Latest / Bloomberg Law / States Fight Live Nation Settlement & Who Is Betting on War?

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

0:02
Speaker 1: This is Bloomberg Law with June Grosseo from Bloomberg Radio.
0:08
Speaker 1: It's a pretty bad deal. So the core issue here
0:12
Speaker 1: was that Live Nation and a ticketmaster when they merged
0:14
Speaker 1: a few years back, they became so powerful that they
0:17
Speaker 1: were able to raise ticket prices.
0:20
Speaker 2: Republican and Democratic attorneys general are among those who are
0:24
Speaker 2: not happy with the Justice Department's sudden mid trial settlement
0:29
Speaker 2: of its landmark anti trust case against Live Nation. North
0:34
Speaker 2: Carolina Attorney General Jeff Jackson says it's a bad deal
0:38
Speaker 2: that keeps Live Nations monopoly in place.
0:42
Speaker 1: The vast majority of the ages who started on this
0:45
Speaker 1: lawsuit are going to stay on this lawsuit. That's Republicans
0:48
Speaker 1: and Democrats, a couple dozen of us from across the country.
0:52
Speaker 1: We're working out the timeline, but we've told Life Nation
0:54
Speaker 1: they can expect to see us back in court very soon.
0:57
Speaker 2: Perhaps as soon as Monday, if settlement talks ordered by
1:01
Speaker 2: the federal trial judge go nowhere. Joining me is anti
1:05
Speaker 2: trust law expert Harry First, a professor at NYU Law School. Harry,
1:11
Speaker 2: let's start with the trial judge's reaction to this surprise
1:14
Speaker 2: settlement of the Justice Department with Live Nation. The judge
1:21
Speaker 2: scolded everyone at a hearing on Tuesday. He said the
1:25
Speaker 2: DOJ's lack of transparency about its settlement negotiations was mind
1:30
Speaker 2: boggling and that the party's conduct here strains the bounds
1:34
Speaker 2: of acceptable conduct. I mean, four days into the trial,
1:39
Speaker 2: the secrecy, what's up?
1:42
Speaker 3: Well, these are great questions. You know, we can speculate.
1:46
Speaker 3: I'm glad to speculate, but we don't know for sure.
1:49
Speaker 3: Here's my guess. My guess is the trial staff. They
1:52
Speaker 3: have really top people trying this case. My guess is
1:56
Speaker 3: they were blindsided. My guess is that they were not
2:00
Speaker 3: involved in this settlement.
2:04
Speaker 4: Just to guess.
2:05
Speaker 3: These are real long serving professionals, both in and out
2:09
Speaker 3: of the Justice Department. I think that this was done
2:12
Speaker 3: above them. That's a guess. And the term sheet I've
2:17
Speaker 3: never seen. This is the crazy term sheet. What is
2:20
Speaker 3: this a deal? The term sheet is signed by the
2:23
Speaker 3: acting Assistant Attorney General, not by anyone on the trial staff.
2:28
Speaker 3: And for this to become a what's called a consent
2:31
Speaker 3: decree that the judge enters, it's got to look a
2:35
Speaker 3: little more formal than this. So whether they'll sign it
2:38
Speaker 3: or not, I think would be a good question, and
2:41
Speaker 3: I don't know. I think that's to look forward to
2:43
Speaker 3: and blaming the states, I would be close to certain
2:47
Speaker 3: that the States were completely out of the loop on this.
2:50
Speaker 3: I think everyone was concerned that this case was going
2:53
Speaker 3: to be sold out, and I mean sold out in
2:57
Speaker 3: the literal sense that this was a political deal. And
3:03
Speaker 3: you know, whether it's actual money changing hands or just
3:06
Speaker 3: straight lobbying that this is another example of you know,
3:10
Speaker 3: something happening like that, and you know, people were watching
3:14
Speaker 3: this case to see if was ever going to go
3:16
Speaker 3: to trial, you know, whether it would be settled out
3:19
Speaker 3: before with exactly the thing that we see, which is
3:22
Speaker 3: that Live Nation doesn't have to give up Ticketmaster.
3:26
Speaker 2: The settlement doesn't address the main relief sought in the case,
3:30
Speaker 2: which is which is Live Nations selling its Ticketmaster subsidiary.
