Musk vs Altman & Prediction Markets

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1:25The Cincinnati insurance companies. Let them make your bad day better. Find an agent at CINFIN.com. This is Bloomberg Law with June Grosso from Bloomberg Radio. Elon Musk and Sam Altman are facing off in a courtroom in California as their decades-long fight over open AI plays out before a jury. The high-profile showdown between the billionaires is the culmination of years of animosity and public feuding over the startup that the pair founded together more than a decade ago before their relationship soured and they became rivals. Musk alleges that Altman and others at OpenAI enriched themselves by abandoning its altruistic principles and converting it to a for-profit company with billions of dollars in support from Microsoft.

2:24Altman and OpenAI accuse Musk of harassment and say the real goal of the lawsuit is to undercut competition with his own startup that he co-founded in 2023, XAI. Joining me is Bloomberg legal reporter Madeline Mecklenburg, who's covering the trial. They started OpenAI a decade ago when their relationship was quite different. I mean, what happened? That is the question, I think. I think that's what we're going to find out over the course of the next three weeks at this trial. Certainly, they were partners at the beginning of this enterprise, and obviously, their relationship has soured since then.

3:06And they've become very public, bitter rivals fighting with each other about AI and specifically about OpenAI, this company that they founded and what should happen there. I think we heard from Elon Musk when he initially left OpenAI that he disagreed about the direction that they wanted to take things in. But I don't think that we've gotten much more specifics from them about what exactly happened there to prompt this falling out. And so I think that's something that eager watchers in this space are going to be helping to hear more about over the course of this trial. So Elon Musk brought the lawsuit and he's looking for$134 million, an eye-popping amount.

3:48Is the basic claim that OpenAI was converted into a for-profit company? So if you'll recall, when this case was first filed, it was massive. There were a lot of allegations, and it's been seriously trimmed down since then by the judge and also by Musk himself withdrawing some of the allegations. But the crux of the argument here is that OpenAI, Microsoft, and its founders violated the founding mission of OpenAI to pursue this AI for all mentality by converting from a nonprofit to a for-profit entity, which was a process they finished in October after quite an undertaking that involved a lot of different parties.

4:29So that's the central allegation here. But technically, the two claims that are going to be up before this jury are breach of charitable trust and unjust enrichment. And how do Altman and OpenAI respond to those allegations? So OpenAI and Sam Altman, they first of all deny these allegations. And they say that Elon Musk is harassing them through litigation. This is not the only lawsuit he has involving one of these entities. and they say that it's a clear attempt by him to undercut a competitor in the AI space because, as you and your listeners know, Elon Musk started his own AI company in 2023, XAI.

5:11And so they say that this is clearly a competitive beef between the two. The charges are unfounded and there are plenty to fight them to the nail. And Microsoft is also a defendant here? Right. Microsoft is a defendant here, And that's because of their significant investments that they made in OpenAI. And that funding was part of what made it possible for OpenAI to pursue this for-profit conversion. Because that's what we heard from Sam Altman when all this was happening, that in order for them to sustain and continue to meet this mission of providing this tool and service in the way that it's accessible now is because they need private funding.

5:49They need to convert to this kind of entity. So, yes, Microsoft is a party as well. We're expecting to hear, in addition to hearing from witnesses from OpenAI and from Musk's camp, we're also going to hear from executives from Microsoft. Musk and Altman will both be testifying. Musk is very practiced at testifying, and he's been called Teflon Elon for his success at trial. What about Altman? I think this is going to be the first time that Altman will be testifying in any kind of trial like this. We've heard him speak in committee hearings on Capitol Hill, which, you know, can have some of the same characteristics of sitting in a jury box.

6:30But obviously, the stakes here are really different because he's defending his business practices as a CEO and decisions that he made in leading this company. So definitely, I think a lot of attention, rightfully so, is being paid to the just huge characters and personalities that these guys are. I mean, when they're coming into the courtroom, they're bringing with them billions of dollars and huge public personas and reputations. Besides testimony, what other evidence do you expect? My understanding is that the evidence that we're going to be able to see at trial is going to include a lot of internal documents about the mission of OpenAI.

