S., but U.S. and European investigators have in the past disputed this.

And New York Times reporters were able to bet with the help of a Pinnacle agent.

Shortly after the company's statement, Doug Madory, the expert from Dyn, said Pinnacle's content had stopped coming from those U.S. data centers and servers we had seen and moved to Europe.

Pinnacle was just one of many sports betting sites offshore that caught our attention.

We'd heard of a website called Beteagle.com that federal prosecutors had tied to the Genovese organized crime family.

The site was registered in Costa Rica, and we wanted to know how it worked.

>> When I went ahead and tried to figure out, if I want to go to Beteagle.com, what address on the Internet do I have to get to to find the machine that's broadcasting the Bet Eagle content, this is what came back.

>> BOGDANICH: 108.61.159.125.

>> 108.61.159.125.

So we know what the address is, and so the next question is where the actual servers are at, or the machines that people connect to to get the content from.

>> BOGDANICH: And the reason we wanted to know where the servers were was because...?

>> Well, we want to know if these things are really offshore, if they're offshore in name only or if they actually have infrastructure in the United States that supports the wire rooms.

>> NARRATOR: The Costa Rican website traced back to an unexpected location.

>> You can see it goes into New Jersey.

We figured out that that's a building number of a data center in New Jersey, in Piscataway, New Jersey.

>> NARRATOR: That data center housed servers operated by a New Jersey company called Choopa, so we looked to see what other sites were on those servers.

>> It's not just Beteagle.com.

There's evidently 165 others at that machine.

>> BOGDANICH: Okay.

>> Race books, mobile wagering.

These are all on that same address on the internet.

>> BOGDANICH: Bet on tennis, bet on baseball, all in one spot.

>> That's correct.

>> BOGDANICH: And these sites are not licensed by the state of New Jersey.

>> None.

>> BOGDANICH: So they're operating illegally.

>> Right.

>> NARRATOR: The New Jersey Department of Gaming Enforcement declined to be interviewed, but said they were not aware of the gambling sites we had found.

And a Choopa spokesman denied any knowledge of the gambling sites.

But a few days later, we noticed something in the Internet traffic.

>> After you made the call, we started seeing the sites move one by one to different places.

We're seeing things migrate to new servers, different networks, different servers.

>> BOGDANICH: They moved off of the Choopa network.

>> They moved off the Choopa network, and we verified that.

>> BOGDANICH: We found more than a hundred gambling sites that apparently federal agents didn't know about.

>> NARRATOR: Choopa, Pinnacle, and other companies declined to be interviewed.

But an American investor in the online gambling business was willing.

Jeffrey Salvati owns a stake in two offshore gambling sites: UBet and VitalBet.

One of his investors is the world champion boxer Manny Pacquiao.

>> BOGDANICH: And where are they based offshore again?

>> Actually, both are licensed out of the country of Curacao, which is completely legal, and both are actually run out of Bulgaria.

>> BOGDANICH: A truly international operation.

>> Absolutely.

>> BOGDANICH: Why did you go to Curacao to get licensed?

>> Just because it's most liberal.

It's not most cost-effective, but it's highly... it is recognized.

>> NARRATOR: He said he is not worried about legalities because his sites don't take bets from the U.S.

But he and his partners are looking beyond the world of offshore gambling.

They're now trying to get into the business of daily fantasy sports.

They're investing in a company called Impact Fantasy Sports.

>> Impact Fantasy Sports has the ability to do games that aren't quite popular in the U.S. yet.

Cricket, rugby, darts... >> BOGDANICH: You'd like to take fantasy sports and take it on a trial run in other countries, is that right?

>> Yes.

While football is probably 50% of DraftKing and FanDuel's activity, in the country of India, if you're not in cricket, you can just pack up and go home.

Impact Fantasy Sports allows us to execute those obscure sports.

>> NARRATOR: Already in the U.S., fantasy sports has expanded beyond games like football and baseball.

Now you can bet on daily fantasy golf, fantasy NASCAR, fantasy mixed martial arts, fantasy video games.

And new companies have stretched the definition of fantasy sports.

This one assembles your teams for you.

You just pick a side.

Daily fantasy has become ten-minute fantasy, reduced to a yes or no question, removing virtually all of the skill that was supposed to separate it from gambling in that 2006 law.

>> BOGDANICH: Do you think fantasy sports is gambling?

Honest answer.

>> No, I don't believe it is.

When you have to draft a roster of eight guys, all from varying teams, and you're not placing a wager on a single guy or a single team, there is skill involved in fantasy.