3:36
Speaker 2: I mean that was that the center of the case.
3:39
Speaker 2: So what does the public get from this settlement?
3:44
Speaker 3: A little bit older and deeper in debt. Wasn't that
3:47
Speaker 3: the song? I don't think the public interest is served
3:50
Speaker 3: by I think public gets very much. There may be
3:53
Speaker 3: some money, who knows how much the states have to
3:56
Speaker 3: agree to it. There's some pullback it wasn't clear who
4:00
Speaker 3: owns what in these arenas. I don't know exactly. They
4:03
Speaker 3: were negotiating the terms, you know, Sunday night before this
4:07
Speaker 3: term sheet was released, so it really isn't isn't clear,
4:12
Speaker 3: and if they have to, you know, go back on
4:14
Speaker 3: some of the contracts, the exclusivity. The problem is not
4:18
Speaker 3: in the formal contracts. The problem is in the economics
4:22
Speaker 3: of this business and tying the ticket sellers to the talent.
4:27
Speaker 3: I mean, that's what it is. And you're not going
4:29
Speaker 3: to solve it by saying, excuse me, don't insist on
4:33
Speaker 3: a contract. That's where they started out in twenty ten.
4:37
Speaker 3: It never worked, it never will work. So it's just
4:40
Speaker 3: really not something to advance the public interest. The second
4:44
Speaker 3: part is some access to ticket Master's API so some
4:50
Speaker 3: other ticketing company can do something. They actually tried this before,
4:55
Speaker 3: that was part of the twenty ten settlement and one
4:58
Speaker 3: of the things that happened is the company supposed to
5:00
Speaker 3: give it access to it didn't want it. I mean,
5:02
Speaker 3: it's just it's failed. Failed, and it fails because venues
5:08
Speaker 3: will not want to offend Live Nation by using a
5:12
Speaker 3: different ticketing company. And Live Nation has said it they
5:15
Speaker 3: said in testimony. They said, you know, we're going to
5:18
Speaker 3: make the choice that makes us the most money. Guess
5:21
Speaker 3: what you know. So it's sad, but overlaying it is
5:25
Speaker 3: this question of political influence, which has been the song
5:31
Speaker 3: of anti trust from the beginning, and here we are again.
5:35
Speaker 2: I think thirty nine state attorneys general are also part
5:39
Speaker 2: of the case, and twenty seven states in DC asks
5:43
Speaker 2: for a mistrial and also for sixty days so that
5:47
Speaker 2: their attorneys can try to get up to speed to
5:50
Speaker 2: try the case. Because the Justice Department was the lead
5:52
Speaker 2: on the case. So the judge didn't rule on the
5:55
Speaker 2: mistrial motion, but he required the top officials to stay
5:59
Speaker 2: in the court house for the rest of the week
6:01
Speaker 2: and try to hammer out a deal. I mean, what
6:04
Speaker 2: are the chances of a deal zero to.
6:07
Speaker 1: What?
6:09
Speaker 3: Well, you never knowing these things. I mean, the states
6:12
Speaker 3: are now in a tough spot. They were sitting there
6:16
Speaker 3: watching the trial. They knew that this could blow up
6:19
Speaker 3: at any point. I don't think they're surprised in that sense.
6:22
Speaker 3: But of course there's a difference between sitting there watching
6:25
Speaker 3: the trial and stepping you know, up there and trying
6:29
Speaker 3: the cases before a jury. I don't know how it goes.
6:31
Speaker 3: When you know, you can see why they'd want to mistrial,
6:34
Speaker 3: not want to have to come before the jury without
6:37
Speaker 3: the Justice Department there and say Hi, we're your new friends.
6:42
Speaker 3: You remember those those other folks.
6:44
Speaker 4: Do you explain this?
6:45
Speaker 3: I don't know how that exactly that would work. This
6:47
Speaker 3: is really weird. There have been cases well, one case
6:52
Speaker 3: in which I'm familiar is the Microsoft case where states
6:55
Speaker 3: and the federal government tried the case together and then
6:58
Speaker 3: the Justice Department settled with Microsoft, but not all the
7:03
Speaker 3: states did, and they continued to litigate the remedy but
7:07
Speaker 3: not you know, whether there's a liability, so it's still
7:10
Speaker 3: a little different. Didn't go so well for them, so
7:14
Speaker 3: it's hard. They're in a hard position.