7:08We're going to see emails and messages from executives of these companies talking about what they want the mission to be. We're going to see text messages between Elon Musk and some of his close allies talking about frustrations about the direction that things are heading in. I think we're going to see a lot of internal we've seen quite a few come out already through the course of discovery. But I think we're expecting quite a bit more hard to say at this point what that will entail. So we've seen Musk call Altman, quote, scam Altman, accusing him of betrayal of Shakespearean proportions and Altman claiming Musk is insecure and not a happy person.

7:49Are we likely to see some of these personal attacks at trial? I think that's kind of what people are expecting, just based on what we've seen from these two guys in the public sphere. You know, they've been even leading up to this trial. They've been posting on social media about it, about each other. They're not strangers to talking about their very strong feelings about the other in a public way. But I think one thing that's going to be different here is that we have a judge who has said previously that she doesn't want this case to be about billionaire versus billionaire. She really wants it to be about the issues.

8:22And so I think we're going to see her trying to limit some of that. I know that she's restricted what some of the questions that can be asked are. Specifically, OpenAI was hoping to ask Musk about his ketamine use. She said that's going to be a no-go, but they are going to be allowed to ask him about his attendance at Burning Man, which was apparently during some of the years of some negotiations with OpenAI. So I think we're going to get a little bit, a little taste of that. It's hard to say exactly right now how into the weeds this is going to get on the personal level. So I know, let's talk about the stakes of this trial for OpenAI.

8:59It goes beyond the$134 billion in damages that Musk is asking for. The stakes are huge for OpenAI. The judges divided this case into two separate sections. One is going to be the liability section where they're going to decide whether or not the claims are legitimate. But the judge is going to have a whole separate set of arguments about what the remedies should be, should she and the jury find in Musk's favor. And as you said, he's seeking as much as$134 billion that he has said that he would like to give to charity. He's not intending to keep that money for himself. He wants to give it back to the OpenAI's charitable arm at the conclusion of this, should he be awarded that.

9:43But you're right. There are other stakes here besides the dollar amount, and that includes a request from Musk that Altman and the president of OpenAI, Greg Brockman, be removed from their leadership positions. And he's also seeking to restore the startup status as a full nonprofit research organization. So unwinding this for-profit conversion that we saw them spend the past year trying to achieve. And so there's definite concern that that could destabilize the company, especially during kind of this critical moment when there's this kind of public offering maybe in the future. So the stakes are huge.

10:17It's hard to say right now whether any of those remedies, of course, are actually going to be awarded. They're huge asks that can't be overstated. But yeah, if they were to come to pass, I think OpenAI would definitely be facing a big question mark about what the future holds. The jury verdict is only going to be advisory. Do you know why the judge chose an advisory opinion? It's quite unusual to have an advisory opinion for the liabilities phase of a trial. Sometimes you'll see that where a jury can offer suggestions to the judge when it comes to damages, how much money they think should be awarded.

10:52And the judge will come in and say, actually, no, we're going to cut this down or it should be higher. I'm not exactly sure why the judge decided to do that in this case. But what we do know is that once the jury hands in its verdict, once they've made these arguments about remedies, the judge is going to take all of that back. She's going to be sitting there through all the arguments and she's going to be weighing her own view of the arguments and the legal arguments being presented, but also taking into consideration this suggestion from the jury about what should be done and how to resolve this very complicated case that involves so many huge public figures and huge companies.

11:29and this hot button issue of artificial intelligence. There'll be nine people on the jury. What are some of the concerns about jury selection when you have two such well-known billionaires opposing each other? That's a great question. I mean, when you're talking about these huge companies and these huge names, a lot of people are going to come in with preconceived notions about them. They're going to have strong opinions about them. If they don't have strong opinions about them, they're going to know who they are. And I think it's always a complicating factor when one of your parties is incredibly wealthy and known for being incredibly wealthy.

12:05And in this case, there is more than one person in that room that's got quite a lot of money to their name. And so I think that's definitely a factor for jurors. There's also going to be like a technological element of this and their familiarity with artificial intelligence and whether that's, you know, do they use ChatGPT? Do they use XAI? Do they use Brock? Any of these tools? Because that could certainly factor into how they view this case. So those are all kind of thorny issues that lawyers are going to be navigating as they're trying to nail down who's going to sit in the jury box. During jury selection, Sam Altman and Greg Brockman actually were there in the room as jurors were being questioned, which is, I think, quite unusual for someone of that high profile to attend jury selection.

