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Political gambling market backers ask Fifth Circuit to nullify federal shutdown order

Two Fifth Circuit judges signaled in a hearing Wednesday they will side with proponents of a website that facilitates bets on elections in a showdown with federal regulators.

(CN) — A market set up by a New Zealand university for educational purposes now turns over millions in wagers each year on political bets such as who will win the 2024 U.S. presidential election. The U.S. Commodity Futures Trading Commission has advised it to shutter.

The PredictIt website was born through 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 the blessing of the Commodity Futures Trading Commission’s Division of Market Oversight via a “no-action letter.”

In the letter, CFTC staffers highlighted the university’s assurances the betting market was meant for educational purposes—it claimed it would use the results for teaching materials in statistics and finance courses and as data for research papers — and would not turn a profit.

PredictIt also agreed to cap bets for each user at $850 for any given event — which it calls “markets” and “contracts,”— and not allow more than 5,000 bettors per event.

The site is now selling shares, i.e. taking bets on future political events, for 14 markets, including the Democratic 2024 presidential nominee (Joe Biden was listed at $0.58 early Wednesday afternoon and California Governor Gavin Newsom at $0.15) and the 2024 presidential election winner (Biden was trading at $0.34 and Florida Governor Ron DeSantis at $0.30).

Shares’ value changes over time corresponding to the market’s estimate of the probability of an event taking place and investors are free to sell them, according to PredictIt.

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

While most of the site’s 80,000 users place small-dollar bets for fun, some have quit their jobs and rely on PredictIt as their main income source, investing tens of thousands of dollars in bets on the site that turns over millions in wagers each year.

But the CFTC’s Division of Market Oversight threw PredictIt’s future into doubt in August when it withdrew the university’s no-action letter, determining it “has not operated its market in compliance with the terms of the letter,” and advised the institution all listed contracts and positions on PredictIt should be closed and liquidated by 11:59 p.m. Eastern Standard Time on Feb. 15.

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 commission in September in Austin, Texas federal court.

They claim the agency violated 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, a month in which they say 2,000 PredictIt traders, fleeing the sinking ship, withdrew all their funds and closed their accounts and trading volume dipped to 24% of its long-term averages.

But the New Orleans-based appellate court staved off PredictIt’s demise on Jan. 26, granting the challengers an injunction allowing the market to continue operating passed Feb. 15 pending resolution of their appeal.

Two Fifth Circuit judges, both Donald Trump appointees, signaled in an expedited hearing Wednesday they will side with PredictIt’s backers.

Kyle Druding, assistant general counsel of the CFTC, downplayed the significance of issuing and withdrawing no-action letters, which the commission argued in briefs are acts of prosecutorial discretion unreviewable by courts.

Druding stressed it is up the five-member commission, not the staffer who issued the letters, to decide whether to take enforcement action, which would be a lawsuit seeking civil penalties but could include referral to the Justice Department for potential felony charges for violating the Commodity Exchange Act.


U.S. Circuit Judge Kyle Duncan asked Druding to explain the disconnect between his claims the no-action letter withdraw had no teeth with its statement that all PredictIt’s contracts should be closed out by a specific deadline.

“If this is just a recommendation how am I supposed to understand, more importantly how is PredictIt supposed to understand that kind of … I mean that’s like setting the death penalty, is what it sounds like,” Duncan said.

Druding argued the plaintiffs are mistakenly trying to read an “or-else condition” into the shutdown directive. “There’s a difference between should and must,” he added.

“Are you saying this is just sort of a friendly suggestion,” Duncan quipped.

“I don’t necessarily know if I would phrase it as friendly,” Druding conceded. “It’s certainly a suggestion, however … I think at most what they’re saying if you don’t do this we’ll recommend enforcement action.”

U.S. Circuit Judge James Ho interjected: “Effectively this sounds like a license to bully … in other words you can issue these threatening letters, there’s no judicial review.”

Arguing for the challengers, Michael Edney with the Washington office of Hunton Andrews Kurth, said he believes the CFTC is saying PredictIt should blow off the shutdown instruction and keep operating and if it has issues it can raise them in defense of a CFTC enforcement lawsuit.

He explained PredictIt could not register its market with the CFTC and avoid the no-action letter route because in 2012 the commission decided that registered markets cannot offer political event contracts. PredictIt’s transactions also do not qualify for an exemption from CFTC regulation under the Commodities Exchange Act, Edney continued.

In closing, Edney said PredictIt had built up substantial “reliance interests” on the CFTC’s forbearance-of-enforcement policy, so the commission owed it an explanation for ending the policy.

“It must have a legal significance of some sort,” Edney argued. “My clients would have been perfectly happy to keep their money in their pocket if the CFTC had said no in 2014, no you can’t start this market. Instead, they plowed millions of dollars into setting it up, the traders plowed millions more into the investments. They relied on the CFTC saying it would be allowed to go forward.”

U.S. Circuit Court Judge James Graves, a Barack Obama appointee, rounded out the three-judge panel. They took the matter under advisement and gave no timeline for a ruling.

Though the challengers stress the CFTC has not given an explanation for directing PredictIt to shutter its market, its founder John Aristotle Phillips told the Washington Post that CFTC chairman Rostin Behnam expressed exasperation that other groups are lobbying for permission to open similar political event markets.

According to Phillips, on an Aug. 1 video call with himself and Victoria University representatives Behnam complained he was “tired of getting pressure from others who want to do what you do.”

Kalshi, a New York firm started in 2019 that bills itself as the “first federally regulated exchange where you can trade on the outcome of events,” has petitioned the CFTC for leave to open its own political markets.

In addition, Aristotle International Inc. filed an application with the CFTC in October, seeking permission to run an entity rebranded as PredictIt Exchange that would be regulated in compliance with the Commodity Exchange Act and not merely allowed to open through a no-action letter.

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