7:17
Speaker 1: You know.
7:17
Speaker 3: Maybe they can eke out some more something from Live Nation,
7:22
Speaker 3: although I bet they don't. And you know, they either
7:28
Speaker 3: are going to have to join the settlement or go
7:31
Speaker 3: it alone. I think the judge is not going to
7:33
Speaker 3: be too happy about a mistrial and starting over again.
7:38
Speaker 3: And the only reason to do it, well, there are
7:42
Speaker 3: two reasons. One is to get good law made, is
7:44
Speaker 3: to get a verdict against Live Nation, and Ticketmaster will
7:50
Speaker 3: help in some other private litigation, maybe not so much help,
7:53
Speaker 3: but a little. And the second is that relief to
7:57
Speaker 3: get to vestiture and you know, maybe they can make
8:01
Speaker 3: the case if they've got the right experts, and that
8:04
Speaker 3: this is the only way to solve this problem than
8:06
Speaker 3: to have competition in ticketing, is to change the incentives
8:10
Speaker 3: of the parties in this industry if.
8:13
Speaker 2: You talk about you know, politics and the politics of
8:16
Speaker 2: the states. For example, New York Attorney General Letitia James
8:19
Speaker 2: has said that at least twenty five states in DC
8:22
Speaker 2: are going to continue with the trial. The idea of
8:25
Speaker 2: this suit is also popular with the public because buying
8:29
Speaker 2: concert tickets has become a luxury item. Every time you
8:33
Speaker 2: go to buy tickets on ticket Master, it seems like
8:36
Speaker 2: the prices have climbed yet again. So what do the
8:40
Speaker 2: states have to lose by going forward with the trial.
8:43
Speaker 3: Well, part of the answer is that the remedy of
8:46
Speaker 3: splitting them apart will not, you know, the day after
8:50
Speaker 3: produce lower ticket prices. It's a market process, and you
8:54
Speaker 3: hope that new companies will enter the ticketing business particularly
8:59
Speaker 3: and bring some competition there. But you know, Taylor Swift
9:03
Speaker 3: concerts are still going to be really expensive and there'll
9:06
Speaker 3: still be resale markets and so it's a slow fix.
9:10
Speaker 3: So yes, it looks attractive from the point of view
9:13
Speaker 3: of the States and you know, pushing on and being
9:16
Speaker 3: the public interest, but it is a longer term public interest.
9:20
Speaker 3: So maybe there's some quick fix or something. Everybody who
9:23
Speaker 3: bought a Taylor Swift ticket gets free out, but I
9:27
Speaker 3: don't know, you know, get some money, so maybe they'll
9:31
Speaker 3: increase the money in the pot. There's a lot of
9:33
Speaker 3: money here.
9:35
Speaker 2: So when the judge rejected the request and said that
9:38
Speaker 2: if the parties truly want to settle, a deal could
9:40
Speaker 2: be made within the week, and the Innaus attorney for
9:43
Speaker 2: Live Nations, Dan Wall, said, I've done this for forty
9:46
Speaker 2: five years and there's zero chance we get this done
9:49
Speaker 2: by Friday. And the judge said, not with that attitude.
9:53
Speaker 4: I love that.
9:54
Speaker 3: That was great. Yeah, Dan Wall is very sure of himself.
9:57
Speaker 3: Let's say, but the States have now apparently hired a
10:00
Speaker 3: very very successful anti trust trial lawyer, Jeffrey Kessler. It's
10:05
Speaker 3: a smart, sharp move, so they're not looking to you know,
10:10
Speaker 3: just vanish, but they are up against a difficult tactical
10:14
Speaker 3: position here, and they have to be sure that they
10:18
Speaker 3: really want to go ahead and push for divestiture. It's
10:21
Speaker 3: not impossible, but the States don't generally do so well
10:26
Speaker 3: once they've been deserted by the Justice Department. There are
10:29
Speaker 3: past cases, not always, but it's hard now. You know,
10:33
Speaker 3: they need the experts, the economists, industry experts, and the
10:37
Speaker 3: you know, they need a top lawyer. I guess they
10:41
Speaker 3: have good lawyers in the house, but they've hired, you know,
10:45
Speaker 3: a guy who could go up against Dan wall if there's.
