States Fight Live Nation Settlement & Who Is Betting on War?

18:25Harry First:Yeah, so Polymarket is one of two major event-driven contract websites that people use that are basically prediction market, you know, sort of platforms. And both Polymarket and Kalshi had various types of events, including events that might occur in Iran. And many of those pertained to the continued integrity of the Ayatollah Khamenei's regime in Iran, and whether it would still be in power, say, by the end of February or by the end of the first week of March. And these were essentially binary bets. Yeah, they call them contracts, but they're essentially bets where you can bet on yes or bet on no.

19:11Harry First:And it became pretty apparent in the hours before the Israeli and U.S. strike on Iran that ended up killing both Ayatollah Khamenei and many other senior members of the Iranian government, that there had been a lot of activity that was essentially betting against the continuing viability of the Iranian government. of the Khamenei government passed, you know, in some future date. The interesting part about this, June, is that while there were a lot of bets that were being placed on this, most were small scale and kind of went on both sides of the transaction. But there were some really big ones that got placed literally within hours of the bombing that were all betting against the Ayatollah's fate.

19:55Harry First:And all of them, at least purportedly, paid out. That gave rise, unsurprisingly, to a pretty significant kerfuffle about who created these brand new accounts. Why were they placing hundreds of thousands, even millions of dollars in betting on this particular event when these accounts hadn't made any bets before?

20:14Eric Talley:And Bubble Maps, which is a company that tracks data on crypto transactions, identified what it called six suspected insiders who made$1.2 million in wagers that the U.S. would strike Iran. Senator Chris Murphy was one of the people who said, you know, it's insane that this is legal. And he said that the unusual betting suggested that even decision makers might have had a stake in the outcome, which the White House denied. But insider trading?

20:49Harry First:Look, so a couple of points to pick apart in that statement. The first has to do with is this, in fact, legal or not legal? Now, you know, because prediction markets are new in the U.S., there's still a battle raging about how exactly these contracts get classified. I think most people think that they are a type of derivative contract. That's kind of my belief as well. They tend to have a lot of the look and feel of a lot of other call options, put options, various exotic options that you can buy and sell on the Chicago Mercantile Exchange. And so those are, in fact, to the extent that they are derivative contracts, they are, in fact, regulated by the Commodities Future Trading Commission or CFTC.

21:34Harry First:And that commission has a pretty robust insider trading prohibition that we can talk a little bit about the specifics of. But I think that the senator, all due respect, might be leaping to conclusions to say that this wasn't prohibited by law. In addition, there are a lot of state laws that might also sweep in to prohibit this type of inside trading that can also have criminal implications. So irrespective of, you know, current bills pending in Congress, this is definitely something that I would expect that CFTC lawyers might be kicking the tires off. As to who did it, we still don't really know.

22:14Harry First:We don't know who the owners of these accounts were. And the fact of the matter is this could range from anyone from senior decision makers in the process, in the room making these decisions, to potentially mid-level staffers or even White House interns who are asked to run papers back and forth. One thing that's kind of interesting, June, is that I don't know whether you have a Polymarket or Calci account.

22:39Eric Talley:Absolutely not.

22:40Harry First:Yeah, I'm just going to say that there is a definite generational skew on who has these accounts. I have them, but the only reason that I have these accounts is that I teach finance to 24-year-olds, and they all have them. And so I have to kind of get inside their head to figure out how I'm going to present the material. So I would say, yeah, it's certainly possible that senior leadership in the Trump administration White House was engaged in some of this trading. But I wouldn't be surprised if a 24-year-old intern wasn't also asked to shuffle some papers back and forth, put two and two together, and then got on Calci and borrowed a bunch of money to make a one-directional bet.

23:20Eric Talley:The CFTC has the authority to investigate this. But Michael Selig, the chair, came out in February saying that he sees the platforms as a way for society to channel the wisdom of crowds for useful information, offering a check on news media and other gatekeepers. gatekeepers. And earlier this year, the CFTC withdrew a Biden-era effort to prevent Kalshi from accepting bets on the outcome of sports events and political elections. So first, does the CFTC have the authority here to look into this? And second, are they likely to?

