Short-seller takes aim at DraftKings over alleged black-market SBTech business

DraftKings has shrugged off a damning report into the business practices of its SBTech subsidiary, the publication of which triggered a 11% downturn in the operator’s share price in pre-market trading yesterday.

The report, compiled by New York-based analysis firm Hindenburg Research, suggested investors should offload DraftKings stock due to the alleged black-market activity of SBTech.

SBTech is the operator’s proprietary sports betting technology business acquired as part of a $3.3bn combination to take the company public in April 2020.

Published to investors before the market opened on 15 June, the report’s explosive findings resulted in DraftKings stock slipping from a Monday closing price of $50.62 to under $45 as the market opened on Tuesday, before rebounding slightly.

Justifying its recommendation to sell DraftKings stock, the Hindenburg report referenced conversations with several former SBTech employees, as well as a review of SEC and other international regulatory filings concerning the business.

It also reportedly conducted an inspection of back-end infrastructure centred around SBTech’s Bulgaria base of operations, alleging that 50% of SBTech revenue is derived from markets where gambling is illegal.

Hindenburg claimed that 25% of DraftKings revenue post-merger came from SBTech.

The report alleges in the period prior to the public listing that SBTech funnelled so-called “illicit customer relationships” into a newly formed distribution entity called BTi/CoreTech, with that entity ostensibly serving as a front company to handle black market operations.

The report suggests that the BTi/CoreTech business serves as a shield against negative exposure to publicly listed DraftKings.

Qualifying this claim, Hindenburg claims to have identified several instances of black-market dealings by BTi/CoreTech, including an Asia-focused gambling website linked to a triad “kingpin” currently under investigation in Switzerland for money laundering offences.

“DraftKings has never identified the nature of its BTi/CoreTech relationship in any of its SEC filings – not as an affiliate or subsidiary of SBTech or in any other way as relevant to DraftKings’ SPAC combination with SBTech,” Hindenburg wrote.

“It also has not provided transparency regarding the markets SBTech and its other “resellers” and affiliates operate in, and their respective contributions to the public company.

“Given the importance of SBTech to DraftKings’ top and bottom-line, it is virtually impossible to fathom that DraftKings was, and continues to remain, unaware of its ongoing relationship with BTi/CoreTech and its illicit operators.

“Yet rather than disclose anything about these relationships, the company instead appears to have created a complex web of misinformation to conceal them,” the report added.

The note further linked SBTech to unregulated gambling operations in China, Thailand, Vietnam and Iran.

“We think DraftKings has systematically skirted the law and taken elaborate steps to obfuscate its black-market operations,” said Hindenburg.

“These violations appear to be continuing to this day, all while insiders aggressively cash out amid the market froth.”

The full Hindenburg report can be found here.

A DraftKings spokesperson said in response to the note: “This report is written by someone who is short on DraftKings stock with an incentive to drive down the share price.

“Our business combination with SBTech was completed in 2020. We conducted a thorough review of their business practices and we were comfortable with the findings.

“We do not comment on speculation or allegations made by former SBTech employees,” the DraftKings spokesperson added.

Despite the early plunge, DraftKings shares on the Nasdaq recovered to close the day at $48.51.

Meanwhile, it was reported Ark Investment Management bought more than 870,000 shares in DraftKings, estimated to be worth around $42m, on the same day as the Hindenburg Research report.