10:48
Speaker 2: No settlement of the judge says the trial's going to
10:50
Speaker 2: restart on Monday with the same jury. It seems very
10:54
Speaker 2: difficult for the States to just pick up now if
10:57
Speaker 2: the judge doesn't give them more time. Okay, on Monday,
11:00
Speaker 2: we're in court when you know, we haven't been prepping
11:03
Speaker 2: the witnesses. We haven't been doing this.
11:05
Speaker 4: Yeah, I don't know.
11:06
Speaker 3: I don't know how actively involved they've been in trial
11:11
Speaker 3: prep or how much is it always an underlying tension
11:14
Speaker 3: between the States and the Feds even when they're trying
11:17
Speaker 3: cases together. You know, playing with your friends doesn't always
11:21
Speaker 3: go smoothly, even if you're good friends. But my guess
11:26
Speaker 3: also is that the professionals on the staff. The trial
11:30
Speaker 3: staff will not be the roadblocks, but the front office.
11:36
Speaker 3: Who knows what they'll do with the witnesses they've got
11:39
Speaker 3: and the information they've got, and how hard they'll make
11:41
Speaker 3: it for the states. I don't know. To add one
11:45
Speaker 3: other thing in there. In February, the head of the
11:47
Speaker 3: any Trust Division was fired.
11:49
Speaker 2: I was going to ask you about that. You know
11:51
Speaker 2: where the anti trust division is going in trump second administration.
11:57
Speaker 3: Yeah, Well, the speculation was, my speculation was that she
12:01
Speaker 3: was told that she was going to have to settle
12:03
Speaker 3: this case and she refused. This really is speculation. I
12:07
Speaker 3: haven't read any reporting about it. In the grand scheme
12:11
Speaker 3: of things, this barely caused a ripple, you know, in
12:15
Speaker 3: the world. So the reporting was that she was fired,
12:18
Speaker 3: not that she quit, you know. So all of this
12:21
Speaker 3: sort of fits together in light of some other things
12:24
Speaker 3: that have happened in antitrust as well as of course
12:28
Speaker 3: the broader world.
12:30
Speaker 2: I mean, the judge can always reject the settlement, right, So.
12:34
Speaker 3: There's a legal process for the settlement itself. They have
12:37
Speaker 3: to file what's called a competitive impact statement. They have
12:41
Speaker 3: to let it open for public comment for a period
12:44
Speaker 3: of time. Then there's a hearing before the judge. It's
12:49
Speaker 3: called a Tonny Act, and the judge has to approve
12:53
Speaker 3: the settlement as in the public interest. Now that, as
12:57
Speaker 3: it's been interpreted over to time, does not give the judge,
13:02
Speaker 3: you know, the broadest power to say this is a
13:04
Speaker 3: crappy settlement, forget it, I want you to try this case.
13:08
Speaker 3: But the judge does have some power and this will
13:12
Speaker 3: certainly provoke a lot of public comment, and that's a
13:16
Speaker 3: process that will go forward while the case is being tried. Apparently,
13:20
Speaker 3: I mean there, I forget the exact time, but it's
13:23
Speaker 3: say thirty or sixty days for comment that this has
13:27
Speaker 3: to be put into a formal decree, yes, and the
13:30
Speaker 3: judge has to eventually review it and approve it, and
13:34
Speaker 3: then it can be appealed. Actually, so we're not at
13:37
Speaker 3: the end of this process.
13:39
Speaker 2: What do you make of the judge telling the attorneys
13:41
Speaker 2: for a live nation the government, you know, this is it.
13:43
Speaker 2: You can't go back on this.
13:44
Speaker 3: Now, well, because you know, the second step in this
13:49
Speaker 3: could be that the Justice Department moves to dismiss its complaint,
13:53
Speaker 3: doesn't even go through the formal process. You know, we've
13:58
Speaker 3: seen that where the Justice Department just says bye, we
14:02
Speaker 3: haven't seen it in any trust cases because the anti
14:05
Speaker 3: trust professionals really don't want to see a case where
14:10
Speaker 3: parties promise to do something but it's not backed up
14:13
Speaker 3: with the court decree. This consent decree. So I don't
14:16
Speaker 3: really predict it here unless she's I've been pretty bad
14:20
Speaker 3: at predicting things, so don't help me to to this.
