A DraftKings (DKNG) subsidiary has ties to organized crime, alleged Hindenburg Research, the short seller that took on EV startups Nikola (NKLA) and Lordstown (RIDE). DKNG stock gapped down.
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The online gambling company has yet to respond to a request for comment.
Meanwhile, DKNG stock mentions on retail trading Reddit forum Wallstreetbets took off, after the Hindenburg report.
The social media platform has launched several meme stocks in the last several months, pumping stocks that are shorted, including GameStop (GME) and AMC Entertainment (AMC).
DKNG stock went public on April 23, 2020 in a three-way merger with Diamond Eagle Acquisitions and Bulgaria-based gaming technology company SBTech. The stock has risen nearly 300% from its IPO price of 19 to an all-time high of almost 75 on March 22.
Hindenburg Research states in a June 15 report that SBTech accounted for about 25% of total revenue initially. It „was the only positive contributor to operating income, providing both financial stability and technology to the deal,“ the research firm added.
However, the firm also said that „brings exposure to extensive dealings in black-market gaming, money laundering and organized crime“ that investors may not be aware of.
Hindenburg says it’s basing the claim on conversations with multiple former employees, a review of SEC and international filings. Also on inspection of back-end infrastructure at illicit international gaming websites.
„We show that SBTech has a long and ongoing record of operating in black markets,“ the report said.
In a statement provided to Yahoo Finance, DraftKings said: „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.“
Meanwhile, Seeking Alpha reported that Credit Suisse analysts defended DraftKings on Tuesday, saying SBTech brings minimal value to DKNG stock. Credit Suisse also said the company is currently operating its betting platform on Kambi, an entirely separate provider of technology.
Blow To DraftKings Image
Additionally, Hindenburg estimates roughly 50% of SBTech’s revenue continues to come from markets where gambling is illegal.
One former employee told Hindenburg: DraftKings‘ subsidiary SBTech has „sold to plenty of mobs.“
If true, the revelations are in sharp contrast to the clean image of DraftKings‘ brand-conscious partners. Among them: the NFL, NBA, NASCAR, UFC and PGA.
Hindenburg also said that a former employee told them that before the SPAC merger, SBTech tried to distance itself from its black-market dealings. Illicit customer relationships shifted into a new entity called BTi/CoreTech.
„The CEO selected to run BTi/CoreTech was formerly an executive of a ‚binary options‘ gambling firm raided by the FBI and subsequently charged by the SEC for deceiving U.S. investors out of over $100 million,“ Hindenburg said.
Former SBTech employees called BTi/CoreTech a „front,“ according to the Hindenburg report. They also said the split preserved SBTech’s (and now DraftKings‘) illicit business while shielding the public company from scrutiny.
„For all practical purposes, it appears that BTi/CoreTech functions as DraftKings‘ undisclosed illegal gaming division,“ the report said.
DKNG Stock
Shares gapped down 4% to 48.55 on the stock market today. DKNG stock fell well below its 50-day moving average, which itself is sloping downward, according to MarketSmith chart analysis. Shares fell as much as 12% intraday, before regaining some of those losses.
Its relative strength line is also trending downward. DraftKings‘ RS Rating is just 12 out of a possible 99. Its EPS Rating is 11, as it has yet to post a profit.
DKNG stock is 26% below the all-time high of 74.28 it notched on March 22.
Rival Penn National Gaming (PENN), which operates the Barstool sports app, lost 2%. MGM Resorts (MGM), with its BetMGM sports gambling app, was flat.
Among top meme stocks, AMC rose 5.5% while GameStop lost 7%.
Follow Adelia Cellini Linecker @IBD_Adelia.
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