Shares of DraftKings (NASDAQ:DKNG) are sliding Tuesday after noted short-selling activist Hindenburg Research published a lengthy report. The report alleges the gaming company’s SBTech unit operates in jurisdictions where sports betting is illegal, and may have connections to money laundering and organized crime.
Hindenburg Research founder Nathan Anderson, seen above. A new report from his firm says DraftKings unit SBTech runs illegal gambling operations. (Image: Johnny Milano/Fortune)
Founded by Shalom Meckenzie, one of the richest men in Israel, SBTech was part of a 2020 three-way reverse merger involving DraftKings and special purpose acquisition company (SPAC) Diamond Eagle Acquisition Corp. That transaction paved the way for DraftKings to become a publicly traded entity.
At that time, SBTech, which is based in Bulgaria, contributed a quarter of the combined company’s revenue and “was the only positive contributor to operating income, providing both financial stability and technology to the deal,” according to Hindenburg. However, the research firm, which took a short position in the gaming stock, adds there’s a dark side to those benefits.
“Unbeknownst to investors, DraftKings’ merger with SBTech also brings exposure to extensive dealings in black-market gaming, money laundering, and organized crime,” said the research firm. “We estimate that roughly 50 percent of SBTech’s revenue continues to come from markets where gambling is banned, based on an analysis of DraftKings’ SEC filings, conversations with former employees, and supporting documents.”
Sports wagering industry observers and some professional bettors have pointed to a slow rollout of the SBTech platform in states in which DraftKings offers mobile sports betting. The Boston-based company primarily uses software provided by Sweden’s Kambi for back-end infrastructure. But that relationship is supposed to end later this year.
Prior to the aforementioned SPAC transaction, there were rumors that DraftKings was looking to acquire SBTech as part of its quest to become vertically integrated.
Hindenburg Highlights SBTech Shady Dealings
Leading up to the blank-check transaction, SBTech supposedly made efforts to distance itself from its black market business. Citing former employees, Hindenburg says SBTech executive Tom Light — described by one former staffer as Meckenzie’s “right-hand man” — left the company to head up an entity known as BTi.
That business, which would later be called CoreTech, acted as a front for SBTech to continue doing business in Asian markets where sports betting isn’t permitted.
“Before SBTech joined with DraftKings, they split the grey market/unregulated…they [Bti] are a separate company marketing their white label solution to the Middle East, South America, mostly China and Malaysia,” a former employee said in the Hindenburg report. “Their technology provider is SBTech. Because SBTech is now on NASDAQ, they don’t want Asia or the grey market to give it a bad influence. They want to be clean.”
A second ex-staffer told the research firm that “well over 90 percent” of CoreTech’s revenue is derived from black or gray markets. DraftKings regulatory documents indicate an unidentified customer focusing on Asia generated 46 percent of SBTech’s 2019 revenue, with that percentage climbing to 52 percent last year.
Adding to the drama, the CEO of CoreTech is Amir Vankin. He previously led SpotOption, an Israeli binary option that was raided by the FBI in 2017 and later charged by the Securities and Exchange Commission (SEC) with duping US investors out of $100 million.
“As alleged, investors were not told that the defendants’ white label partners were the counter-parties on all investor trades, and thus profited when the investors lost money,” according to an April statement issued by the SEC. “To ensure sufficient investor losses and make the scheme profitable, Spot Option allegedly, among other tactics, instructed its partners to permit investors to withdraw only a portion of the monies the investors deposited, devised a manipulative payout structure for binary options trades, and designed its trading platform to increase the probability that investors’ trades would expire worthless.”
Illicit Asian Operations
In the Asia-Pacific region, there are some countries where sports wagering is regulated. For example, Australia is one of the largest sports betting markets in the world. In Macau, the world’s largest casino hub, Macau Slot Co Ltd. has an instant lottery business and is allowed to accept wagers on basketball and soccer, while Japan permits betting on cycling, horse racing, and motorboat and motorcycle racing.
Hindenburg claims BTi/CoreTech operates on the fringes, including running a Mandarin and Thai language sports betting website out of Thailand that was recently raided by authorities. Both China and Thailand forbid sports wagering. The research firm adds SBTech has ties to Vietnamese betting operations allegedly controlled by a triad kingpin — Paul Phua.
“In addition to apparent black-market bookmaking, 12Bet is, or was, owned by Paul Phua, according to an investigation commissioned by the Swiss IHAG Bank,” said the research firm. “The US Department of Justice has alleged that Phua is a senior member of the 14K Triads, one of the most dangerous criminal syndicates in the world, known for heroin smuggling and contract murder, among other activities.”
Hindenburg also alleges that SBTech, in its quest to land a contract with the Oregon lottery in 2019, obfuscated ties to 10bet China — an illegal gambling operation in that country. A former SBTech employee told Hindenburg that operation is “massive,” and that Meckenzie continues to profit from it.
At Least One Bank Defends DraftKings
In just over a year as a freestanding public company, DraftKings garnered plenty of praise on Wall Street, and even with today’s controversy, at least one bank is stepping up to defend the sports betting stock.
Following the Hindenburg report, Credit Suisse released a note saying DraftKings acquiring SBTech was about buying the target’s technology, not its current revenue stream. The bank adds that based on 5x sales, the $105 million in revenue generated by SBTech last year contributes just $1 to DraftKings shares.
“While not ideal, in a worst-case scenario, an SBTech issue would not necessarily interfere with betting operations today,” said Credit Suisse. “We would use today’s weakness as an opportunity ahead of potential Canada legalization (senate meeting today) as well as New York, both of which are catalysts for DKNG.”