12:49That looks like a good strategic move to me, letting the jurors see you're concerned and involved in the case. Thanks so much, Madeline. We'll check back with you as the trial goes on. That's Bloomberg Legal Reporter Madeline Meckleberg. Coming up next, a soldier will be arraigned on charges of using classified information to make$400 ,000 trading on the timing of the capture of Nicolas Maduro. This is Bloomberg. This message is brought to you by Apple Card. Apple Card members can earn unlimited daily cash back on everyday purchases wherever they shop. This means you could be earning daily cash on just about anything, like a slice of pizza from your local pizza place or a latte from the corner coffee shop.

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14:48A U.S. Army soldier has been charged with using classified information about the timing of the capture of then-Venezuelan President Nicolas Maduro to make more than$400 ,000 trading on Polymarket's prediction market. It's a little like Pete Rose. Pete Rose, he kept him out of the Hall of Fame because he bet on his own team. Federal prosecutors say Master Sergeant Gannon Ken Van Dyke, a Special Forces soldier who was involved in the planning and execution of Operation Absolute Resolve, the military effort to capture Maduro, placed a total of about 13 bets from December 27th through the evening of January 2nd, all taking yes positions on various Maduro-related questions posed by the trading platform.

15:39President Trump said last week that he has issues with the concept of event betting platforms. The whole world, unfortunately, has become somewhat of a casino. And you look at what's going on all over the world in Europe and every place they're doing these betting things. I was never much in favor of it. I don't like it conceptually, but it is what it is. No, I think that I'm not happy with any of that stuff. However, his son, Donald Trump Jr., is an advisor to both CalShe and Polymarket and an investor in Polymarket through the Venture Fund, where he's a partner. My guest is Joshua Mitts, a professor at Columbia Law School and an authority on insider trading, securities law and corporate law.

16:24Explain what the sergeants accused of. Sure. So these websites known as betting markets, sometimes prediction markets, they are platforms which allow individuals to essentially purchase a contract that pays off if a future event happens. And if the event does not happen, then you lose all the money you paid. So like any other markets where you might pay 20 cents, then you can make a dollar or lose all of your 20 cents. And these markets on a website known as Polymarket have sort of sprung into existence for all sorts of future events. And in this case, the sergeant purchased contracts which paid off$1 if Maduro was, I think it was deposed as leader of Venezuela or might have been Maduro out by a certain date, something to that effect.

17:21And the sergeant purchased these contracts when they were relatively inexpensive. So I think in the order of single digit cents, maybe around seven cents or so a contract. And of course, he knew, very few people knew at the time he purchased the contract that the operation was underway. And so when the operation occurred and the contract's value went from whatever it was, seven cents, eight cents to$1 per contract, and he had purchased a large number of contracts, he made just short of half a million dollars or so in profit. And is he being charged because he used classified information to make the bets?

18:06That's exactly right. I mean, the operation itself was classified information. So the capture of rendition of Maduro was non-public information that it was going to happen when it happened. And so the way that prosecutors have set forth the theory of criminal liability here is that he was essentially misappropriating information that belonged to the federal government, information that was non-public, information that was classified for personal gain. He placed a total of 13 bets from December 27 through January 2, all yes on various Maduro-related questions. Is that any defense for him that he was, you know, placing 13 and making different predictions?

18:56So there's two questions here. I mean, on Polymarket, you'll often see minor variants or variations of the same underlying contract. Or it could be that an event happens by a particular date, but there might be slight variations in the date. It could be a day before or a day after. So an individual who is in possession of material non-public information about one of these future events may decide to trade in connection with that information without necessarily pinning themselves down to one specific date. It could be that you are highly, highly confident that an event is going to happen by a particular point in time, but you're not sure exactly when, so you hedge your bets a little bit on the specific contract.

19:40I think your question, though, is getting at a broader question, which is that there isn't a lot of case law, or it's not very clear, and this is such a new and emerging area, what it means for information to be material in this context and for the misappropriation of information to be more than the sort of garden variety, you know, general intuitions that people have from their exposure to, you know, ordinary speculation about the future. And I would imagine that the sergeant will try to make the argument that he did not necessarily have this level of specificity, which would be required to render this an actual misappropriation of information, but simply that he had a general sense that something was going to happen.