23:58Harry First:Yeah, it's a fine point. And maybe backing up a little bit, one of the things that I have to, impress upon my law students is that formal legal differences don't always add up into substantive differences. So one thing that I ask my students is what's the difference between gambling, insurance, and buying and trading securities? And many valiantly attempt to distinguish them, but the fact of the matter is, June, they are all kind of the same type of a thing. they're regulated very differently. And so the boundaries of where one ends and one begins, it's really important from a legal perspective.

24:35Harry First:But, you know, really the biggest difference between, you know, insurance, gambling and securities trading is how exciting is the thing that you're trading on. And gambling is probably more exciting than any of them. The other thing, though, that is important to keep in mind is that while the CFTC, The spokesperson certainly has a point to say that prediction markets are an important tool for marshalling the wisdom of the crowd. There are at least two important caveats to that. The first caveat is that if one allowed pretty much unbridled insider trading in these circumstances, then you and I, as people who don't have access to that type of inside information, are going to get wise to it pretty soon.

25:22Harry First:And we're going to realize that any bet that we make on Calci or Polymarket, there's a good chance we're going to be on the losing side of it because we don't have as much information as the person that we are essentially trading with on that platform. And so one of the big conundrums with inside information and trying to see how quickly we can get it infused into the market is that if you basically say we're just taking the brakes off completely, that can have a feedback effect of causing all the uninformed people to say, I'm just going to sit this dance out. I don't trust these markets and I'm not going to provide liquidity and depth to these markets.

25:59Harry First:So that's one thing to worry about, that even if you believe this idea that the wisdom of crowds is really, really important for things like price discovery, and I do believe that, that doesn't necessarily imply that you should basically take all the brakes off of insider trading because it can undermine that very market itself. The second thing that is probably worth keeping in mind is that there are bets and there are bets, right? So if you and I were to make a bet about, I don't know, Friday's temperature at noon in Botswana, that's something that, you know, there will be a temperature reading, it will probably be trustworthy, and there is nothing that you or I could do to influence the nature of that outcome.

26:44Harry First:On the other hand, if we are betting on whether, you know, the Yankees pitcher is next going to throw a ball or a strike or a curveball or a fastball, and that pitcher himself is in, you know, contact with folks who are making those sorts of bets, that's a highly manipulable decision. And there, the wisdom of crowds is almost self-defeating. As soon as the wisdom of crowds points in one direction, our hypothetical Yankees pitcher is going to have an incentive to pitch in the other direction and make money off of it. So they're in situations where the thing that is being bet upon, you know, is basically under the control of someone who is either participating in those markets or has connections to people that are participating in that market.

27:29Harry First:There, you know, I think people lose trust in these markets almost immediately and they don't actually even serve this idea of aggregating preferences and beliefs in a very effective way. And so, you know, where do we put things like bombing of Iran? You know, that's kind of kind of in the middle. It's a big decision. You and I probably don't have an awful lot of of influence over it. But there may be a lot of people who either know about it and want to go out and make approximately infinity dollars off the markets here or, you know, are the decision makers in this area, which which creates a second problem.

28:05Harry First:Right. Which is that as soon as they see money to be made by a particular decision, you know, if they're engaged in these markets, do they have an incentive to change their decision so as to be able to cash out?

28:16Eric Talley:Just straighten one thing out for me. The CFTC does prohibit these prediction markets from listing markets related to war.

28:24Harry First:Right now, there is a prohibition in U.S. trading on various types of extremely sort of political type of events, but it's very hazy. And so sometimes, you know, something on the periphery like, you know, will this administration be around in four months? That's going to be something that gets wrapped up in war as well. And so I think that we're in the middle of this kind of process where these platforms are trying to figure out what can we allow and what should we disallow on these platforms in ways that make people both participate and trust these platforms as not basically being a sucker's play for people that don't have inside information.

