In a surprise legal move, the Commodity Futures Trading Commission (CFTC) has retracted its August 2022 letter to PredictIt, only to issue a new one. By doing so, it says it has rendered PredictIt’s request for a preliminary injunction moot. Although this likely means that PredictIt can continue operating for now, the CFTC has issued a new letter that may still force the predictions market site to shut down eventually.
Crucially, the new letter, dated March 2, 2023, provides details about the CFTC’s rationale for wanting PredictIt to shut down. The lack of such an explanation has been essential to PredictIt’s case against the Commission.
By retracting the earlier letter, the CFTC has also removed a deadline it had attempted to impose on PredictIt. It has therefore filed a “suggestion of mootness” with the court regarding PredictIt’s request for an injunction to continue operating past the deadline.
In plain English: if there’s no deadline anymore, there’s no need for the court’s permission to ignore it.
The Fight to Keep PredictIt Running
PredictIt is a site allowing users to trade contracts whose value depends on the outcome of real-world political events. Victoria University has operated the site since 2014 under the blessing of a “no-action” letter from the CFTC. This allowed it to serve US customers without fear of legal action by the CFTC, which ordinarily does not allow markets based on election results or other parts of the political process. The Commission had decided to grant the University some leeway as PredictIt’s ostensible goal was educational, not commercial.
In August 2022, the CFTC issued a new letter withdrawing that protection. Now, it has withdrawn that withdrawal in order to withdraw its permission all over again. The reasons relate to a lawsuit against the CFTC by PredictIt, its operator Aristotle International, and several individual stakeholders. This team seeking to keep PredictIt up and running notably does not include the University.
That 2022 letter recommended that PredictIt liquidate open contracts and discontinue operations by Feb. 15, 2023. The implied threat, as understood by PredictIt, was that CFTC would take enforcement action if the site were still operating after that date. However, the Commission has since argued that the deadline was merely a suggestion, not an ultimatum.
A Temporary Reprieve for PredictIt
What the CFTC seems to be trying to accomplish with the new letter could be described as “losing the battle to win the war.”
The plaintiffs in the case would like for PredictIt to be able to continue operating indefinitely. However, their first step was to seek an injunction to avoid enforcement action by the CFTC while the larger case plays out.
That portion of the case found its way into the Fifth Circuit Court of Appeals. While things had been going poorly for the plaintiffs in the lower court, two of three judges on the Fifth Circuit panel signaled their intent to side with PredictIt. That may be why the CFTC is now trying a new tack.
Much of the plaintiffs’ case hinges on the argument that the CFTC’s August letter violated the Administrative Procedures Act by failing to explain its decision. That law limits how agencies like the CFTC wield their powers and obliges them to follow specific protocols. The plaintiffs characterized the Commission’s decision as “arbitrary, capricious, [and] an abuse of discretion.”
In its court filing, the CFTC claims that staff from its Division of Market Oversight (DMO) had, in fact, explained the rationale to Victoria University before issuing the August 2022 letter. This is crucial information that has, until now, been absent from the arguments presented in court.
The suggestion of mootness states:
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. Although there is no requirement that DMO do so, the March 2, 2023 letter reiterates three categories of previously identified evidence that appear to show actions inconsistent with the conditions specified in the 2014 no-action letter and related inconsistencies in various representations made by the University to DMO staff.
Aside from its ramifications to the case, this new information may explain Victoria University’s decision not to join the plaintiffs.
Why the CFTC Wants PredictIt to Shut Down
The CFTC’s court filing lays out the same three arguments it says it presented to Victoria University before August 2022. These are:
- The use of a third-party operator (Aristotle) to run the site, rather than the University or its faculty.
- That the University appears to have received compensation from Aristotle through payments to a wholly-owned subsidiary of the University.
- That several specific contracts listed on the exchange had violated limitations the CFTC imposed in its 2014 no-action letter.
Those watching the case have generally assumed that the CFTC changed its mind because it felt that PredictIt had crossed the line from an academic endeavor to a commercial one. Points (1) and (2) seem to confirm that suspicion.
What Does the Suggestion of Mootness Mean for PredictIt?
The implications of this move are a “good news, bad news story” for PredictIt and its users.
The good news is that PredictIt no longer faces the immediate pressure put on it by the August 2022 letter. As the CFTC put it:
That letter, including what Plaintiffs had characterized as a “liquidation mandate” — which is what Plaintiffs had sought to enjoin — no longer exists.
However, the Fifth Circuit had already granted PredictIt such a reprieve. Feb. 15 has come and gone, and, for now, contracts are still trading on the site.
That’s important because it solves the issue of how PredictIt should liquidate contracts on events that haven’t happened yet, like the 2024 general election.
The bad news is that by formally laying out its rationale, the CFTC has addressed one of PredictIt’s main objections.
In doing so, the Commission has also allowed Victoria University a second chance to respond to its concerns. However, if it’s true that the University was informed of those reasons before August 2022 and declined to participate in the lawsuit, it seems unlikely that it can or will intervene to save PredictIt the second time around.
Nonetheless, the legal battle is likely to continue, and it may be some time before we reach the story’s final chapter. For now, it looks like the probable outcome is that PredictIt will continue to operate for a while but that its days are numbered.