Without cash flow to fund an expansion project, Football Index dipped into customer deposits to the tune of £15m. [Image: Shutterstock.com]
Did not keep player funds segregated
The dramatic saga of UK soccer betting site Football Index continues, as new information has come to light that shows the company used customer funds to pay for international expansion. Uncovered by The Athletic, leaked documents showed that the site’s owner, BetIndex, sent £15m ($20m) to its holding company, Index Labs, between 2019 and the beginning of 2021.
goal was to take the Football Index betting-as-stock-exchange concept to other countries and other sports
The goal was to take the Football Index betting-as-stock-exchange concept to other countries and other sports in an endeavor called “Project Hadron.” Spinoffs that the company wanted to try included another soccer betting platform in Germany, one for cricket in India, and one in the United States for (American) football.
This would have been all well and good, but using player deposits to fund company operations is one of the cardinal sins of the gambling industry. The UK Gambling Commission (UKGC), which regulates companies like Football Index, requires that customers funds are kept separate from operating funds.
Online poker players ran into a similar situation a decade ago, when the US government seized funds from Full Tilt Poker as part of what is known as “Black Friday.” Full Tilt had been paying hefty bonuses and dividends to its owners using player deposits. As long as the site kept running, Full Tilt could cover its tracks, but once funds were seized and payment processing was frozen, customers found out that hundreds of millions of their own dollars were missing.
Documents seen by The Athletic revealed that Football Index only had £4m ($5.4m) in cash when it went under, but £124m ($169m) in open bets.
In June, a UK High Court ordered Football Index to reimburse customers a total of £3.2m ($4.4m), though the company did have £4.5m ($6.1m) in its player protection account. Customers were able to start withdrawing money in July. While this was certainly some semblance of good news, it is estimated that customers lost £90m ($123m) in total when Football Index collapsed.
Though those who ran Football Index shoulder the lion’s share of the blame for this scandal, the UKGC has been a target of criticism, as well. A report published by Members of Parliament (MPs) in September found that while BetIndex did not properly inform the UKGC of exactly how Football Index worked, the UKGC did eventually know.
In early 2019 the Commission learned the “full nature” of Football Index and did nothing to try to prevent future problems with the site. In essence, it should have seen disaster coming and taken appropriate action. In response, the UKGC has promised to change some of its procedures, including adjusting its oversight of what it calls “innovative” gambling products.
Unsustainable business model
And Football Index was certainly innovative, which, unfortunately, was the source of much of the problem. It was a soccer betting site, but rather than just wagering on games, users would buy shares of professional soccer players, either on a marketplace from other users or from the site itself. Those prices of shares could go up and down and customers could buy and sell them to try to make money, just like a stock market.
But the real key was the dividends Football Index paid shareholders. The site doled out up to 14p per soccer player share based on how that real-life player performed on the pitch and even the notoriety they received in the media. It was a boon to customers, who could enjoy a daily stream of cash if their holdings were strong.
share prices plummeted, since the major driver of their value was killed
But in early March, Football Index announced that it was slashing the maximum dividend to just 3p. As a result, share prices plummeted, since the major driver of their value was killed. Share prices dropped 90% or more, wiping out player accounts.
On top of that, it was discovered that the company knew it was going to cut dividend payouts weeks earlier because it could not sustain the cash outflow. But even after it made the decision, Football Index continued to mint and sell new shares.