>> BOGDANICH: As there is in poker?

>> As there is in poker.

>> BOGDANICH: One is considered gambling but one is not.

>> I don't make those decisions.

In 2006, the United States Congress carved out a piece of legislation that says fantasy sports is not gambling.

I didn't make that decision, they did.

We're playing by the rules, they make them.

>> NARRATOR: But as the daily fantasy business grew, with an estimated $3.1 billion being bet last year, it did so with very few rules at all.

The New York Times began publishing stories on what we'd found out about the realities of unregulated sports betting, and how the daily fantasy industry avoided government oversight.

>> BOGDANICH: Why should casinos and sportsbooks be subjected to oversight and regulation by the government, and fantasy sports somehow escapes all that?

>> Fantasy sports has always been recognized to play a different role.

When you talk to people about fantasy sports, it's a social activity, it's about competing with their friends.

But we are clearly very focused on making sure that everybody in the industry operates with the highest degree of integrity.

>> BOGDANICH: So we're talking about self-regulation here.

>> Mm-hmm.

>> BOGDANICH: And you're content that that's working well.

>> It is.

>> This morning, two of the biggest names in fantasy sports are scrambling to clean up their image.

>> NARRATOR: But a few days after that interview, scandal hit the industry.

>> DraftKings and rival site FanDuel have acknowledged that their employees have played and won significant money on each other's sites.

>> An employee of DraftKings allegedly used inside information to win $350,000 on a rival site.

>> NARRATOR: DraftKings hired an outside investigator, who cleared them of any wrongdoing, but the damage to the industry's credibility had already been done.

>> People suddenly realized hundreds of thousands, if not millions of people were playing for real money, billions of dollars were involved, but as it turned out, we don't actually know what's going on inside the black box that is daily fantasy sports.

>> New developments in the explosive scandal rocking the unregulated world of fantasy sports.

>> NARRATOR: The controversy prompted New York attorney general Eric Schneiderman to investigate.

>> Up until now, FanDuel and DraftKings have not been subject to any regulation, so all we're doing is taking them at their word that they're doing the right thing.

The standard in New York is not whether or not there's some skill involved.

In fact, our laws make it explicitly clear that if there's a material element of chance, even if skill is involved, it's still gambling.

>> Massachusetts attorney general has... >> NARRATOR: Other states followed quickly with their own inquiries.

>> In New Jersey, you have a senator and you also have a congressman who want investigations done.

>> The moment we began to think that there was something amiss, that something wasn't quite on the level... >> We're not gonna allow it if there's any chance whatsoever.

>> ...it accelerated things to a degree where it seems as if half the states in the country are teeing up some form of regulation or legislation.

>> It could be the beginning of the end.

>> It has gone big, it has gone national.

>> NARRATOR: And in mid-October... >> If you live in the state of Nevada, you can no longer play DraftKings or FanDuel.

>> NARRATOR: ...Nevada gaming officials ordered daily fantasy companies to shut down operations in the state.

>> The state says they can't operate there without a gambling license.

>> Obviously, Nevada doesn't prohibit all forms of gambling, but you have to submit yourself to a very rigorous regulatory process to run a gambling operation in Nevada.

>> All bets are off, at least in New York State at this time, after the attorney general... >> NARRATOR: Soon after, New York cracked down, saying daily fantasy was illegal, their ads misleading, and the games possibly unfair.

>> BOGDANICH: A FanDuel executive told me that daily fantasy sports is really all about entertainment.

Why, then, would the government, and you in particular, decide to get involved in a product that's just about entertainment?

>> Well, gambling is entertainment.

People go to casinos to be entertained.

The issue here is not whether or not it's entertaining, it's whether or not it is gambling, and you can't have unregulated gambling without running into problems.

>> NARRATOR: At the headquarters of the pro sports leagues in New York City, the New York attorney general's actions caused concern.

The leagues' big investments and lucrative deals in fantasy sports were at stake.

Major League Baseball may now end its deal with DraftKings, if they don't comply with New York law.

And NFL commissioner Roger Goodell has also raised questions about daily fantasy sports.

>> We see a big distinction between season-long fantasy and daily fantasy.

I want to make sure there's proper consumer protections.

That's important for us, and I think that's something that's missing from the current structure.

>> BOGDANICH: There's the saying, "No harm, no foul."

Is that the case here?

I mean, who's being harmed?

>> Well, the fact is we just don't know what's been going on in there, so our investigation is ongoing.

