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DraftKings Tumbles as Hindenburg Research Alleges Black Market Connections

In a research note that called DraftKings "a $21 billion SPAC betting it can hide its black market operations", Hindenburg also unveiled a short position in the online gaming group.

Draft Kings  (DKNG) - Get DraftKings Inc Class A Report shares slumped lower Tuesday after analysts at Hindenburg Research, a noted short seller, said the betting group's merger with Bulgaria-based SBTech has opened it up to exposure linked to black-market gaming and money laundering.

Hindenburg said DraftKings, which went public last year via a three-way merger with special acquisition company sponsor Diamond Acquisition and SBTech, has 'systemically skirted the law and taken elaborate steps to obfuscate its black market operations" as insiders "aggressively cash out amidst the market froth".

Diamond Acquisition, Hindenburg said, received 9.3 million shares worth around $114 million in exchange for a small investment of $25,000, "and insiders have dumped over $1.4 billion in stock" since last year's listing, with SBTech's founder Shalom Meckenzie selling around $568 million worth of DraftKings's shares. 

"SBTech offered DraftKings a turnkey sportsbook, complete with user management, customer support, and payment gateways," Hindenburg wrote. "It also looks to have exposed DraftKings shareholders to extensive black market dealings, money laundering and organized crime."

We estimate that roughly half of SBTech’s 2020 revenue came from black or unregulated markets, based on our review of SEC filings and discussions with former employees," Hindenburg added. "Overall, black market operators were charged a higher fee, the former employees told us, due in part to the elevated risks involved in operating in such jurisdictions."

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Draft Kings shares closed 4.5% lower on the Tuesday session at $48.51 each, a move that leaves the stock with a year-to-date gain of around 4.2%.

“This report is written by someone who is short on DraftKings stock with an incentive to drive down the share price," DraftKings said in a statement emailed to TheStreet. "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," the statement added.

Credit Suisse analyst Benjamin Chaiken, however, thinks the stock's move might be overdone, given that he sees minimal value in DraftKing's being applied to SBTech.

"Our view is that SBTech was purchased by DraftKings for its tech platform rather than its existing revenue stream," he said. "Said another way, if SBTech revenues were to go away entirely, we think there would be minimal impact on the DraftKings stock."  

"While not ideal, in a worst case scenario, an SBTech issue would not necessarily interfere with betting operations today," he added. "We would use today’s weakness as an opportunity ahead of potential Canada legalization as well as New York, both of which are catalysts for DraftKings."