Weekend Law: Prediction Markets, the 'God Squad' and Social Media Addiction

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1:56Here today, roam tomorrow. Join now at Sinesta.com. Terms and conditions apply. This is Bloomberg Law with June Grosso from Bloomberg Radio. If you want to make a prediction about U.S. Supreme Court review, the odds are clearly in favor of the justices taking a case over who should regulate the booming prediction markets, the states or the Commodity Futures Trading Commission. Calci, the leading prediction market, won the first appellate court decision in the battle over regulation this week. It argued that bets placed on the outcomes of sporting events on its platform are not gambling, but events contracts, a type of derivative.

2:44A theory Kalshi's CEO, Tarek Mansour, has advanced. I always say this, you know, whether something feels and looks like gambling doesn't necessarily make it gambling. Speculation exists in all financial markets. If we're going to take a line that speculation is gambling, then the stock market with retail participation is gambling. Then buying options for retail or zero data expiry options is gambling. Then retail buying crypto is gambling. And in a two-to-one decision, the Third Circuit Court of Appeals agreed with Calci and ruled that the CFTC regulates the platform, not New Jersey. But lower courts across the country have reached conflicting decisions on the issue, and there are more arguments ahead in at least three other appellate courts, making a circuit court split likely the favorite route to the Supreme Court.

3:33Joining me is Bloomberg Intelligence Senior Litigation Analyst Elliot Stein. Elliot, tell us about the legal battle that's been going on between the prediction markets and the states. Yeah, this litigation has been going on for over a year now, and we have cases all over the country in multiple state courts, multiple federal courts. And essentially, it started when some states started sending cease and desist letters to the prediction markets like Cal-shee, seeking to stop them from operating in those states because the states viewed those products as gambling. And the prediction markets, particular Cal-shee at that point, sued the states sort of preemptively to stop the states from filing an enforcement action against them.

4:17And the prediction market argument is that these are derivatives that should be regulated by the CFTC and under the Commodity Exchange Act. States are preempted from regulating them as gambling. And the states, of course, take the position that these products are really gambling in effect and they should be regulated as such. How are they not gambling? I mean, you're placing a wager on an outcome. There are some differences. And these event contracts that the prediction markets offer, you really have two sides to the contract. You have parties on both sides, as opposed to your traditional gambling and betting apps where a consumer is really betting against the house.

4:58And event contracts, like other derivatives, are contracts that you can get in and out of and sell, which is also a difference. But really, it comes down to the statutory language in the Commodity Exchange Act and whether these event contracts fall into the definition of swaps, which is very broad in the Commodity Exchange Act. And related to that is whether Congress intended to preempt states from regulating these products. Lower courts across the country have reached conflicting decisions in these cases. Which side is winning more of the lower court battles? Like you said, we have multiple decisions now at the trial court level.

5:38It's funny, The first decisions came almost exactly a year ago in April of 2025 with respect to these sports event contracts. And CalCity won those. They won a preliminary injunction in Nevada. They won a preliminary injunction in New Jersey. And so, you know, they sort of came out of the gate winning. Then shortly thereafter, in August, I believe, a federal court in Maryland ruled against CalCity and ruled in the state's favor. And since then, we've had probably more trial court rulings going in favor of the states because you've had decisions in Ohio and in Michigan in favor of the states. You had a state court in Massachusetts issue a preliminary injunction in favor of the state against Calci as well.

6:22So I would say, you know, up until the decision by the Third Circuit Court of Appeals, you sort of had more federal courts ruling in favor of the states. But you did have some, like I mentioned, New Jersey and also Tennessee ruling in favor of Calci. The Nevada decision I mentioned earlier was interesting because the judge there, even though a year ago he ruled in favor of Calci, more recently in October, he sort of changed his mind and ruled in favor of Nevada. And that set off sort of a cascading series of events in Nevada litigation, which is all going to be teed up in the Ninth Circuit next week.

6:53And explain the Third Circuit's decision in favor of the CFTC. This is a split decision, but the majority ruled that the definition of swaps under the Commodity Exchange Act is very broad and is broad enough to encompass event contracts like those that are offered by the likes of CalChi and other designated contract markets, DCMs. and that under the Commodity Exchange Act, the CFTC has exclusive jurisdiction over swaps that are traded on designated contract markets. And as a result, states are preempted from regulating them as gambling. Those are like sort of the two main issues. And those are the same issues that we see being decided in the trial court.