14:23
Speaker 2: I don't know about that. I'll also look back at
14:25
Speaker 2: your score. Also, under this agreement, the government could sue
14:29
Speaker 2: them again.
14:31
Speaker 3: So as it's written, you know, this is not you know,
14:35
Speaker 3: we're forever done. It's hard to know what to make
14:38
Speaker 3: of that. I mean, the government has actually they did
14:42
Speaker 3: sue in twenty ten when Ticketmaster acquired Live Nation and
14:48
Speaker 3: entered into a consent decree. They re up the consent
14:52
Speaker 3: decree in twenty nineteen where they threatened to sue again.
14:55
Speaker 3: And then this is a suit with a different legal
14:58
Speaker 3: theory that they out in twenty twenty four. So the
15:02
Speaker 3: standard rule is the government is not stopped from, you know,
15:07
Speaker 3: unless they've signed a piece of paper, from bringing a
15:10
Speaker 3: new suit. So the answer to that is, yes, they
15:13
Speaker 3: could bring another suit. I mean, in a way, it's
15:16
Speaker 3: cold comfort we've now had from twenty ten to you know,
15:20
Speaker 3: twenty twenty six. This monopoly. It's you know, they've made
15:25
Speaker 3: a lot of money off of this. Thank you very much.
15:28
Speaker 3: We could eventually sue them at some point.
15:30
Speaker 2: When this settlement is actually turning out to be more
15:33
Speaker 2: interesting than the trial in some ways. Thanks so much,
15:36
Speaker 2: Harry for your insights. That's Professor Harry First of NYU
15:41
Speaker 2: Law School. Prediction market platforms have soared in popularity in
15:46
Speaker 2: recent years, testing legal and regulatory norms like never before,
15:52
Speaker 2: although most have drawn a line at one category, direct
15:56
Speaker 2: wagers on war. In fact, betting on war is prohibit
16:00
Speaker 2: in the United States, as is insider trading. Despite that,
16:04
Speaker 2: it seems to be flourishing on Polymarket, one of the
16:08
Speaker 2: world's largest prediction markets, whose main exchange operates offshore and
16:13
Speaker 2: outside the oversight of US regulators and now blockchain analysts
16:19
Speaker 2: have flagged suspicious activity and lawmakers are calling for a crackdown.
16:25
Speaker 5: Why.
16:26
Speaker 2: The day before the US and Israel launched an attack
16:29
Speaker 2: on Iran, there was a surge in big bets on
16:32
Speaker 2: poly Market that correctly predicted the strike would happen. The
16:36
Speaker 2: next day, bubble Map's Paris based company that tracks data
16:41
Speaker 2: on crypto transactions, identified what it called six suspected insiders
16:48
Speaker 2: who made a one point two million dollar wager that
16:51
Speaker 2: correctly predicted the US would strike Iran. Joining me is
16:56
Speaker 2: business law professor Eric Tally of Columbia Law School. He's
17:00
Speaker 2: the co host of the Beyond Unprecedented podcast. Eric tell
17:04
Speaker 2: us about the bets on Polymarket that are causing concern.
17:09
Speaker 4: Yeah.
17:09
Speaker 5: So, Polymarket is one of two major event driven contract
17:17
Speaker 5: websites that people use that are basically prediction market, you know,
17:21
Speaker 5: sort of platforms. And both Polymarket and Calshi had various
17:26
Speaker 5: types of events, including events that might occur in Iran,
17:30
Speaker 5: and many of those pertained to the continued integrity of
17:35
Speaker 5: the Ayatola Kamenese regime in Iran and whether it would
17:41
Speaker 5: still be you know, in power, say by the end
17:44
Speaker 5: of February or by the end of the first week
17:45
Speaker 5: of March. And these are essentially binary bets, you know,
17:49
Speaker 5: they call them contracts, but they're essentially bets where you
17:52
Speaker 5: can bet on yes or bet on no. And it
17:56
Speaker 5: became pretty apparent in the hours before the Israeli and
18:00
Speaker 5: US strike on Iran that ended up killing both Iotola
18:04
Speaker 5: Khameni and many other senior members of the Iranian government
18:09
Speaker 5: that there had been a lot of activity that was
18:12
Speaker 5: essentially betting against the continuing viability of the how many
18:17
Speaker 5: government passed in some future date. The interesting part about
18:22
Speaker 5: this June is that while there were a lot of
18:24
Speaker 5: bets that were being placed on this most were small
18:27
Speaker 5: scale and kind of went on both sides of the transaction.
