Let the Games Begin: Sports Gambling Amidst the Return of Sports

Given the current circumstances of COVID-19, infringing on the innate privacy of athletes has the potential to encourage sports gambling. Sports betters are always looking for a way to gain a competitive advantage. Anti-tipping rules prohibit athletes and other sports personnel from disclosing nonpublic information that might be used for manipulating betting markets. The NBA, WNBA, NFL, LPGA, NCAA, and PGA Tour are among the sports organizations that have established regulations prohibiting athletes from “tipping.” However, core terms like “nonpublic information” and ambiguous standards such as “legitimate business need for the information” are left up to interpretation.[1] The broad and vague language used cause concerns especially amidst the pandemic and might lead to unjust disciplinary action against athletes. More than 15 states have recently legalized sports betting and some of those laws address tipping, but focus on gambling operators and gamblers (the potential tippees) rather than on sports personnel like athletes (the potential tippers).

So what’s the answer? As the legalized sports gambling industry expands, sports organizations need to narrow the applicability of their anti-tipping rules and clarify the ambiguities by drawing on U.S. insider trading law.

While Nevada gaming law on sports books is silent on anything about using an unfair insider advantage, SEC Rule 10(b)5-1 defines illegal insider trading as the buying or selling of security, in a breach of a contractual duty or other relationship of trust and confidence, while in possession of material, nonpublic information about the security. Section 10(b) declares it unlawful “to use or employ, in connection with the purchase or sale of any security… any manipulative or deceptive device or contrivance in contravention of such rules and regulations as the Commission may prescribe as necessary or appropriate in the public interest or for the protection of investors.”[2] Interpreted broadly, Rule 10b-5 prohibits all fraud and deception in connection with the purchase and sale of securities. Insider trading violations may also include “tipping” such information, securities trading by the person “tipped,” and securities trading by those who misappropriate such information. Under the misappropriation theory, a person may be held liable for “tipping” material, nonpublic information to others who trade, and a “tippee” can be held liable for trading on such information.[3]

The United States Supreme Court recognized the legality of the mosaic theory of securities analysis, where fragments of information from company insiders are obtained and then utilized to create a mosaic of information used to come to a conclusion that influences stock trade.[4] This theory could potentially be applied across the landscape of sports betting. To put this approach to the test, think about placing a proposition bet. Proposition bets or “prop bets” are bets that a sports book can take on something other than the outcome of a game. For example, “Will NBA superstar Lebron James sit out any games in the month of August?” What if James’ agent was a close friend of yours and he told you that James has recently lost his sense of smell? Knowing that this is an early symptom of COVID-19, could you then legally place a large bet to take advantage of it?

In this hypothetical, an argument may be made that the bets were permissible because they were based on several nonmaterial, public pieces of information that came together to form a material, nonpublic conclusion. It is important to differentiate between nonpublic conclusions that you may have drawn and obtaining confirmation from the issuer of such conclusions. For example, if the tippee got confirmation from Lebron James himself that his COVID-19 test just came out positive and such information has yet to be released, that confirmation can constitute material, nonpublic information. Thus, the confirmation would constitute illegal tipping if you knowingly placed a bet based on said information.

With the NBA set to officially resume games on July 30, the league has numerous legal concerns to juggle as it aims to keep players healthy and return professional basketball to eager sports fans. Monitoring the health of each player and tracking data is crucial to the NBA’s plan, but if the Bubble is going to be successful, players’ innate privacy must stay protected.

[1] Covo, Yaron. “How Will Returning Sports Leagues Disclose COVID-19 to Prevent Insider Bets?” Slate Magazine, Slate, 27 May 2020. [2] 15 U.S.C. § 78j(b). [3] TANNENBAUM HELPERN SYRACUSE & HIRSCHTRITT LLP. The Law of Insider Trading: A Primer For Investment Managers. 2017. [4] SEC v. Dirks, 463 U.S. 646 (1983). Photo Credit: GoodSportsBooks

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