The SportsFolio Journal - October 17, 2021
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We’re back!
Please excuse our long absence. This was supposed to be just a couple of weeks during the summer break, and then all of a sudden, White v. Cuomo, the third and likely last step in the daily fantasy sports saga in New York crept up on us and we couldn’t pass up the opportunity to participate as an amicus (friend-of-the-court). We submitted an amicus brief (PDF) to the New York Court of Appeals on August 17 and it was accepted, but did not stop there. Writing is like exercise, the more you do it, the more you want to keep doing it. We have been admittedly neglecting our sister publication, Full Court Press, for quite some time, so we decided to create a 12-post series detailing the daily fantasy sports case in front of the Court of Appeals. (Part I starts here).
On October 5, 2021, the New York Court of Appeals heard the oral arguments. We were even briefly mentioned (not by name) during the arguments! We’ll leave the hearing commentary to Full Court Press. Over here, we are ready to pick up where we left off.
The world has not become any less complex or challenging and to be perfectly honest, we don’t see how it can or will. There are simply too many forces pulling us in the wrong direction; just take a look at a few of these headliners:
The Courts
SEC v. Ripple. In mid-September, Ripple stated that they have no intention to settle with the SEC. Then, the SEC won a round when the Judge denied (PDF) Ripple’s motion requesting the documents reflecting the SEC’s trading preclearance decisions with respect to SEC employees’ transactions in bitcoin, ether, or XRP. Roughly a week later, the Ripple CEO showed a willingness to settle, but only under one condition.
Jeremy Hogan, who has been following the case closely, has a good video here:
We encourage you to watch the entire video. Here are three takeaways:
Fair Notice Defense. In non-technical terms, Ripple takes the view that nobody told them anything was wrong with what they were doing and from Bill Hinman, SEC Director, Division of Corporation Finance stating that bitcoin and ether are not securities to the SEC Commissioner Peirce taking a crypto-friendly approach, Ripple is essentially trying to turn the fact that the regulators have been acting slowly into their advantage. This is, of course, essentially the same argument that daily fantasy sports made. The SEC motioned the court to strike the Fair Notice Defense, and the Court has still not ruled on it, though that may come in the next few weeks according to Hogan.
The XRP Offering. XRP, in and of itself, may not be a security, but the way it is marketed makes it a security offering. As Hogan explains in the video, that means the SEC will win the battle, but perhaps not the war; XRP could live on.
XRP. The doomsday scenario for XRP: it is a security, period. Under this scenario, the SEC scores a major victory not against XRP, but against crypto in general. This all comes down to the SEC’s mission of protecting investors.
The price of XRP has inched up in the last few months. That said, we don’t think a settlement is coming up anytime soon; if the SEC wins the battle on the motion and Ripple won’t be able to make the fair notice defense-related arguments, it would likely indicate that we are still in the second inning.
131 Judges. This is the number of judges who have recently broken the law; the WSJ broke the story. 131 federal judges heard cases where they had a financial interest. Some of them blamed their own court clerks and one judge didn’t realize their spouse’s holdings required a recusal from the case. Another judge didn’t even realize that there is a recusal law on the books.
This is a problem. If companies play fast and loose with the law, the legislature falls asleep at the wheel, national media is more interested in fanning the partisan flames and local news coverage declines, what have we got left? The judiciary, of course. It is the last stop where things can be rectified and justice can be achieved. If the judiciary system fails, then we fail as a nation.
A trio of sports gambling cases in Florida. Sports betting is not launching in Florida just yet. There are multiple legal challenges to the gaming compact which was entered into between Florida and the Seminole Tribe of Florida in April 2021. The compact (PDF) gave the tribe the exclusive ability to conduct sports betting in the state. One of the issues is the Wire Act, which makes it illegal for sports bets to cross the state lines. This case may also turn on whether sports betting is a game in the first place; the compact defines “Covered Games” to include both fantasy sports and sports betting, and you know how we feel about this issue: neither sports betting, nor fantasy sports is a game.
The Coins
BitCoin. China chose the nuclear option with Bitcoin and it subsequently dipped to the 30ks in July and most recently has topped its previous high in the 60ks after Square announced that they are considering their own crypto-mining system. It also looks like a futures Bitcoin ETF is on the way.
a16z is pursuing a crypto lobbying push.
Jamie Dimon, CEO of JPMorgan Chase said that Bitcoin is worthless. Good for him. No, seriously:
https://www.cnbc.com/2021/10/11/jpmorgan-chase-ceo-jamie-dimon-says-bitcoin-is-worthless.html
What do you think of that cigarette analogy? We think it is a bit misplaced. Cigarettes, as harmful as they are, are ultimately a personal choice because there are: i) appropriate disclosures (it is hard for anybody to say that they didn’t know that cigarettes are harmful given the labeling requirements); and ii) the negative externalities can largely be managed in other ways, e.g., you cannot smoke indoors. The same can be said for alcohol, you can drink in the comfort of your home, but you cannot drink and drive.
Can we say the same about Bitcoin, or more broadly, about any coin? Do people really, truly understand that Bitcoin is not a financial asset (because it does not have any cash flows), thus not an investment vehicle? When the going is good, nobody is going to complain. When the price tanks, and it is almost guaranteed that at least some of the coins’ prices will tank, watch out. Then, there will be a multitude of financial injury lawyers circling the wagons. All kinds of attacks will likely be made across the board: regulators who are not stopping it, promoters that market coins as a once-in-a-lifetime investment opportunity, finfluencers that are not happy with the old guard, etc. We believe the foregoing is inevitable. Aswath Damodaran, Charlie Munger, Paul Krugman, Jamie Dimon and the likes will be vindicated, but in any event, it will be too late for people who bought into this myth that Bitcoin is a good investment. There will likely be no money to make them whole. The lawyers will get richer, a few companies will go bankrupt, we will move on to something else and a generation that shuns investing as we know it and instead opts for uber-leverage, meme stocks and coins may end up having nothing to show for their efforts.
Here is the thing: if the goal is to protect investors, we need to realize that in this day and age, the problems we are solving are different from what they were in the past. Investor protection today isn’t just solving the information asymmetry problem between promoters and true investors. Increasingly, investor protection is about helping investors understand what an investment is in the first place.
The Gambling Ads
Jersey Ads. You may like the idea of having the names of gambling companies on sports jerseys, even though the UK, after 16 years of experimenting with this very idea, has chosen to go in the exact opposite direction. Must we always learn the hard way?
Tv and Arena Ads. More broadly, are we the only ones not liking the fact that there are so many gambling ads degrading the sports consumption experience? This is 2015 all over again, when Fanduel and DraftKings spent upwards of $200 million in a mere nine months. Except now, it’s actually worse. Even the New York Times, who once ran hard against sports gambling seems to be taking a softer stance. Not everybody is happy, however. The New York Post ran an article, with the author wondering what NFL Commissioner Goodell would think when he turns on the TV and sees all the ads. The Atlantic claimed that Sports Gambling is a Disaster Waiting to Happen.
The House of Mouse. What does Disney think about all of this? Only two years ago, the company was distancing itself from sports betting, but the tide has started to turn with ESPN exploring sports betting deals. It is not yet clear whether Disney (or its broader stakeholders) will ever get fully comfortable with sports betting. It just doesn’t work well with the branding the company cultivated over a century. The more logical scenario, perhaps, is Disney spinning off ESPN.
The fundamental tension is this: there is, and will always be, a substantial core group that will never be comfortable with sports betting and the way it changes how we consume sports. Sports gambling has been on a roll lately, but will it last?