18:30
Speaker 5: But there were some really big ones that got placed
18:33
Speaker 5: literally within hours of the bombing, that were all betting
18:37
Speaker 5: against the Iyatola's fate, and all of them at least
18:41
Speaker 5: purportedly paid out. That gave rise, unsurprisingly to a pretty
18:46
Speaker 5: significant kerfuffle about who created these brand new accounts, why
18:50
Speaker 5: were they placing hundreds of thousands, even millions of dollars
18:53
Speaker 5: in betting on this particular event when these accounts hadn't
18:57
Speaker 5: made any bets before.
18:59
Speaker 2: And which is a company that tracks data on crypto transactions,
19:05
Speaker 2: identified what it called six suspected insiders who made one
19:10
Speaker 2: point two million dollars in wagers that the US would
19:13
Speaker 2: strike Iran Senator Chris Murphy was one of the people
19:17
Speaker 2: who said, you know, it's insane that this is legal,
19:20
Speaker 2: and he said that the unusual betting suggested that even
19:26
Speaker 2: decision makers might have had a stake in the outcome,
19:30
Speaker 2: which the White House denied. But insider trading look.
19:34
Speaker 5: So a couple of points to pick apart in that statement.
19:37
Speaker 5: The first has to do with is this in fact
19:40
Speaker 5: legal or not legal?
19:41
Speaker 4: Now?
19:42
Speaker 5: You know, because prediction markets are new in the US,
19:44
Speaker 5: there's still a battle raging about how exactly these contracts
19:49
Speaker 5: get classified. I think most people think that they are
19:52
Speaker 5: a type of derivative contract.
19:55
Speaker 4: That's kind of my belief as well.
19:57
Speaker 5: They tend to have a lot of the look and
19:59
Speaker 5: feel of a lot of other call options, put options,
20:02
Speaker 5: various exotic options that you can buy and sell on
20:06
Speaker 5: the Chicago Mercantile Exchange. And so those are in fact,
20:10
Speaker 5: to the extent that they are derivative contracts. They are
20:13
Speaker 5: in fact regulated by the Commodities Future Trading Commission or
20:17
Speaker 5: a CFTC, and that commission has a pretty robust insider
20:22
Speaker 5: trading prohibition that we can talk a little bit about.
20:25
Speaker 4: The specifics of.
20:26
Speaker 5: But I think that the Senator, all due respect, might
20:29
Speaker 5: be leaping to conclusions to say that this wasn't prohibited
20:33
Speaker 5: by law. In addition, there are a lot of state
20:36
Speaker 5: laws that might also sweep in to prohibit this type
20:39
Speaker 5: of inside trading that can also.
20:42
Speaker 4: Have criminal implications.
20:44
Speaker 5: So, irrespective of current bills pending in Congress, this is
20:49
Speaker 5: definitely something that I would expect that CFTC lawyers might
20:54
Speaker 5: be kicking the tires off as to who did it.
20:57
Speaker 5: We still don't really know. We don't know who the
20:59
Speaker 5: owners of these accounts were. And you know, the fact
21:02
Speaker 5: of the matter is this could range from anyone from
21:05
Speaker 5: senior decision makers in the process in the room of
21:09
Speaker 5: making these decisions, to potentially mid level staffers or even
21:13
Speaker 5: White House interns who were asked to run papers back
21:16
Speaker 5: and forth. One thing is kind of interesting, June, is
21:19
Speaker 5: that you know, I don't know whether you have a
21:21
Speaker 5: polymarket or calshy account.
21:23
Speaker 2: Absolutely not.
21:24
Speaker 5: Yeah, I'm just gonna say that there is a definite
21:28
Speaker 5: generational skew on who has these accounts.
21:31
Speaker 4: I have them.
