Insider Trading Laws Are Coming … to Sports Betting
WHY YOU SHOULD CARE
Less than a year after the Supreme Court allowed states to legalize sports betting, legislators are turning their attention to a new threat: insider betting.
By Andrew Mentock
After losing in Game 1 of the 2018 NBA Finals, an emotional LeBron James smashed a whiteboard in the Cleveland Cavaliers locker room, breaking his right hand. His play faltered in the subsequent three games that the Golden State Warriors also won for a clean sweep. Yet, the injury wasn’t made public until after the finals were over. That kind of information can prove decisive for oddsmakers like Tom Stryker, a nationally renowned sports handicapper who compares his profession to a stockbroker’s. “I would’ve never come up with that pick or advised my clients to play Cleveland knowing he was hurt,” he recalls. If known only to a select few, it’s also the kind of inside dope that’s now coming under scrutiny stock markets are usually subjected to.
Just weeks before the game where James was injured, the U.S. Supreme Court had opened the gates for states to legalize sports betting, striking down the Professional and Amateur Sports Protection Act (PASPA). But while oddsmakers, professional sports leagues and gambling enthusiasts wrestled questions related to James’ injury, lawmakers were already beginning to address another: insider betting.
State after state is introducing sports wagering legislation and regulations to either prohibit operators from allowing people with inside information to place bets or punish bettors who use such information. In June, legislation was filed in West Virginia to regulate its Sports Wagering Act. The regulations specifically include the “misuse of inside information” in its definition of “suspicious betting activity.” Pennsylvania has introduced similar regulations in the past year.
People are … trying to keep the system as clean as possible.
Christine Hurt, securities regulations expert, Brigham Young University
States such as Indiana, Massachusetts, New York, Tennessee and others use similar language to prohibit or prevent the use of “confidential” or “nonpublic information” when placing a bet on a state-approved athletic competition in legislation they introduced in anticipation of, or after, the Supreme Court order. New Jersey has gone one step further. It introduced emergency sports regulations, using a verbatim definition from the West Virginia bill, to curb insider betting. The same language appears in New Jersey’s proposed rules for permanent adaptation.
And at the federal level, Sen. Chuck Schumer co-sponsored and introduced legislation in December that, if passed, would federally regulate sports gambling and make it unlawful for a person to place or accept a bet on the basis of “material nonpublic information.” This language is nearly identical to rules that govern insider trading as it applies to securities.
These moves might appear preemptive, given that sports betting is becoming legal in these states only now. But the evidence of the threat is real. In the mid-2000s, NBA referee Tim Donaghy sent gambler Jimmy “the Sheep” Battista non-public information he had access to, thanks to his position as a referee, including “his knowledge of the officiating crews for upcoming NBA games, the interactions between certain referees, players and team personnel, and the physical condition of players,” according to facts that emerged during legal proceedings against Battista. Both were convicted in the United States District Court for the Eastern District of New York for conspiracy to transmit wagering information, and in the case of Donaghy, two counts for conspiracy to commit wire fraud. That was before sports gambling was widely legal. Now, the prospects of such insider betting are higher, many fear.
(LeBron James speaks after the fourth game of the 2018 NBA Finals, explaining his injury.)
“It sounds like people are thinking through some of these issues and are trying to keep the system as clean as possible,” says Christine Hurt, the associate dean at Brigham Young University’s law school, who teaches securities regulations.
That’s an approach that the professional sports leagues appear to support. At a hearing in September, Jocelyn Moore, executive vice president, communications and public affairs for the NFL, spoke in front of members of Congress and mentioned insider betting as one of her concerns. The league’s 2018 gambling policy also prohibits its personnel from “using, disclosing or providing access to confidential, nonpublic information.” They are also barred from placing a bet on a professional, international or Olympic athletic event.
“The sports leagues generally want the federal government to be involved,” says Mark Conrad, an associate professor at Fordham University’s Gabelli School of Business and director of its sports business program. “One, for an integrity fee, but also I think they feel, with some justification, that there will be more quality control on the federal level than on the state level.”
Yet many, including Conrad, do not believe that the federal legislation will pass. It’s received significant backlash, especially from the American Gaming Association and Nevada politicians. For years, Nevada was the only state to allow legal sports betting and thus has significant experience regulating it and adjusting its laws. According to Jennifer Roberts, associate director at the International Center for Gaming Regulation and an adjunct law professor at University of Nevada, Las Vegas, the state is in the process of adding legislation that will prohibit operators from accepting wagers from players, coaches and owners of professional teams.
Roberts says that in Nevada, insider betting hasn’t been much of an issue because it’s in the interests of licensed sports-wagering operators to stop someone with a significant advantage from placing a bet. In Nevada, there’s also an existing law that bars the pursuit of a wager “after acquiring knowledge, not available to all players, of the outcome of the game or any event that affects the outcome of the game.”
At the level of individual states though, it makes perfect sense to have laws preventing insider betting, say experts. “If you’re going to say [sports gambling] is good for our state and allow it, then you’re going to have to take some additional steps to make sure it doesn’t mar the sport,” says Hurt, who in her research has shown similarities between sports wagering and securities trading. That’s critical, she says, because part of the reason sports gambling is “lucrative” is that people care about sports. “And if people start to think that sports are corrupt or dirty or rigged, then that’s not good for sports and it’s also not good for sports gambling.”
Going forward, Hurt is interested to see how insider betting laws develop, especially because many of the regulations against insider trading came from judge-made law and not state or federal legislature. For instance, what type of information will end up being considered “inside” or “nonpublic”? And how effective will states be at monitoring suspicious betting trends that could help them uncover insider bettors?
There’s also the question of what sports leagues can do to promote transparency in information that can dramatically influence bets — for instance, injuries to players such as James. “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 the past, the NBA has fined teams that have hidden such information. In the future, if the insider betting laws come to fruition, it’s the selective use of such information to place bets that will draw the stick of the law.
- Andrew Mentock, OZY Author Contact Andrew Mentock