DraftKings Hit by Lawsuit Alleging ‘Unjust Enrichment’ in SBTech Deal
Posted on: October 13, 2021, 10:47h.
Last updated on: October 13, 2021, 12:02h.
A lawsuit filed Friday in a New York federal court accuses a number of DraftKings directors of breach of fiduciary duty and unjust enrichment.
The 103-page complaint brought by shareholder Jiahan Yu alleges the defendants brought on the company to engage in “illicit operations,” thereby exposing it to “heightened threat of criminal or regulatory enforcement actions.”
This is in relation to DraftKing’s controversial three-way reverse merger with Bulgaria-primarily based computer software provider SBTech and specific purpose acquisition firm (SPAC) Diamond Eagle Acquisition Corp (DEAC).
Among those named are the Draftkings founders, CEO Jason Robins, CRO Matt Kalish, and COO Paul Liberman. Yet another defendant is Shalom McKenzie, the founder and majority shareholder of  SBTech. He is now the largest shareholder in the combined business, with around 11 %.
Black Market place Ops
Yu alleges SBTech has “a long and ongoing record of operating in black markets,” specifically in Asia, which it attempted to conceal prior to the merger by creating a “front” firm, BTi CoreTech.
BTi continued the black-market place operations, whilst “ostensibly shielding SBTech and DraftKings from scrutiny,” the lawsuit alleges.
The complaint echoes allegations contained in a report published in June by short-promoting activist Hindenburg Analysis. The report estimated that roughly 50 % of SBTech’s revenues come from jurisdictions where gambling is illegal.
It also repeats Hindenburg’s claim that one particular of the tech firm’s consumers was 12Bet, whose ownership has been linked to high-stakes poker player Paul Phua. The FBI claims Phua is a “high-ranking member of the 14K triads.”
As a quick-seller, Hindenburg had a monetary incentive to drive down DraftKings’ shares.
Yu further asserts that the defendants, who have been then in manage of DraftKings, “willfully or recklessly made and/or brought on the Business to make false and misleading statements” regarding SBtech’s operations, so they could benefit financially from the merger.
“The Person Defendant’s misrepresentations had the effect of misleading the investing public and artificially inflating the Company’s stock during the Relevant Period, for the duration of which time at least seven Individual Defendants benefited from lucrative insider sales at artificially inflated costs for proceeds of around $825.3 million,” the lawsuit states.
These seven of the Person Defendants breached their fiduciary duties by promoting shares at costs that have been artificially inflated due to the Individual Defendants’ conduct in engaging in the Illicit Operations …” it adds.
DraftKings is already the subject of two pending class-action lawsuits which make related claims. It was also subpoenaed by the US Securities Exchange Commission (SEC) in the wake of the Hindenburg allegations. The firm has said it is cooperating with that investigation.
Yu’s lawsuit is a shareholder derivative action, which makes it possible for a minority shareholder to sue majority shareholders on behalf of the company. It seeks economic restitution for DraftKings from person defendants and costs for the plaintiff.