29:07Harry First:And that's going to be very much in Calci's and Polymarket's interests to try to do that. But they're hardly ever going to be able to get it right. And a lot of times, you know, the underlying nature of these securities bet, if you will, are essentially going to be around the fringes of what, you know, the designers of Calci and Polymarket are capable of anticipating in advance.

29:30Eric Talley:Calci faced backlash over a multimillion dollar market on whether Khomeini would be ousted. and they actually issued refunds on the market, citing regulations barring wagers on death.

29:44Harry First:Yeah.

29:44Eric Talley:So they self-regulated?

29:47Harry First:They sort of self-regulated. And, you know, I think that there is, you know, in some ways, because a lot of these bets were very, very one-sided, Calci actually faced possibly a little bit of exposure on this as well. And so I think, you know, some people are trying to say, Was this Cal sheet basically trying to cover their own backsides or were they legitimately trying to enforce a prohibition on various types of effectively what becomes wagering at the platform level? You know, where they ended up sort of coming down was this sort of, I think, a little bit of a messy distinction between, you know, were they going to pay off at all?

30:25Harry First:And if they were, were they going to pay off only a portion of the wager that was put down? And, you know, I think that created a lot of ire amongst their clients who felt maybe some of them honestly were making a wager in a direction that paid off and they didn't have any inside information on. And suddenly they were getting shortchanged on it. By the same token, you know, these platforms absolutely have an incentive not to develop a reputation as being kind of the place where suckers go to lose their money.

30:55Eric Talley:Coming up next, what about possible prosecutions? This is Bloomberg. I've been talking to Columbia Law School Professor Eric Talley about the controversy over bets placed on the prediction market platform Polymarket correctly predicting the U.S. strike on Iran. So in February, Israeli authorities arrested several people and charged to a civilian and a military reservist with using classified information to place bets on polymarket. Anyone in the U.S. who used classified information to place a bet, I mean, would be subject to criminal prosecution, right? Is anybody looking into that? Is there an agency besides the CFTC?

31:42Harry First:I'm pretty positive there are some state attorneys general that are looking at this as well. One of the things that's kind of interesting about this, June, is that it gets a little bit into the details of how insider trading law works. And there are a couple of theories behind it, but the one that would most likely apply to this situation is something that lawyers call the misappropriation theory. And what it basically means is if my employer or someone with whom I have some kind of a relationship of trust and confidence reveals inside information to me, that is going to happen with either the stated or implied restriction that I have to keep that confidential.

32:22Harry First:So if I go out and trade on it, then I have breached that confidentiality. And that is effectively what triggers a lot of criminal and civil liability for insider trading. The fact that I've misappropriated, I've violated this order or this command of confidentiality that came from the source. Maybe it's my employer or someone else. But the thing that's always been weird about this theory, and that applies also in the derivatives context, is that it hinges very, very critically on what does your employer permit and not permit, right? And so you could, in principle, have an employer who develops a lot of confidential information and their inside employee policies say, you know what, rather than paying you salaries, we're just going to let you trade rampantly on this inside information.

33:11Harry First:And the third parties, the third party suckers who trade with these informed folks, they have no idea even who they're trading with or what the inside policy is of the employer, but that's going to have a huge effect on whether there will be civil or criminal liability, whether there was such a prohibition. So you transport this over to the administration in which clearly for classified information, there's both an implicit and an explicit prohibition on, you know, trying to make money off of your own private knowledge of classified information. On the other hand, as we learned from the first Trump administration's classified documents gate, there's a big question about, well, what constitutes classified and not classified and who gets to determine when something is suddenly classified or declassified and when?

33:59Harry First:And President Trump basically made the claim on behalf of himself that as he spirited these documents out of the White House at the end of his first administration, he basically declared possibly to himself or possibly in passing that they're all declassified now and therefore he doesn't have any liability. So query whether, I don't know, some staffer or employee or, you know, person higher up in the administration was placing some of these bets, the way that it would trigger, you know, most directly insider trading prohibitions is because they were classified. If, you know, President Trump said, oh, no, I declassified that in a meeting that I did it orally, but it's totally fine.