20:28And that general sense was not any sort of information that had been misappropriated, but rather his own impression or analysis of what he had been exposed to. And it was Polymarket that turned him in that alerted the authorities? Pauli Market did. And one of the facts from the indictment we see is that he used a virtual private network because Pauli Market is actually not accessible under essentially an agreement with the CFTC. They do have a small U.S. market that they've been working with, but the Pauli Market's primary markets are not accessible to U.S. residents. So he had to use a VPN to use Polymarket.

21:11That wasn't the problem, but it did explain why it was a little difficult for Polymarket. Polymarket, you know, they didn't have an obvious indication based on his IP address that he was coming from the United States. He did, however, my understanding from the indictment is that he had shared his actual email address with Polymarket. And that is what gave them a trail, if you will, back to this individual. So last week, Calci, another predictions platform, said it had fined and banned three political candidates who'd bet on their own elections. So is it up to the prediction platforms themselves to police themselves?

21:50Well, we are seeing increased regulatory and enforcement attention on this. Jake Clayton gave a speech a couple months ago. This was back in February that this was going to be an area of priority, the most recent indictment. So all this suggests that this is growing in importance and focus for federal prosecutors. The reality is that most cases are unlikely to be as simple as this one. And you mentioned these three congressional candidates who had placed bets essentially on their own markets and markets concerning their own campaigns. That's a form of manipulation or a form of influencing the outcome of a contract, which is also prohibited.

22:35But these are, again, the exception. I have a new paper which looked systematically at Polymarket, and we think that there's quite a bit of informed trading. Not all of this will be illegal misappropriation of information, but anomalous or suspicious trading, which suggests that perhaps there could be much more widespread exploitation of this sort of information than these individual idiosyncratic cases might suggest. Yeah. What about there was apparently there was also trading on the Iran war and then the White House put out a statement warning against insider trading. Yeah, well, as we explained in the paper, I mean, this happened in a number of cases, both before the February Iran war, the second Iran war, as well as the June 2025 Iran war.

23:32There were there were other events. So we do see anomalous trading, large purchases again, unless someone is going to put their email address in. It's going to be quite hard for Polymarket in particular. Polymarket runs on the blockchain. The blockchain is much more anonymous in its structure than a traditional market. So there's very little know your customer or similar regulatory disclosures which are required. So it's going to be more difficult for polymarket and regulators to chase down whoever might have been trading in advance of these events. And the other thing is it's important to recognize that not all lucky trading is on the basis of inside information.

24:16Some of it may be on the basis of putting lots of pieces of information together, but it's not necessarily using some misappropriated facts that only you possess. And so we don't know in any of these cases whether the traders might have just connected some dots that the rest of us had not yet connected, in which case under the law, they're entirely entitled to benefit from the profits of that work. What concerns do you have about the prediction markets? Well, if in fact there are episodes, even episodically, even here or there, where government officials or those like the sergeant in possession of this sort of information are rushing out to these markets to profit off of that information, there can be a number of concerning, I think, collateral consequences.

25:04So one could be that our adversaries learn from this sort of trading. So if there's any exploitation of information that takes the form of large transactions prior to national security or military actions, that information is broadcast immediately globally. And so it could, in fact, put our soldiers in harm's way. And I believe the prosecution referred to this as betrayal of his of his fellow servicemen. And I think there's there's definitely truth to that. There's also a question around whether the profits that could be made from these sorts of contracts may have a first order effect or may skew the way that individuals behave.

25:44So if I know that if I take a certain action, I'm going to profit personally or my friends are going to profit personally, that might introduce a form of corruption to my decisions. We see certain forms of this in the extreme so-called mentioned markets where contracts that pay out if a public figure says something. And you can start to imagine how this can create incentives to say certain things and essentially redirect and redistribute who's winning from these mentioned market bets. So this sort of activity, if it continues to grow and aggregate, and it's not just widespread gambling or widespread betting, it can actually change potentially the way people behave.

26:26Coming up next on the Bloomberg Law Show, I'll continue this conversation with Professor Mitts. The Commodity Futures Trading Commission lodged a parallel civil complaint against the soldier. The first time the regulator filed a prediction market's insider trading case. Also the first time the agency used what's known as the Eddie Murphy rule in an insider trading case. I'm June Grosso and you're listening to Bloomberg. And now the No Panic Party Save, brought to you by Grand Appliance. Your party is safe. Wow, Amy, great party. And the food? Incredible. Thanks. And did I tell you my stove died two days ago?

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