DraftKings scores comprehensive victory as investor lawsuit over SBTech dealings tossed

A class action lawsuit against DraftKings over shareholder losses resulting from the controversial Hindenburg Research report into SBTech has been dismissed by judges in a New York court.

The case centered on claims made by New York-based analysis firm Hindenburg Research, which in June 2021 released a broadbase investigatory report alleging black market activity by SBTech in a number of international jurisdictions.

Hindenburg, itself a short seller of stock, sold its DraftKings stock in the wake of publication and suggested investors do the same.

These revelations prompted a 4% drop in the company’s share price as the US Securities and Exchange Commission (SEC) launched an investigation into DraftKings over claims published in the report.

Later, in September, groups of disadvantaged shareholders filed individual suits against DraftKings over the report, alleging that certain information on the SBTech business was not disclosed when it was acquired as part of a $3.3bn combination deal to take the company public in April 2020.

Separate claims from six law firms were amalgamated into a single class action lawsuit in the US District Court for the Southern District of New York.

The suit alleged violations of federal law, as well as making “false and misleading” statements about the SBTech business relating to the alleged black-market activity.

In an 82-page order dismissing the class action, District Judge Paul A. Engelmayer suggested that the shareholders’ claims did not have a “strong inference” of wrongdoing on the part of DraftKings for multiple reasons.

Firstly, the shareholder dealing conducted by DraftKings CEO Jason Robins and CFO Jason Park as well as SBTech founder Shalom Mackenzie during 2020 and 2021 cited in the lawsuit was not deemed as “suspicious” by Engelmayer.

Secondly, the timing of the transactions highlighted in the suit was also deemed to be unsuspicious by the judge. In addition, Engelmayer suggested that allegations made were “conclusory” in nature.

“Most salient, the SAC [second amended complaint] – unsurprisingly given its failure to plead black-market operations adequately – makes only conclusory allegations that defendants knew of such operations,” Engelmayer wrote.

“It does not ‘specifically identify the reports or statements containing this information’ that were accessible to individual defendants.

“The categories of evidence on which plaintiff relies do not support an inference of wrongdoing.

“As to the first category, the SAC relies on the same uncorroborated and unconfirmed statements from anonymous employees quoted in the Hindenburg Report that, under the case law, must be put aside,” he added.

Concerning other allegations, Engelmayer scrutinized the suit, determining that due diligence claims as well as a denial of the allegations by DraftKings as sufficient evidence of wrongdoing and violations of federal law,  all claims made by the plaintiffs which were similarly dismissed.

Crucially, Judge Engelmayer ruled that any potential resurrection of the case or similar class action lawsuit be denied, drawing on a previous warning made to the plaintiffs regarding the allegations.

“On November 22, 2021, the Court advised plaintiffs that, if they chose to amend the complaint rather than oppose a motion to dismiss, no further opportunities to amend would ordinarily be granted,” Engelmayer wrote.

“Plaintiffs have already amended the complaint twice – once before and once after a motion to dismiss.

“Plaintiffs have not identified additional factual allegations – for example, a solid factual basis on which to allege black-market operations by SBTech – that would cure the deficiencies noted in the motion to dismiss, explained how further investigation or diligence would rectify the SAC’s deficiencies, or otherwise offered any reason for the Court to disregard its earlier warning,” he concluded.