It's clear to us that what they're doing is gambling, and there are people who have gambling addiction problems.

And for them to contend it's not gambling, you can almost lure people who know they have gambling addiction problems into getting back involved in betting.

And gambling addiction experts have come forward to say this is a particularly pernicious form of gambling.

>> NARRATOR: In pursuing the industry, Attorney General Schneiderman has cited the work of Dr. Jeffrey Derevensky, one of the world's leading experts on youth gambling problems.

>> Nobody becomes a problem gambler after the first time you gamble.

The problems come about when you can't stop.

>> NARRATOR: What concerns him is that the young, millennial-aged males who make up daily fantasy's target demographic are most at risk for gambling addiction.

>> We know that young people are greater risk takers.

We know that males tend to gamble more than females in general.

We also know that males tend to have more gambling related problems than females, and boys are much greater risk takers than girls.

>> NARRATOR: But FanDuel's Matt King insisted it was not a problem.

>> BOGDANICH: Are you aware of any young people who have developed gambling problems by playing fantasy sports?

>> No.

>> BOGDANICH: None?

>> No.

>> NARRATOR: To find out whether addiction was becoming an issue, we talked to counselors who work with problem gamblers across the country and wound up in Auburn, Alabama, to meet a gambling addict named Josh Adams.

>> Gambling for some people is fun, and some people can do it normally.

I'm not one of those people.

If you have a mind like an addict has, it's dangerous.

>> NARRATOR: He's been a gambling addict for much of his life.

He says he's lost hundreds of thousands of dollars betting on sports.

He thought he'd recovered, but then discovered daily fantasy sports, playing for years on a number of different sites.

>> It'd be akin to an alcoholic finding out about a whole new street of bars that he or she never knew about.

>> BOGDANICH: How much time a day did you spend on picking players?

>> 80% of my day was spent either researching or analyzing.

I would listen to fantasy sports radio all day.

I'd have one ear bud in my ear.

>> BOGDANICH: How much money did you lose?

>> Close to $20,000.

>> NARRATOR: The New York Times article on Josh's account of his addiction struck a nerve with some readers.

>> It had a profound impact on me, to the point where I almost cried as I was reading it because I could relate to Josh's story, and kind of what I was going through at the time.

>> NARRATOR: Paul is a gambling addict in his 20s.

We agreed to conceal his identity and voice because he's afraid of ruining his career prospects.

Like Josh, he says an addiction he thought was under control was reignited when he found daily fantasy sports.

>> BOGDANICH: You knew you had a gambling problem.

Why did you play that first game on fantasy sports?

>> I didn't think it was gambling.

One of my friends was playing online fantasy, and he sent me a link, and the deal was he gets a free entry, and I get a free entry.

That was my first time on the website.

>> NARRATOR: Paul showed us his betting records.

>> There's one day where I deposited $5,300, lost, then deposited again a few hours later, and $10,000 again.

If that's not an indication of problem gambling, I don't know what is.

>> BOGDANICH: How much do you estimate you lost?

>> I think it's a little bit over 60.

It's between $60,000 and $65,000.

>> BOGDANICH: Did you have it to lose?

>> No.

It's mostly credit card debt that I had to take on.

>> BOGDANICH: Now that you've stopped playing daily fantasy sports, are there triggers that you worry about?

>> Anytime I see one of those commercials for FanDuel or DraftKings, I think about it.

>> After I played FanDuel the first time, I was hooked.

>> I start pacing back and forth.

>> It's like the best adrenaline rush ever.

>> NARRATOR: Josh Adams says he feels the same.

>> The only urges I still have are when I see the daily fantasy sports advertising.

They don't say that there are going to be more losers than there are winners.

>> $75 million a week with immediate cash payouts and no commitment.

>> You heard me: real cash money!

>> The Achilles' heel for the industry is clearly problem gambling.

Nothing will get the attention of state lawmakers, state legislators.

That's the dark side of gambling, the real-life adverse consequences that befall people who are unsuccessful at it or do it way too much.

>> People have been hurt that could've been protected, and I think the industry has lost several years.

You know, they've taken some blows that could've been avoided so easily.

>> NARRATOR: Keith Whyte of the National Council on Problem Gambling says he's been trying to convince the companies to develop serious consumer protections.

>> BOGDANICH: How long have you been engaging the daily fantasy sports companies in conversations about what they should be doing that they're not?

>> Almost three years.

>> BOGDANICH: Three years.

Based on what you're telling me today, it doesn't sound like you've made a whole lot of progress.