21:32
Speaker 5: But the only reason that I have these accounts is
21:35
Speaker 5: that I teach finance to twenty four year olds and
21:37
Speaker 5: they all have them, and so I have to kind
21:39
Speaker 5: of get inside their head to figure out, you know,
21:42
Speaker 5: how I'm going to present the material. So I would say, yeah,
21:45
Speaker 5: it's certainly possible that senior leadership in the Trump administration
21:49
Speaker 5: White House was engaged in some of this trading, but
21:51
Speaker 5: I wouldn't be surprised if a twenty four year old
21:54
Speaker 5: intern wasn't. Also, you know, asked to shuffle some papers
21:58
Speaker 5: back and forth, put two and two together, and then
22:00
Speaker 5: got on Calshi and you know, borrowed a bunch of
22:02
Speaker 5: money to make a one directional bet.
22:04
Speaker 2: The CFTC has the authority to investigate this, but Michael Sellig,
22:10
Speaker 2: the chair, came out in February saying that he sees
22:14
Speaker 2: the platforms as a way for society to channel the
22:17
Speaker 2: wisdom of crowds for useful information, offering a check on
22:21
Speaker 2: news media and other gatekeepers. And earlier this year the
22:25
Speaker 2: CFTC withdrew a Biden era effort to prevent Calshie from
22:30
Speaker 2: accepting bets on the outcome of sports events and political elections. So, first,
22:35
Speaker 2: does the CFTC have the authority here to look into this?
22:39
Speaker 2: And second are they likely to?
22:42
Speaker 5: Yeah, it's a fine point, and maybe backing up a
22:45
Speaker 5: little bit, one of the things that I have to
22:47
Speaker 5: you know, impress upon my law students is that formal
22:51
Speaker 5: legal differences don't always add up into substantive differences. So,
22:55
Speaker 5: you know, one thing that I asked my students is
22:57
Speaker 5: what's the difference between gambling, insurance, and buying and trading securities?
23:03
Speaker 5: And many valiantly attempts to distinguish them, but the fact
23:08
Speaker 5: of the matter is, June, they are all kind of
23:11
Speaker 5: the same type of a thing. They're regulated very differently,
23:14
Speaker 5: and so the boundaries of where one ends and one
23:17
Speaker 5: begins it's really important from a legal perspective, but you know,
23:20
Speaker 5: really the biggest difference between you know, insurance, gambling and
23:24
Speaker 5: securities trading is how exciting is the thing that you're
23:27
Speaker 5: trading on, and gambling is probably more more exciting than
23:30
Speaker 5: any of them. The other thing, though, that is important
23:33
Speaker 5: to keep in mind is that while the CFTC you
23:36
Speaker 5: know spokesperson certainly has a point to say that prediction
23:40
Speaker 5: markets are an important tool for marshaling the wisdom of
23:46
Speaker 5: the crowd, there are at least two important caveats to that.
23:50
Speaker 5: The first caveat is that if one allowed pretty much
23:55
Speaker 5: unbridled insider trading in these circumstances, then you and I,
24:00
Speaker 5: as people who don't have access to that type of
24:02
Speaker 5: inside information are going to get wise to it pretty soon,
24:06
Speaker 5: and we're going to realize that any bet that we
24:09
Speaker 5: make on Calshi or polymarket, there's a good chance we're
24:12
Speaker 5: going to be on the losing side of it because
24:14
Speaker 5: we don't have as much information as the person that
24:16
Speaker 5: we are essentially trading with on that platform. And so
24:20
Speaker 5: one of the big conundrums with inside information and trying
24:24
Speaker 5: to see how quickly we can get it infused into
24:27
Speaker 5: the market is that if you basically say we're just
24:30
Speaker 5: taking the breaks off completely, that can have a feedback
24:34
Speaker 5: effect of causing all the uninformed people to say, I'm
24:37
Speaker 5: just going to sit this dance out. I don't trust
24:39
Speaker 5: these markets, and I'm not going to provide liquidity and
24:42
Speaker 5: depth to these markets. So that's one thing to worry
24:46
Speaker 5: about that even if you believe this idea that the
24:49
Speaker 5: wisdom of crowds is really really important for things like
24:52
Speaker 5: price discovery, and I do believe that, that doesn't necessarily
24:57