7:33But the decision by the Third Circuit is the first time that we have a federal appeals court rule on these issues in any sort of substance. The dissenting judge, Jane Richards Roth, wrote that Calci's actions are a performative slight meant to obscure the reality that Calci's products are sports gambling. And she said that their offerings were virtually indistinguishable from the betting products available on online sports books like DraftKings and FanDuel. Is she right? Well, it depends who you ask. But, you know, I tend to think the prediction markets actually have the better statutory argument here.

8:11I think the Commodity Exchange Act is pretty clear that the CFTC has exclusive jurisdiction over swaps that are traded on designated contract markets. You know, that doesn't mean that states can't regulate your more traditional forms of gambling because the Commodity Exchange Act doesn't stop them from doing that. The Third Circuit covers Delaware, New Jersey and Pennsylvania. Other jurisdictions don't have to follow this ruling. So how important is it? It's important because it's the first federal appeals court to weigh in on these issues, but it's not going to be the last, right? I mean, I mentioned earlier that next week, the Ninth Circuit is going to hold argument in cases in Nevada concerning Cal Shea, Robin Hood, and Polly Market.

8:57The Maryland case that I mentioned earlier is going to be argued in the Fourth Circuit next month in May. The Massachusetts preliminary injunction that I mentioned earlier is going to be argued in the Massachusetts Supreme Court also next month. And then in the Sixth Circuit, we have conflicting rulings from federal trial courts in Ohio and Tennessee that is going to be argued sometime probably in the second half of the year. So we're going to have multiple decisions from multiple federal circuit courts. And inevitably, these cases are destined for the Supreme Court because you're probably going to get conflicting rulings from some of the circuit courts.

9:34And we're talking about issues of federal preemption, which is, you know, a really important issue that the Supreme Court likes to weigh in on. So sketch out for us what the issues might look like at the Supreme Court. I think the issues have to do with what the Commodity Exchange Act provides for and what Congress intended with the Commodity Exchange Act going back multiple decades. And then in 1974, Congress basically gave the CFTC exclusive jurisdiction over derivatives that trade on federally regulated exchanges. They removed language that would have given states concurrent jurisdiction over those products.

10:13And then in 2010, you get the Dodd-Frank Act, which adds swaps to that language and very clearly includes event contracts in the definition of swaps and also gives the CFTC authority and discretion to ban or reject event contracts that might be against the public interest. So I think that's really what the focus is going to be at the Supreme Court when these cases reach out, just like it's been in the lower court. So has the CFTC been regulating any of these prediction markets? Have they done anything? So the CFTC under the Biden administration actually proposed a rule that would have essentially banned contracts related to elections and sports.

10:59When Kelsey first started offering election contracts leading up to the 2024 presidential election, the Biden administration's CFTC tried to stop those. that was litigated. Kalshi won in the trial court and never really litigated fully in the appeals court because then you had the Trump administration come in. And so the case sort of went away. And it was around that time that Kalshi also started getting into sports event contracts. And the CFTC at that point was a little bit in flux. Its leadership was changing. It didn't do much until really very recently in the last couple of months, where it first revoked the Biden administration's proposed rule and then started going down a path where it would read to its own rulemaking.

11:44It issued a staff advisory talking about, you know, contracts that might be susceptible to manipulation and how exchanges have to be careful not to offer those and should really consult maybe with the CFTC before listing those. And it also issued an advance notice to propose rulemaking, which is the first step towards further rulemaking. So the CFTC has started to get involved in this. It has taken the side of the prediction markets in the litigation. In the Ninth Circuit, it's filed an amicus brief in support of the prediction markets because the CFTC takes the position that these event contracts should be regulated by the CFTC, not by the states.

12:18The CFTC just last week sued three states to stop them from trying to regulate these products as gambling. And so, you know, we should see more developments in the area of rulemaking as well in the coming months, I would say. So as you mentioned, the CFTC is suing Connecticut, Arizona, and Illinois. Why do you think they're taking this affirmative step instead of leaving the litigation to Calci and the other prediction market platforms? Yeah, it's a little bit of a pile-on, I would say. I'm not sure that their lawsuits add much beyond what the prediction markets lawsuits already are trying to do.

12:56But, you know, it's just a further thumb on the scale, I think. But I'm not sure it's going to change the outcome of the cases all that much. So we'll see what happens at the Ninth Circuit next week. And we'll wait to see what action New Jersey takes, whether it petitions the Third Circuit for rehearing en banc or petitions the Supreme Court. Actually, a decade ago, it was a Third Circuit case that the Supreme Court took that led to the landmark decision allowing the states to legalize betting on sports. Thanks so much, Elliot. That's Bloomberg Intelligence Senior Litigation Analyst Elliot Stein.

