Shares in fantasy sports pioneer DraftKings plunged more than 11% in early trading Tuesday as short-seller Hindenburg Research issued a report stating the company has “exposure to extensive dealings in black-market gaming, money laundering and organized crime.”
Hindenburg Research, a small New York group led by forensic accountant Nathan Anderson, stated that the links originate with SBTech, the Bulgaria-based betting technology business DraftKings merged with as part of its 2020 going-public merger with Diamond Eagle Acquisition Corp., a SPAC led by Hollywood executive Jeff Sagansky. SBTech founder Shalom Meckenzie is a DraftKings board member.
DraftKings shares opened 11.2% lower at $44.95 on high volume on the news and recovered to trade around $48 in the first hour of trading. The report was posted online prior to trading Tuesday. Hindenburg said it has taken a short position in DraftKings, meaning it aims to profit from shares falling in price.
“This report is written by someone who is short on DraftKings stock with an incentive to drive down the share price,” a DraftKings spokesperson wrote in a text message. “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.”
Hindenburg claims that about half of SBTech’s revenue comes from markets where gambling is unregulated or banned, including China and Vietnam. Hindenburg says many of the troublesome links it believes it sees come from an entity named BTI, which was spun off from SBTech. The report cites anonymous sources behind the claims and includes past webpages and screen grabs to seemingly connect present and former SBTech employees to BTI. The researchers conclude by saying the appearances of crime links means DraftKings should submit to an independent audit of its revenue streams.
The report was posted online prior to trading Tuesday. Hindenburg said it has taken a short position in DraftKings, meaning it aims to profit from shares falling in price. The group’s reports are contested by their target companies and—regardless of accuracy—typically have a lasting effect on share prices. Hindenburg previously has shorted Nikola, a next-gen fuel truck maker that went public by SPAC last year. Shares of that company are down $20 from Hindenburg’s report, to around $17.
Credit Suisse, an investment bank that has an ‘outperform’ rating on DraftKings stock, issued a research note Tuesday after the start of trading, saying the initial plunge in DraftKings shares was overdone. “Our view is that SBTech was purchased by DKNG for its tech platform (which DKNG plans to vertically integrate) rather than existing revenue stream. Said another way, if SBTech revenue were to go away entirely, we think there would be minimal impact on the DKNG stock,” wrote analyst Benjamin Chaiken in the note. The bank also disputes some of Hindenburg’s estimates of SBTech’s importance to DraftKings’ revenue profile.
DraftKings is one of the most successful companies to come public by SPAC. Its shares are up more than four-fold since announcing in December 2019 its intention to go public.
(The story was updated to include a comment from DraftKings and a research note issued by Credit Suisse.)