DraftKings Faces a Class Action Lawsuit Over Plummeting NFT Values
DraftKings (NASDAQ: DKNG) recently came under fire for a federal class action lawsuit regarding the declining value of non-fungible tokens (NFTs) sold on their platform.
NFTs are pieces of digital data stored on a blockchain and can be used with various digitized items like audio and video files or imagery. The lawsuit filed earlier this month in the US District Court in Boston was brought by Illinois resident Justin Dufoe. He claims he lost around $14,000 worth of NFTs from the DraftKings Marketplace. The defendant, based in Boston, was alleged in the lawsuit for exposing clients to vulnerabilities due to their managerial decisions.
The complaint asserts that marketplace users relied entirely on the management of DraftKings to make a profit. The profit would come when Plaintiffs and the Class sold their NFTs on the secondary market platform controlled and managed by DraftKings. From this, DraftKings could earn transaction fees and commissions from the purchases and sales on their platform.
The lawsuit also argues that during the class period, DraftKings did not register their NFTs as securities with the Securities and Exchange Commission (SEC). If accurate, DraftKings could be in trouble since the SEC is considering classifying NFTs as securities, which would attract more regulatory scrutiny and potentially legal trouble for the sportsbook operator.
Background of DraftKings NFT
DraftKings entered the NFT industry in mid-2021 when excitement for non-fungible tokens was still strong.
The gaming company teamed up with Autograph, an NFT collecting platform co-founded by legendary quarterback and seven-time Super Bowl champion Tom Brady. In 2021, an NFT by the artist known as Beeple sold for more than $69.3 million at a Christie’s auction. That year, DraftKings board member Shalom Meckenzie bought the "CryptoPunk #7523" NFT for $11.8 million at a Sotheby’s auction.
However, enthusiasm rapidly faded as NFT prices plummeted in 2022. Dufoe spent $72,261 on NFTs through the DraftKings Marketplace, and those NFTs are now estimated to be worth around $58,000.
This decline in the NFT market is further highlighted by Fanatics selling its 60% stake in Candy Digital, a digital collectibles platform, to Galaxy Digital for an undisclosed amount in January 2023.
Possible Consequences of DraftKings NFT Lawsuit
The outcome of the class action lawsuit is hard to predict. On one hand, since the DraftKings Marketplace is the only place for clients to trade the company's NFTs, a jury could deem that DraftKings had a responsibility to run the NFT platform competently without leaving clients susceptible to financial losses.
As investors in traditional securities like common stock, preferred stock, bonds, and warrants that carry different features and profit opportunities, clients investing in DraftKings’ NFTs depended solely on the company's management decisions just like in these other cases.
On the other hand, class action lawsuits resulting from dropped security values often fail, with courts usually deciding that investing involves risks and the issuers of investment products are not responsible for losses tied to market conditions leading to value deterioration.
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