>> Unfortunately no, we haven't.

>> NARRATOR: Whyte says he's recommended truth in advertising standards, effective age verification, and listing his gambling addiction help line on their websites.

>> BOGDANICH: Why hasn't the fantasy sports industry adopted these consumer protection safeguards?

>> I can't speak for the fantasy sports industry.

I only can say that when we've engaged with them, they have recognized that there are customers of theirs with problems, we have offered our help, and to date, they have not embraced it fully.

>> NARRATOR: DraftKings recently added a link to the National Center for Responsible Gaming, which is not a gambling addiction hotline, but a research group funded partly by the casino industry.

Both DraftKings and FanDuel now say they are working with state lawmakers, though they have sued to prevent the New York attorney general from shutting them down.

They insist fantasy sports is not addictive, and that they have adequate controls in place.

>> BOGDANICH: Are daily fantasy games fair, as far as you know?

>> That is something that we're looking into in our investigation.

It's an ongoing investigation.

There certainly have been allegations that they're not fair.

What the daily fantasy sports sites do to make this worse, is they run ads that are clearly geared to attracting the minnows, attracting the small players, suggesting that it's easy to win, everybody can win.

>> You don't have to be an expert, you can just be an average guy and you've got a chance of doing well.

>> On FanDuel, I've won over $62,000.

>> In fact, it's very difficult to win for an average player.

89% of the players lose money.

If that's true, or if it's even worse, then that raises the question of who's winning all the money.

>> NARRATOR: The industry says that proves their point that fantasy sports is a game of skill.

>> Just like football or basketball, the more you practice, the better that you get.

Many of the forms of regulated gambling are actively constructed so they are games of chance, and that is a very, very different experience than a game of skill, which is what fantasy clearly is.

>> NARRATOR: But in recent days a major payment processor said it won't handle fantasy sports transactions, and Citigroup began blocking credit and debit card payments in New York to FanDuel and DraftKings.

>> Missisppi's attorney general says fantasy sports betting is illegal... >> Violates Texas gambling laws.

>> Considered illegal gambling in Hawaii.

>> NARRATOR: Even with the industry's future now uncertain, millions continue to chase the dream of winning big at daily fantasy sports.

>> You play for real money with immediate cash payouts!

>> NARRATOR: Though few will be as successful as Bryce Mauro.

>> The game lobby on FanDuel is kind of like an ecosystem, almost.

You can get games against just people who just haven't had the experience of playing on FanDuel before and don't have as much experience playing on the site.

So they're more known as fish.

You get more fish action at the beginning of the seasons as opposed to the end of the seasons.

I mean, pretty much everyone who has come into this industry and I play against-- the sharks, per se-- are all poker players, former poker players, because poker, when online poker became illegal, a lot of people shifted to this industry.

That's kind of what caused, in part, the boom of it.

>> BOGDANICH: With so much money at stake, is it fun?

>> Honestly, it's not as fun as it used to be, you know?

Moving up in stakes, you know, I just have a lot invested every day, so it's turned into more of a job than a hobby.

I mean, I can take my economics degree and I can go into investment banking.

I'm not entirely sure that's what I want to do.

I don't want to work 70-hour weeks.

Something like this is perfect for me.

I don't have to sit in a cubicle all day.

I can just continuously try to grow this into something that I can do after college.

I mean, I like sports for different reasons now.

I like it because it makes me money.

>> NARRATOR: Next time on Frontline... >> It was like a wave of heroin.

>> NARRATOR: A two-hour special report.

>> I lost it all, and it really didn't matter to me as long as I could get high.

>> NARRATOR: Inside an epidemic.

>> I'm not putting you in jail.

>> NARRATOR: A radical new approach.

>> It should not at all be seen as a criminal justice problem.

It ought to be seen as a public health issue.

>> NARRATOR: And the new face of addiction.

>> I will not let this kill me.

>> NARRATOR: "Chasing Heroin."

>> Go to pbs.org/frontline to see the latest on how states are challenging the daily fantasy sports industry.

Learn more about the ties between fantasy sites and pro sports leagues.

Read extended interviews.

>> We're an entertainment product.

>> It's clear to us that what they're doing is gambling.

>> And check out the reporting by the New York Times on fantasy sports.

Then connect to the Frontline community on Facebook and Twitter, visit us on YouTube, and sign up for our newsletter at pbs.org/frontline.

>> For more on this and other Frontline programs, visit our website at pbs.org/frontline.

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