13:34Coming up next on the Bloomberg Law Show, it's called the God Squad, and its latest decision is putting critically endangered species at risk in favor of oil and gas drilling. I'm June Grosso, and you're listening to 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. Apply for Apple Card in the Wallet app to see your credit limit offer in minutes.

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15:20The committee in doing this will be issuing an exemption from the requirements of the ESA for all oil and gas exploration, development and production activities associated with the Boehm and Bessey Outer Continental Shelf. They're called the God Squad with good reason. They play God in deciding whether a species lives or dies. The Endangered Species Committee last met 34 years ago, until last week when Interior Secretary Doug Burgum convened it. Why? To consider waiving the protections for critically endangered whales, sea turtles, and other species in the Gulf of Mexico to make way for more oil and gas drilling.

16:04Defense Secretary Pete Hegseth claimed that pending environmental litigation is a threat to oil and gas operations in the Gulf and a matter of national security. These legal battles waste critical government resources and make it impossible for energy companies to plan and invest in new projects. When development in the Gulf is chilled, we are prevented from producing the energy we need as a country and as a department. After 15 minutes without testimony from experts or discussion, the committee voted unanimously to exempt all oil and gas activities in the Gulf of Mexico from complying with the Endangered Species Act.

16:46Environmental groups are suing to cancel the exemption, saying it will push some species like the rice's whale into extinction. There are only 50 left on Earth, and they're all in the Gulf, which is the home to at least 19 other threatened and endangered species, including the world's smallest and most endangered sea turtle. My guest is an expert in environmental law, Pat Parenteau, a professor at the Vermont Law and Graduate School. He's tangled with the God Squad on several occasions. Pat, tell us about the God Squad. So this is a cabinet level committee, federal officers. It was created in 1978 in response to the Supreme Court's decision in the infamous Teleco Dam case, where the Supreme Court said if there's a violation of the Endangered Species Act that could result in the extinction of a species, the courts are basically powerless to do anything about that.

17:49Only Congress could exempt an action that might jeopardize a species. And so Congress responded to that decision by creating this cabinet-level committee, literally with the power of life or death over a species, which has now come to be known as the God Squad. The God Squad has only met three times in its history until last week. What was different about this meeting? Well, this time around, for the first time, Burgum convened the committee with just the federal officers. You know, in the other God Squad proceedings, there were always states involved. But this time, it's just the feds. And this time, the committee was convened at the request of Secretary Hegseth, who is claiming that there's a national security issue here with regard to oil and gas development in the Gulf of what we still call Mexico, Gulf of Mexico.

18:48And so this is the first time that that kind of national security rationale has been invoked. And the law does say if the secretary determines there is a national security threat as a result of some action that has been stopped by the Endangered Species Act, then the committee must issue an exemption. So the real question is, is there really a national security emergency in this situation? And the answer is no, there is not. You're anticipating my next question. Is there any evidence at all that the Endangered Species Act has resulted in any restrictions on the amount of oil produced in the Gulf?

19:37None. In fact, oil and gas development in the Gulf is at an all-time high. There is no action that has been stopped by the Endangered Species Act. There are lawsuits challenging the Trump administration's analysis of threats to various species, most prominently the rice's whale, which is one of the most endangered whales and marine mammals in the world. There are only 50 or so of these whales left, and they're all in the Gulf. And clearly, oil and gas development poses a serious threat to these whales. But there are many other. There's over a dozen listed endangered species in the Gulf. There are sea turtles.

20:23There are sperm whales. There are manatees. There are all kinds of iconic marine mammals on the list of endangered species. But the point is, none of them have stopped any of the oil and gas, either exploration or development. So this is a made-up fictional crisis. Hegseth said that pending litigation threatens to shut down all oil and gas activities. But if it's pending, that means they don't even know what the decision will be, and it could take years to get to it. Right, and the point is that Congress never intended or even considered the notion that lawsuits would be a trigger for exemptions.

21:07You have to understand if the entire oil and gas program, and that's what Hegseth is demanding an exemption for, the whole operation in the Gulf. If a lawsuit, and there's only one lawsuit right now, was enough to justify an exemption, that means there is no Endangered Species Act protection for any of these species. That's the dramatic impact of an exemption. And that's why Congress said it is to be emphatically a last resort mechanism where there is an irresolvable conflict between a vital federal action and the Endangered Species Act. We don't have anything like that. But the idea that an exemption could be granted could wipe out all kinds of protections for these species.

