The ruling says that the loan violates the LCS Team Participation Agreement because Hilgers is a minority stakeholder in G2 Esports, a direct competitor to Fnatic.
Based on the ruling, the LCS league:
“Formally warns Hilgers and Fnatic for entering an impermissible indirect financial relationship. This will be accounted for as an aggravating factor in any future transgression of this type. Mandates reversal of the loan between Hilgers and Fnatic, or the relinquishment of Hilgers’ ownership stake in G2 Esports.”
Hilgers lent cash to help fund expansion of Fnatic Gear
The context for the transgression was a loan made by Hilgers after an agreement made with Fnatic’s founder, Sam Mathews. The loan was for the purpose of funding the expansion of Fnatic’s Gear business.
The two men have known each other for over a decade and according to Hilgers, he has always supported Mathews “as a mentor and brainstorming partner in all his entrepreneurial endeavours, well beyond his Fnatic activities.”
The loan was made to Sannpa Ltd rather than directly to Mathews, and the terms of the agreement ensured that should the loan be unpaid, then Hilgers would be a senior creditor to Sannpa.
If Sannpa went bankrupt, then the loan could be reclaimed by assuming an ownership interest in Fnatic—and this is where the potential conflict of interest arose.
Even a remote indirect conflict of interest is not acceptable
The Riot Games statement made it clear that there was no immediate conflict of interest, nor was there likely to be one in the future.
“This does not mean that any kind of direct ownership or control was established by Hilgers over Fnatic in the past or present, and similarly, it does not create a future state wherein he would be guaranteed control of Fnatic.
What it does establish is a situation where if Sannpa were to become insolvent and consequently unable to pay back the loan, Hilgers would have priority over potential other creditors in claiming Fnatic’s equity (and ownership) as a way to recoup the lost money from the loan.”
Hilgers’ statement adds that:
“Even in the worst case scenario, I would have the option to call for an independent broker to liquidate the shares in order to get my money back without having to own the shares myself at any point.”
Riot accepted that the chance of a conflict of interest was remote, but determined that even such “a form of indirect financial interest” was a violation of the LCS Team Participation Agreement.
Hilgers has agreed to “resolve the loan in mutual agreement with Riot and Fnatic.”
High standard exceeds that of many mainstream sports
One of the major themes of Hilgers’ extensive response to the ruling is that the financial integrity standard Riot Games is setting is higher than that set in other established sports.
“Riot is taking a very strong and restrictive position on ownership and financial ties, stronger than what is typically seen in traditional Sports and in Esports elsewhere,” Hilgers said.
He suggests that such a restrictive standard could “restrict Esports growth.” Hilgers recommends that there should now be some debate within the industry over what these standards should be, “to evolve and find the right balance on Sports integrity rulings.”
He links to an article discussing the €2 million loan made by the president of soccer team Bayern Munich to its competitor Borussia Dortmund in 2004. That loan helped to finance the acquisition of top player Sebastian Kehl, even though Bayern and Dortmund were competing to buy him.[show-table name=betway]
Esports needs the perception of integrity
Undoubtedly, Riot Games has now set a high bar for financial integrity, and it may indeed make it more difficult for investors to spread their cash across multiple teams or leagues, but on the other hand, recent scandals have exposed sports integrity as a risk to the entire industry’s potential.
ESL’s investment in helping to found the Esports Integrity Coalition (ESIC) earlier this year was a recognition that esports has integrity issues which must be resolved if it is to get the benefits of its explosive growth.
Esports betting is a nascent industry that could be shattered as quickly as the skin betting industry has been unless consumers and regulatory authorities can be confident that integrity can be managed.
Riot Games’ insistence on a higher standard of financial integrity for team owners can be seen as a constructive response that will enhance the industry’s reputation and reduce the risks that a scandal will develop in the near future.