DraftKings under federal investigation over acquisition of SBTech following short-seller report

DraftKings is under federal investigation by the Securities and Exchange Commission over its acquisition of SBTech, a sports betting technology provider based in Bulgaria.

In an earnings report released Friday, DraftKings acknowledged that two federal securities law putative class actions were filed against the company and certain officers in July in the U.S. District Court of the Southern District of New York. The actions allege violations of the Securities Exchange Act related to DraftKings' purchase of SBTech and stem from a report by financial research firm and short seller Hindenburg Research.

"It is not uncommon for the SEC to investigate allegations" in short-seller reports, a DraftKings spokesperson wrote in a statement to ESPN. "The SEC inquiry does not suggest any wrongdoing or agreement with the short-seller allegations, and we intend to cooperate with the SEC inquiry."

In DraftKings' earnings report, the company said that it plans to defend itself against the claims but acknowledged that it cannot predict the outcome or the potential liabilities associated with the SEC investigation.

"Despite the potential for significant damages, the Company does not believe, based on currently available information, that the outcome of the 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," the company stated in its earnings report.

DraftKings reported receiving a subpoena from the SEC on July 9, requesting documents based on allegations made in Hindenburg Research's report. The report, which was published in mid-June, alleged that, "Unbeknownst to investors, DraftKings' merger with SBTech also brings exposure to extensive dealings in black-market gaming, money laundering and organized crime."

DraftKings purchased SBTech, a veteran company in the international sports betting market, in December 2019. The deal was completed in 2020.

In June, in response to the Hindenburg report, DraftKings dismissed the allegations, telling Fox Business that it "conducted a thorough review of [SB Tech's] business practices" and was "comfortable with the findings."

In Friday's earnings report, DraftKings also acknowledged that it is under audit by the Internal Revenue Service for past tax years, with the primary unresolved issues centered on "excise taxation of fantasy sports contests."

Editor's note: DraftKings agreed to a multiyear deal with ESPN in 2020 to be the exclusive daily fantasy sports provider for the network, and the companies also have a sports betting partnership.