DraftKings stock falls after Hindenburg Research warns of ‘black market’ link
Shares of DraftKings tanked as a short seller alleged the sports-betting powerhouse has exposure to international “black market” gambling rings and organized crime.
But in a surprise twist, the shares recovered more than half their losses by day’s end as traders on Reddit rallied around the stock, with some asserting the short seller’s report was “fake news.”
DraftKings shares opened at $44.95 on Tuesday — down 11 percent from Monday’s close — after short seller Hindenburg Research issued a lengthy report on alleged misconduct. As of 4 p.m. trading, however, the shares were off just 4.1 percent at $48.51.
Hindenburg’s report claimed that DraftKings’ 2020 merger with Bulgaria-based SBTech, which brought both companies public in a $3.3 billion blank-check deal under the DraftKings banner last April, exposed DraftKings to serious “black market” operations — including SBTech’s track record of operating lucrative illegal gambling businesses in China, Vietnam and Thailand.
While Hindenburg provided corroboration for some of its claims, others were based on interviews with anonymous ex-employees. The firm is known for other recent brutal short-selling reports on companies like Nikola, Clover Health and Lordstown Motors.
“This report is written by someone who is short on DraftKings stock with an incentive to drive down the share price,” a DraftKings spokesman said. “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. SBTech does not operate in any black markets. We do not comment on speculation or allegations made by former SBTech employees.”
In a Tuesday note to clients, Truist Security analyst Barry Jonas said SBTech’s contribution to DraftKing’s overall revenue is minimal, and that Hindenburg’s report posed more of a risk to DraftKings’ reputation and investor “sentiment” around its shares.
DraftKings insiders have benefitted handsomely from the company going public, selling a combined $1.4 billion in stock since last April, according to Hindenburg, which alleges that the company failed to disclose the risks posed by the 2020 SBTech merger.
SBTech, which was founded in 2007 and sells back-end infrastructure to other gambling companies in exchange for a cut of their revenue, has a “long and ongoing record of operating in black markets” that began years before it combined with DraftKings, according to Hindenburg.
An archived version of SBTech’s site from 2014 advertises a “powerful turnkey Asian system” that allows gambling operators to accept payment in currencies including Vietnamese Dong and Indonesian Rupees — even though gambling is banned in both Vietnam and Indonesia.
SBTech made money by collecting 10 to 30 percent of revenue from operators who used its software and was able to charge higher rates in countries where gambling was illegal, according to the report.
When murmurs that the US would legalize sports betting emerged in 2017, SBTech reportedly spun off its sketchier gambling operations into a separate company called BTi/CoreTech so they could allegedly clean up their brand’s image and potentially enter the US market.
BTi/CoreTech sold SBTech’s software to customers in countries where gambling is illegal through a virtually identical business model — but on paper acted as a customer of SBTech rather than a subsidiary in an attempt to create legal separation between the two entities, according to Hindenburg.
To show the integration between the companies, Hindenburg pointed to evidence including several LinkedIn posts where employees claimed to work for both BTi/CoreTech and SBTech. Both companies were allegedly controlled by SBTech owner Shalom Meckenzie and operated out of offices in Sofia, Bulgaria.
Clients of newly-formed BTi/CoreTech have reportedly been connected to Asian organized crime — including a site called 12Bet connected to an international syndicate called the Triads and another site called Fun88 that was the subject of a government raid in 2019, according to Hindenburg. Both sites appeared to do business with BTi/CoreTech, the short-seller alleged.
While BTi/CoreTech was allegedly operating in Asia, the US Supreme Court lifted the federal ban on sports gambling in 2019 and states began writing their own gambling laws. SBTech moved into the US market and eventually inked the merger deal with DraftKings.
It appears that DraftKings still takes-in millions from BTi/CoreTech. In DraftKings’ 2020 SEC filings, the company disclosed that SBTech “relies primarily on one reseller for its Asia revenue.”
The company did not name the reseller, which was responsible for 52 percent of SBTech’s 2020 revenue and 46 percent of its 2019 revenue, but Hindenburg quotes a former employee who says the reseller is BTi/CoreTech.
SBTech itself also operated in Iran, where gambling is also illegal, from 2014 or 2015 until 2019, a former employee alleged in Hindenburg’s report. The company allegedly dropped its Iran business when it was angling for a deal in Oregon due to concerns about US sanctions.