21:54So there are two lawsuits by environmental groups to cancel the exemption. What are the grounds they're alleging? The Endangered Species Act sets up a really complex series of steps for exemptions. I know this because I'm the only lawyer that's been involved in all four of the God Squad proceedings, all four of them. And I was the spotted owls lawyer in the last God Squad proceeding. And I was the whooping cranes lawyer in the first God Squad proceeding. So I've been with this process forever. You have good clients. Yeah, good clients. My favorite clients. They never complain. In any event, so, you know, there's multi-steps involved in this process, including, did you engage in good faith consultation?

22:37Did you make a diligent effort to identify alternatives to avoid jeopardy and avoid a conflict that would require an exemption? Did you write an adequate environmental impact statement? Did you write an adequate biological assessment? You see what I mean? So there's all kinds of these safeguards. And I know about these safeguards because I had a hand in lobbying Congress to include them. None of that's been done. None of those steps has been followed. Hexeth showed up at this meeting, which lasted 15 minutes among the cabinet officers, you know, nodding in agreement with what Hexeth is saying.

23:10But nothing about whether there really was an irresolvable conflict, nothing about the fact that there had been steps taken to protect the rices whale. And those steps are very modest. They're common sense steps. They basically come down to keep a sharp lookout for whales when the vessels are moving through the Gulf. And if there are whales in the vicinity, slow down, limit your speed, don't run them over. I mean, these are the kinds of very modest protections. In fact, I don't think they're totally adequate protections. But The point is, those are the only protections that were imposed on oil and gas development.

23:50Now, the oil industry doesn't want to slow down. They want to speed up. They want to get as much oil out as fast as they can, particularly now, right? So that's kind of the context of what we're talking about. Very modest steps to protect these critically endangered species. And yet this administration is saying it's full speed ahead. Damn the whales. Drill the oil. There is a question of whether this kind of decision by the God Squad is even subject to judicial review? Yes, we'll find that out because this is the first time that a national security rationale has been used. There's no precedent for how that gets reviewed, how Hegseth's determination gets reviewed.

24:33But the legislative history, and again, I had a hand in this, of the 1978 amendments makes it really clear that that decision is subject to judicial review under the Administrative Procedure Act in the district courts. And both the NRDC and the Center for Biological Diversity have filed lawsuits in district court in D.C. challenging the exemption and challenging HEGSES finding. So we will find out relatively soon, I think, whether the courts are going to take review. We do know this, that when a national security reason is invoked, the courts are very careful about how to review that. In fact, they're very deferential generally on questions like that.

25:19But where there is zero evidence of a national security threat, that's a very different situation. We know that the Trump administration invoked national security when they issued stop work orders on offshore wind farms, all five of them off the East Coast this past year. And the courts uniformly in all five cases rejected Hegseth's invocation of national security. Judge Lambert in the D.C. case actually looked at the classified documents that Hegseth was citing for stopping work on these projects. And Judge Lambert said, I don't see any national security threat in here at all. So my expectation is we'll see something like that.

26:04To the extent that Hegseth has some kind of classified information he's relying on, which he hasn't made public, The courts are going to demand to take a look at that and determine for themselves whether there really is a basis for it. If there were some evidence that the Endangered Species Act was somehow affecting military readiness, military operations, that would be a different situation altogether. But we don't have any evidence of that. Do they want to start new drilling in the Gulf? Is there something actually on the agenda or is this just an opportune moment to do this? There definitely is drilling ongoing and there is exploration for drilling projects.

26:46And now they're moving way off the coast into deep ocean waters of the Gulf and talking about drilling wells deeper than we've ever drilled them before. And that raises the prospect of a really catastrophic spill like what we had in Deepwater Horizon. That spill killed 20 percent of the rice as well, that one spill. So the idea that drilling can proceed without serious risk to these species is just wrong. There's a lot of activity, a lot of ship traffic. Ship traffic is the leading cause of injury and death to these whales. We know that also with the right whale off the East Coast in the Gulf of Maine, vessel strikes is the leading cause of mortality for those whales.

27:34And it's the same for the rice's whale, the sperm whale, and the others in the Gulf. So that's where we are. I mean, it isn't as if the Endangered Species Act is stopping oil and gas development, but it is supposed to require at least those kinds of precautions that can reduce the risk, save some of these whales, give them a chance to recover. We'll see what happens in the D.C. court. Thanks, Pat. That's Professor Pat Parenteau of the Vermont Law and Graduate School. Coming up, fallout from the social media addiction litigation. I'm June Grosso and this is Bloomberg. So there's a lot of noise about AI, but time's too tight for more promises.