DraftKings Shares Fall After Hindenburg Unveils Short Position

Hindenburg published a report early Tuesday that said DraftKings’ gambling-technology subsidiary SBTech makes about half of its revenue in countries where gambling is banned. According to the report, SBTech created a new entity for what Hindenburg says are its black-market operations ahead of last year’s merger with DraftKings and a blank-check company that took the combination public. DraftKings shares slid in early trading, then recovered. They were recently down about 5%.

“SBTech does not operate in any illegal markets,” a DraftKings spokesman said in a statement. “We conducted a thorough review of their business practices and we were comfortable with the findings.”

New York-based Hindenburg said it based its report on conversations with former employees, regulatory filings and assessments of illegal international gaming websites. It claimed SBTech poses a risk to DraftKings because SBTech accounted for roughly 25% of the firm’s overall sales at the time of the 2020 SPAC merger and brought its technology to the combined company.

The Wall Street Journal hasn’t been able to verify independently the accusations in Hindenburg’s report. DraftKings CEO Jason Robins has said publicly that SBTech gives the company a technological advantage and provides better user experiences.

Boston-based DraftKings, which is considered a leader in the sports betting industry, has partnerships with major sports leagues including the NFL, NBA and PGA Tour. As the market expands, operators like DraftKings and FanDuel are in heated competition for customers, spending big on advertising and technology.

Sports betting has boomed since the Supreme Court in 2018 cleared the way for states beyond Nevada to legalize wagers on sporting events. Now, 30 states and the District of Columbia have legalized sports gambling. Boston-based DraftKings had a market value of about $20 billion entering Tuesday’s trading session. It is unprofitable and had sales of about $615 million in 2020.

Tuesday’s share-price drop is the latest triggered by Hindenburg and founder Nathan Anderson. The firm publishes financial research and often bets against shares of companies it deems overvalued. DraftKings shares are down about 30% in the past three months.

Hindenburg’s Mr. Anderson and a reporter for The Wall Street Journal are among the more than 20 defendants in a lawsuit brought by private-equity firm Catalyst Capital Group and Callidus Capital Corp. alleging a short selling conspiracy related to a 2017 article about Catalyst. A Journal representative has said the news organization is confident in the fairness and accuracy of its reporting. Mr. Anderson has said Hindenburg stands by its research.

DraftKings’ share decline comes a day after electric-truck startup Lordstown Motors Corp. said its chief executive and chief financial officer resigned after a board committee found disclosures about preorders for its truck to be inaccurate, partially confirming claims from a March Hindenburg report. Lordstown’s CEO previously declined to comment to The Journal, and efforts to reach the CFO were unsuccessful.

Hindenburg has also published reports about two other notable companies that have gone public by merging with special-purpose acquisition companies—electric-vehicle firm Nikola Corp. and Clover Health Investments Corp. Regulators are investigating both companies as well as Lordstown. Like Lordstown, Nikola also partially confirmed Hindenburg’s allegations after initially saying they were untrue. Hindenburg’s report was critical of Clover’s stock but the research firm didn’t take a short position in Clover. Clover has called the claims false.

Also called a blank-check company, a SPAC is a shell company that lists on a stock exchange with the sole intent of merging with a private firm to take it public. The private company then gets the SPAC’s spot in the stock market. SPAC mergers let companies make projections about their business, which wouldn’t be allowed in a traditional initial public offering. They also often offer startups a quicker way to raise large sums from investors who are excited about future technologies.

SPACs have raised more than $105 billion this year, surging past last year’s record north of $80 billion, according to data provider SPAC Research.

Hindenburg’s latest report could also have implications for SPACs, which have become a popular way for startups to raise money and access public markets in the 2020 and 2021 in part due to the lofty valuations of companies like DraftKings. A SPAC backed by former film and media executives Harry Sloan and Jeff Sagansky took the company public. The SPAC team declined to comment. The executives have also taken mobile gaming firm Skillz Inc. public.

DraftKings and other popular companies linked to SPACs have become trendy with ordinary investors in recent months. Some professionals like Hindenburg, meanwhile, have been betting that shares of many companies that merged with blank-check firms will fall, putting the sector at the center of the recent tension between day traders and pros on Wall Street.

Some analysts say SPACs enrich their creators at the expense of other investors by giving the blank-check executives deeply discounted shares, a point that Hindenburg mentioned in its report.

—Katherine Sayre contributed to this article.

Write to Amrith Ramkumar at [email protected]