Fifth Circuit blocks government shutdown of political gambling market

(CN) — Proponents of a market taking bets on who will win the 2024 presidential election are likely to prevail in their lawsuit accusing federal regulators of improperly ordering the market to close, a divided Fifth Circuit panel ruled Friday.

The PredictIt website offers armchair political pundits a way to make some pocket change by placing small wagers on election outcomes and the actions of politicians.

The site is now selling shares — taking bets on future political events — for 10 “markets," the most popular of which at 47.6 million shares traded is whether former President Donald Trump or Florida Governor Ron DeSantis will be the Republican Party’s 2024 presidential nominee.

It is also soliciting bets on whether President Joe Biden will resign in his first term and if a woman will be elected president in 2024.

While most of PredictIt’s more than 50,000 users place small-dollar bets for fun, some rely on it as their main income source, investing tens of thousands of dollars in bets on the site that turns over millions in wagers each year.

Shares’ value changes over time based on the market’s estimate of an event’s probability of happening and investors can sell them, according to PredictIt.

If they maintain their bets until the event occurs and their prediction is correct, PredictIt redeems each of their shares for $1.

PredictIt was formed via a partnership between its creator, American businessman John Aristotle Phillips, and Victoria University in Wellington, New Zealand.

It launched in 2014 after the university received approval of the Commodity Futures Trading Commission’s Division of Market Oversight via a “no-action letter.”

Though PredictIt has the hallmarks of an online sports book, the university got the Division of Market Oversight's approval to open the platform by claiming it was meant to generate data for educational purposes, such as teaching materials for statistics classes and finance courses and fodder for academic papers.

The university said it would not make a profit from the site and agreed to cap bets for each user at $850 and not allow more than 5,000 bettors per event.

If the university stayed within those guardrails, the oversight division agreed not to recommend the commission bring any enforcement lawsuit against it.

Nearly eight years later, in August 2022, the division rescinded the no-action letter and gave PredictIt until Feb. 15 to close out or liquidate all its markets. With no further explanation, the division said the university had not operated the platform in compliance with the terms of the no-action letter.

A group of PredictIt users, American professors who use it for data and two U.S. companies who manage it, including founder John Aristotle Philips’ firm Aristotle International Inc., sued the Commodity Futures Trading Commission last September in federal court in Texas.

They claimed the agency infringed upon the Administrative Procedure Act by providing no details about Victoria University's alleged violations or why it believed closing the market was the appropriate remedy.

With the drop-dead deadline fast approaching and U.S. District Judge Lee Yeakel, a George W. Bush appointee, declining to rule on their motion for a preliminary injunction, the plaintiffs appealed to the Fifth Circuit in December.

They argued withdrawal of the no-action letter had caused PredictIt irreparable harm, evidenced by the fact that in the final weeks of 2022 around 2,000 PredictIt traders withdrew all their funds, closed their accounts and trading volume dipped to 24% of its long-term averages.

But a panel of the New Orleans-based appellate court kept PredictIt going by granting the challengers an injunction on Jan. 26, allowing the market to continue operating past Feb. 15 pending resolution of their appeal.

Fast-tracking a hearing, the panel heard oral arguments on Feb. 8.

Less than a month later, the CFTC’s Division of Market Oversight tried to moot the appeal.

It wrote another letter to Victoria University officials on March 2 withdrawing its August 2022 rescission of the no-action letter. This time, the division gave the university an explanation for why it had revoked its consent for the platform.

The agency said the university had agreed PredictIt would be operated by itself or its professors, but Aristotle Inc. was running it; that a subsidiary of the university was receiving compensation from Aristotle, despite the university promising not to profit from the site; and that the site had reneged on its agreement to only take bets on two submarkets: one for political events and the other on loan interest rates set by the Federal Reserve.

The CFTC said PredictIt had listed event contracts for various off-limits topics, including “How many Ebola cases in the U.S. in 2015?” “Will Caitlyn Jenner address the 2016 Republican National Convention?” and “How many tweets will @realDonald Trump post from noon May 27-June 3?”

In its March letter, the agency also gave the university a chance to respond to the allegations.

On Friday, U.S. Circuit Judge Kyle Duncan, writing for a 2-1 majority of the Fifth Circuit panel that heard arguments in February, found the case is not moot, that the plaintiffs have standing even though the university chose not to join them in the challenge, and the plaintiffs are likely to succeed on their claims the CFTC’s rescission of the no-action letter was arbitrary and capricious.

Duncan’s fellow Trump appointee U.S. Circuit Judge James Ho joined him in the majority.

A main argument of the government was that revoking the no-action letter was not a “final agency action,” but an act of prosecutorial discretion that is unreviewable by courts.

Duncan disagreed. He found courts have jurisdiction because the no-action letter qualifies as a final agency action under the Administrative Procedure Act.

“Here, the whole point of Victoria University’s requesting the no-action letter was to obtain permission to operate an unregistered event futures market, and to get that green light before plunging significant resources into it,” he wrote in the 20-page opinion.

He remanded the case to the lower court with instructions to enter a preliminary injunction against the CFTC shutting down PredictIt, pending resolution of the case on the merits.

In a short concurring opinion, Ho said he also believes the plaintiffs have shown they are likely to prevail on the merits. But he lamented that Duncan had broken new ground for appellate courts.

“To my knowledge, no circuit has held that a no-action letter or its withdrawal is sufficient to constitute ‘final agency action’ under the Administrative Procedure Act. And some have held the opposite,” Ho wrote.

U.S. Circuit Judge James Graves, an Obama appointee, also focused on that point in his dissent.

“I have not come across any instance where a court has ruled that a ‘no-action letter’ constitutes a final action taken by the agency. Tellingly, the majority cites no such case. Contrarily, no-action letters have been regularly found to be non-binding and devoid of legal authority, precluding their review,” Graves wrote.

"Because I am not persuaded that we should be the first court to draw the conclusion that a ‘no-action letter’ constitutes ‘final agency action,’ I respectfully dissent," he added.

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