By Liana B. Baker and Suzanne Barlyn
NEW YORK (Reuters) - Daily fantasy sports site FanDuel said on Friday it stopped taking new deposits in New York after the state's attorney general declared the games to be illegal gambling.
New York Attorney General Eric Schneiderman sent cease and desist letters this week to daily fantasy sports market leaders FanDuel and DraftKings, demanding that they stop taking money from players in the state.
Both companies filed lawsuits in New York state court on Friday, contesting the order and asking the court to rule the games are legal.
While FanDuel stopped taking new money from New Yorkers, it said players who had deposited money previously would be able play in this weekend's contests. It said users in New York would be able to continue to withdraw from their accounts.
On Tuesday, the state attorney general's office declared the games against state law because customers "are clearly placing bets on events outside of their control or influence, specifically on the real-game performance of professional athletes."
DraftKings said in its lawsuit that New York Attorney General Eric Schneiderman was "using strong-arm tactics and defying the rule of law," accusing him of acting as judge, jury and executioner of the companies.
New York has more daily fantasy sports players than any other U.S. state, according to Eilers Research, so being forced to shut down there could cripple the fast-growing, multibillion-dollar industry.
DraftKings accused Schneiderman of abusing his authority by threatening to take action against the company's payment processors, Vantiv Inc and PayPal Holdings Inc, if they did not stop working with DraftKings.
Vantiv has stopped processing payments for DraftKings, the fantasy sports company said in its lawsuit. PayPal is still processing payments, pending developments in New York, a spokeswoman said.
The attorney general's declaration that daily fantasy sports is gambling, if correct, would make it "nearly impossible" for New York's legislature to pass a law allowing the games, said Bennett Liebman, former New York state deputy secretary for gaming and racing.
New York's Constitution prohibits gambling though the state has carved out a handful of exceptions, including horse racing and the state lottery. But each of those changes required amending the state's Constitution, a years-long process that requires approval of legislation by two successive legislatures, followed by a public vote, he said.
PLAYERS, EMPLOYEES PROTEST
About a hundred people, including a significant number of daily fantasy sports site workers, protested Schneiderman's decision on Friday outside his office.
Jason Green, 35, visiting from Nashville for a daily fantasy sports conference this weekend, came to the protest after reading the cease and desist letters.
"Regulation is one thing, but this isn't regulation - just one guy making a decision," he said. "There's a lot of misinformation out there and hopefully we've shown that people should be allowed to keep playing."
Green works at a video game company and enters up to 20 hockey lineups per night, spending a few hundred dollars a week on the games.
Modern fantasy sports started in 1980 and have mushroomed online. Participants typically create teams that span an entire season in professional sports, including American football, baseball, basketball and hockey.
Daily fantasy sports, a turbocharged version of the season-long game, has developed over the past decade. Players draft teams in games played in just one evening or over a weekend.
The companies may have painted targets on their backs through aggressive advertising at the start of the National Football League season that promised large winnings. FanDuel has said it planned to pay out $2 billion in cash prizes this year.
"They got very big, very fast," Schneiderman said on Thursday at an event, saying New York will not be the only state to make daily fantasy sports illegal. "New York state regulators and regulators in a lot of other states weren't paying attention."
The companies have been at the center of controversy since early October when a DraftKings employee won $350,000 from a $25 entry in an American football contest on the rival FanDuel site.
The two companies banned employees from playing, but local and federal authorities began to investigate whether the sites offered games of chance, essentially gambling.
DraftKings and FanDuel have valuations of more than $1 billion. The companies have raised hundreds of millions of dollars from investors including Fox Sports, Major League Baseball, the National Hockey League, KKR & Co LP, Raine Group, Google Capital and the venture arms of Time Warner Inc and Comcast Corp.
DraftKings also partnered with Major League Baseball to advertise in ballparks while FanDuel signed partnerships with several NFL teams.
Players are not the only ones fretting about the possible loss of daily fantasy games. A cottage industry of blogs, magazines and apps has sprung up to provide advice and information to players, and revenue lost from daily fantasy sports sites could hurt them too.
RotoGrinders.com is a popular blog offering tips by "grinders," or professional daily fantasy sports players who spend thousands per day on games. RotoGrinders also has a daily satellite radio show on SiriusXM.
Fantasy advice is often the lead story on ESPN.com, and Matthew Berry, the company's senior fantasy analyst, is a paid spokesman for DraftKings. NBC Universal also saw success with a news website for fantasy sports, Rotoworld.
(Additional reporting by Diane Bartz in Washington, Writing by Michael Erman, editing by G Crosse and David Gregorio)