CFTC Takes New Direction in Attempt to Shut Down PredictIt

Posted on: March 3, 2023, 07:18h. 

Last updated on: March 6, 2023, 01:52h.

The Commodity Futures Trading Commission has revoked a letter it sent last year to PredictIt organizers that vacated its no-action status. However, in doing so, the federal agency also said its taking new steps to shut down the online political exchange.

The Commodity Futures Trading Commission building in Washington, DC, seen above. The commissions recently pulled a letter to PredictIt, opting for more severe measures against the company. (Image: CFTC)

That information was revealed in a court filing Friday before the US Fifth Circuit Court of Appeals. Last month, that court granted PredictIt an injunction allowing it to keep existing markets open for trading past a CFTC-recommended February 15 deadline to liquidate all remaining markets, including those for the 2024 presidential election.

In Friday’s filing, the CFTC argued that by pulling the August 4 revocation letter and sending a new letter, which it did on Thursday, the injunction now becomes moot. The CFTC says the court should dismiss PredictIt’s appeal.

The new letter lists allegations of violations and has requested Victoria University of Wellington in New Zealand, the institution that formed PredictIt in 2014, respond with its objections by March 20. A footnote from the letter signed by CFTC Division of Market Oversight (DMO) Director Vincent McGonagle said any response should only come from the university and not from Aristotle International.

CFTC Releases PredictIt Allegations

The new letter and the court filing provide additional insights into why the CFTC sought to shut down PredictIt. In the 2014 no-action letter, the CFTC set out a series of requirements for Victoria to abide by to open the exchange, which school officials proposed operating for research purposes.

The August 4 letter said that PredictIt violated those terms but did not cite specific violations.

Friday’s court filing by the CFTC states that the DMO shared its findings with the University in June 2022. In that meeting, federal regulators claimed that Aristotle, and not the university or its faculty, had been operating the exchange. The division also claimed that Aristotle paid a university subsidiary in return for managing PredictIt and that the exchange offered several markets that were not permissible under the no-action letter.

According to the court filing, the university began including Aristotle in communications between it and the CFTC during the nearly two-month period from that meeting to the issuance of the August  4 letter.

Prior to issuing the August 4, 2022 letter, DMO staff had explained to the University the basis for withdrawing the 2014 no-action letter, as the March 2, 2023 letter confirms,” the CFTC’s court filing stated. “Neither Plaintiffs, nor the non-party University (which submitted an unsworn letter to the district court) ever disclosed that information at any point in this litigation to date.”

In Thursday’s letter, the DMO said that the political exchange was supposed to run similarly to one operated by the University of Iowa. In particular, the commission required the exchange to be a small nonprofit organization with fees only covering “basic expenses” for running the markets.

“However, statements on the Platform’s website indicate that Aristotle was charging a 10% fee on all profits and a separate 5% fee on all withdrawals for so-called ‘costs related to running this site,’” the letter said. “This fee structure appears likely to generate funds far greater than those necessary to operate a small-scale market.”

The letter also revealed 17 markets the DMO claimed PredictIt offered in violation of the no-action letter, which permitted markets on key economic indicators and elections and political events. Regulators said markets offered outside the permitted scope include the 2015 Nobel Peace Prize recipient and the number of tweets Donald Trump or Alexandria Ocasio-Cortez would post in a week.

CFTC Opposes Trading Through 2024

Unlike the August letter, the DMO did not indicate when PredictIt should end existing markets. In its court filings, PredictIt and other plaintiffs wanted the existing markets to continue to their natural conclusion. Ending markets prematurely would cause irreparable harm to traders invested in them.

However, based on “persistent violations,” DMO believes PredictIt would continue to break the rules if trading continues through 2024. In addition, it also provided a recommendation on compensating traders.

“This would therefore cause additional unreasonable use of taxpayer resources for the Division to verify that the University has begun to comply with the Letter’s conditions and continue to do so over the next nearly two years,” Thursday’s letter stated. “To the extent the University believes that withdrawal of the Letter would cause downstream injury to third parties, we believe the better course would be for the University, Aristotle, or others to remedy them, if at all, by compensating any injured parties directly.”

Aristotle Responds to CFTC’s PredictIt Claims

Late Friday afternoon, Aristotle issued a statement that said the CFTC’s new letter was proof that the agency acted illegally when it issued the August 4 letter.

While this belated admission of wrongdoing is welcome, the Commission’s new letter is a desperate attempt to escape the consequences of its prior ill-considered action by avoiding judicial review and the ruling we have requested requiring the Commission to treat those affected by its actions fairly,” the company said in a statement.

Aristotle General Counsel David Mason also said the company strongly disagrees with “the CFTC’s characterization of the facts.” He added that the company has been open with regulators and addressing their concerns.

“We are disappointed that the CFTC continues to insist that traders and others impacted by its regulatory decisions have no voice in decisions affecting them,” Mason said. “We plan to continue to fight this prejudiced attempt to shut down this useful market.”