34:42Harry First:Who knows what's going to happen there? Now, having said that, that doesn't necessarily take these folks off the hook for state level offenses. And there are some state level offenses that easily could be applied here. California, New York have pretty rigorous prohibitions on inside trading transactions. There are also various other types of provisions out there, the Wire Fraud Acts, the Computer Fraud and Abuse Act, that might also kind of play a peripheral role in this context. You know, at the federal level, that's only going to be as strong as the stomach of the federal prosecutors who are going to bring these cases.

35:18Harry First:And if they've gotten a command from on high that they shouldn't bring any of them, then I think we're going to be largely going to be left up to state attorneys general.

35:26Eric Talley:Are they difficult to investigate because the main prediction platform operates offshore? The bets are placed on the blockchain. The identities of the accounts making the trades are anonymous. I mean, let's say state attorneys general. Would it be difficult for them to get through all those layers?

35:46Harry First:Yeah, this has always been a difficult thing in investigating trades made on the blockchain. Compared to 10 years ago, it's much easier to trace the identity of who was making these trades. Where was this wallet created? Who did the creation of this wallet? It's possible to get that information. A lot of it would rest on subpoena power that might have to be applied extraterritorially, right, outside the country because all these companies are based in Ireland or England or Europe and so forth. So that creates a stumbling block, not one that is necessarily insurmountable. I could certainly imagine various regulators inside the EU or the UK being equally worried about the use of prediction markets for insider trading and being perfectly willing to assist a request from, say, the New York State Attorney General or the California State Attorney General for some of that information, or at least to say, yeah, we are willing to serve your subpoena in Europe.

36:45Eric Talley:So finally, Eric, what do you think about, you know, you talked about bills and yesterday, Senator Adam Schiff, Democrat of California, introduced legislation seeking to explicitly ban any entity regulated by the CFTC from listing a contract that involves, relates to, or references terrorism, assassination, war, or death. I mean, what do you think about these bills? Long chances they go through, but if they did?

37:09Harry First:I think it's a valued attempt by Senator Schiff. I think there's a couple things that are going to be challenges for it. So thing one is that if you take a look at that distinction that we talked about earlier between, you know, events that no one has much control over practically versus events that, you know, decision makers do have control over, you know, these things sit right in the middle, right? Terrorist events, war, you know, in a lot of circumstances, those are completely extraneous events to a lot of the participants in these markets. And these markets, June, are also, you know, potentially helpful ways to hedge various types of risk that you might bear, right?

37:49Harry First:If you're running, I don't know, a wholesale operation that requires shipping things through the Strait of Hormuz, and you're quite worried that war is basically going to shut down your business, you know, having some type of insurance or a more exciting version of insurance, right, taking a position in these prediction markets might be a particularly good way to try to hedge those risks. So on some level, you know, is this just going to push things back into insurance markets that may be less competitive than having more choices out there? So, you know, I think that's going to be, you know, potentially a problem.

38:26Harry First:I think another one is, you know, where exactly do you set the boundaries? Things like terrorism and war affect a lot of other things that don't at least optically look like they're terrorism and war, Right. Like, you know, does a prediction market contract that says, you know, we're making predictions on how many ships are going to pass through the Strait of Hormuz. Is it going to be more than 100 or less than 100, you know, a day in the month of April? Is that a war contract or is that a shipping contract? Right. And, you know, on some level, it could be both. And so I envision a lot of sort of boundary marking that's going to be heavily freighted.

39:04Harry First:And it's going to be easy to spot things that ended up on the permitted side of the boundary that pretty much look and walk and talk and act as though they're a bet on war or terrorism.

39:14Eric Talley:A lot more to come with these prediction platforms. Thanks so much, Eric. That's Professor Eric Talley of Columbia Law School. His podcast is called Beyond Unprecedented. And that's it for this edition of the Bloomberg Law Show. Remember, you can always get the latest legal news on our Bloomberg Law podcast. You can find them on Apple Podcasts, Spotify, and at www.bloomberg.com slash podcast slash law. And remember to tune into the Bloomberg Law Show every weeknight at 10 p.m. Wall Street time. I'm June Grosso, and you're listening to Bloomberg.