“Insider betting” and LeBron James’ right hand

Posted in Regulations

Insider trading generally refers to buying or selling a security, in breach of a fiduciary duty or other relationship of trust and confidence, on the basis of material, nonpublic information about the security. Under US law, anyone who “acts” on insider information can be held liable. For example, in 1983 in Dirks v. SEC, the US Supreme Court held that an individual who receives such insider information from an insider (the “tippee”) may be liable for securities fraud where the insider who provided the information (the “tipper”) breached a fiduciary duty in providing it. The Dirks Court held that such a fiduciary breach occurs where the tipper receives a personal benefit in exchange for the information, a requirement known as the heavily litigated “personal benefit” test. How would the revered US laws that protect the investing public change if viewed in the paradigm of protecting the US sports betting public?

After losing Game 1 of the 2018 National Basketball Association Finals (the “NBA Finals”) in heartbreaking fashion, LeBron James punched a whiteboard in the Cleveland Cavaliers locker room, breaking his right hand. James and the Cavaliers faltered in the remaining three games as the Golden State Warriors won the NBA Championship in a four game sweep. Although not his usual dominant self, James was able to play with his broken hand, which was not publically revealed until after the Finals were over, where he appeared at a post-game press conference wearing a cast on his hand. Information about James’ hand would have been crucial to those making bets on the game (assuming such bets were legal at the time). Tom Stryker, a nationally renowned sports handicapper, who has compared his profession to being a stockbroker, stated, “I would’ve never come up with that pick or advised my clients to play Cleveland knowing he was hurt,” he recalls. 

Herein lies a major issue yet to be completely addressed in the wake of the growing US sports betting market. Just several weeks before the game, the Supreme Court overturned the Professional and Amateur Sports Protection Act (“PASPA”), opening the doors for states to enact their own sports betting regimes.[1] What if an injury similar to what happened to LeBron James in 2018 happens in the upcoming NBA Finals to either Stephen Curry or Kevin Durant (of the presumptive favorite Golden State Warriors)? Further, what if such “inside injury information” is only available to a select few individuals, perhaps a trainer or an arena security member (i.e., tippers)? Moreover, what if those select few tippers act on said “inside injury information”—either directly or indirectly, via the use of another person (i.e., tippees)? Assuming that a fiduciary duty has been broken, a bet has been placed on that “inside injury information”, and the tipper will receive a “personal benefit,” it is arguable that an “insider betting” violation has occurred under the current securities law regime. The foregoing hypothetical highlights the fact that the injury status of a key player is akin to the kind of inside information regarding earnings calls of public companies or pending acquisitions that has been under scrutiny by the SEC for decades.

This aforementioned hypothetical is much more than that. In the mid-2000s, NBA referee Tim Donaghy sent gambler Jimmy “the Sheep” Battista material, non-public information he had access to, which stemmed from his position as an NBA referee, including his knowledge of the players’ physical condition, to bet accordingly. Donaghy and Battista were subsequently convicted in federal court for conspiracy to transmit wagering information, and in the case of Donaghy, two counts for conspiracy to commit wire fraud. This incident occurred before sports betting had made its way to the mainstream and before a number of states had authorized sports betting regimes. As such, many fear that the dissemination of such “inside” injury information in conjunction with sports betting becoming more prevalent will tarnish the integrity of the games being played. 

In June of last year, West Virginia passed legislation to address the “misuse of inside information” in its Sports Wagering Act. Additionally, states such as New Jersey, Indiana, Massachusetts, New York, and Tennessee have included similar language in passed or draft legislation aimed at preventing the use of “confidential” or “nonpublic information” in sports betting. At the federal level, last December, Senators Chuck Schumer and Orrin Hatch co-sponsored and introduced legislation, which has subsequently been dropped, to regulate sports betting. If such legislation would have been passed, there would have been federal regulatory oversight of sports betting and it would have been unlawful for a person to place or accept a bet on the basis of “material nonpublic information” - such language being nearly identical to rules that govern insider trading as it applies to securities.

On March 24, 2019, NBA Commissioner Adam Silver was interviewed on 60 Minutes during a segment titled, Will Legalized Sports Betting Curtail Corruption or Encourage It? Silver believes a repeat of the Donaghy situation is less likely now that sports betting is legal, as legalized sports betting “decreases risk dramatically because we have access to the betting information. I think when you have an underground business operating in the shadows, you have no idea what people are betting on.” Ryan Rodenberg, a Professor of Sports Law Analytics at Florida State University agrees, “because of technology, you can essentially get a fingerprint for every bet that’s placed. You can detect unusual and unnatural line movements, bets.” 

Looking forward, Christine Hurt, Associate Dean of BYU Law School and a securities regulation expert, is interested to see how insider betting laws develop, especially because many of the regulations against insider trading are judge-made as opposed to being based on legislation. Hurt queries what type of information will end up being considered “inside” or “nonpublic” and how effective states will be at monitoring suspicious betting trends that could help uncover insider bettors.

There’s also the issue of what sports leagues can do to promote transparency in information that can dramatically influence bets. “I can remember making selections on Cleveland and wondering why he was performing so poorly,” recalls Stryker. “And of course, when it comes out he was injured, there’s a level of frustration on my end.” In prior incidents, sports leagues have fined teams that have hidden such injury information.

As we approach the 100 year anniversary of the Chicago White Sox scandal, where eight members were accused of intentionally losing the 1919 World Series, bettors should remain aware that the inappropriate use of such inside information will be subject to the prying eyes of all stakeholders who are trying to balance betting with the integrity of the games themselves.

 

[1] For a further discussion, please see this prior blog post by the author: https://www.insidesportslaw.com/blog/2019/
q1/jockeying-begins-for-inevitable-growth-in-us-sports-betting/

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