Speaker 5: imply that you should basically take all the break breaks
25:00
Speaker 5: off of insider trading, because it can undermine that very
25:03
Speaker 5: market itself. The second thing that is probably worth keeping
25:06
Speaker 5: in mind is that there are bets and there are bets. Right,
25:10
Speaker 5: So if you and I were to make a bet
25:12
Speaker 5: about I don't know Friday's temperature at noon in Botswana,
25:17
Speaker 5: that's something that you know, there will be a temperature reading,
25:20
Speaker 5: it will probably be trustworthy, and there is nothing that
25:23
Speaker 5: you or I could do to influence the nature of
25:27
Speaker 5: that outcome. On the other hand, if we are betting
25:30
Speaker 5: on whether you know, the Yankees pitcher is next going
25:35
Speaker 5: to throw a ball or a strike, or a curveball
25:38
Speaker 5: or a fastball, and that picture himself is in you know,
25:42
Speaker 5: contact with folks who are making those sorts of bets,
25:45
Speaker 5: that's a highly manipulable decision, and there the wisdom of
25:50
Speaker 5: crowds is almost self defeating. As soon as the wisdom
25:53
Speaker 5: of crowds points in one direction are hypothetical, Yankees pitcher
25:57
Speaker 5: is going to have an incentive to pitch in the
25:58
Speaker 5: other direction to make money off of it. So they're
26:01
Speaker 5: in situations where the thing that is being bet upon,
26:05
Speaker 5: you know, is basically under the control of someone who
26:08
Speaker 5: is either participating in those markets or has connections to
26:11
Speaker 5: people that are participating in that market. They're you know,
26:15
Speaker 5: I think people lose trust in these markets almost immediately,
26:18
Speaker 5: and they don't actually even serve this idea of aggregating
26:22
Speaker 5: preferences and beliefs in a.
26:23
Speaker 4: Very effective way.
26:25
Speaker 5: And so you know, where do we put things like
26:27
Speaker 5: bombing of Iran? You know, that's kind of kind of
26:31
Speaker 5: in the middle. It's a big decision. You and I
26:33
Speaker 5: probably don't have an awful lot of influence over it,
26:37
Speaker 5: but there may be a lot of people who either
26:39
Speaker 5: know about it and want to go out and make
26:42
Speaker 5: approximately infinity dollars off of the markets here, or you know,
26:46
Speaker 5: are the decision makers in this area, which which creates
26:49
Speaker 5: a second problem, right, which is that as soon as
26:51
Speaker 5: they see money to be made by a particular decision.
26:54
Speaker 5: You know, if they're engaged in these markets, do they
26:56
Speaker 5: have an incentive to change their decision so as to
26:59
Speaker 5: be able to cash out.
27:00
Speaker 2: Just straighten one thing out for me. The CFTC does
27:04
Speaker 2: prohibit these prediction markets from listing markets related to war
27:09
Speaker 2: right now.
27:09
Speaker 5: There is a prohibition in US trading on various types
27:16
Speaker 5: of extremely sort of political type of events. But it's
27:21
Speaker 5: very hazy, and so sometimes you know, something on the periphery,
27:24
Speaker 5: like you know, will this administration be around in four months?
27:28
Speaker 5: That's going to be something that gets wrapped up in
27:31
Speaker 5: war as well. And so, you know, I think that
27:33
Speaker 5: we're in the middle of this kind of process where
27:36
Speaker 5: these platforms are trying to figure out, you know, what
27:39
Speaker 5: can we allow and what should we disallow on these
27:42
Speaker 5: platforms in ways that make people both participate and trust
27:46
Speaker 5: these platforms as not basically being a suckers.
27:49
Speaker 4: Play for people that don't have inside information.
27:52
Speaker 5: And that's going to be very much in Calshing's and
27:54
Speaker 5: polymarkets interests to try to try to do that, but
27:58
Speaker 5: they're hardly ever going to be able to get it.
28:00
Speaker 5: And a lot of times, you know, the underlying nature
28:04
Speaker 5: of these of these securities bet if you will, are
28:07
Speaker 5: essentially going to be around the fringes of what you know,
28:10
Speaker 5: the designers of Calci and Polymarket are capable of anticipating
28:13
Speaker 5: in advance.
28:14
Speaker 2: Calhi faced backlash over a multimillion dollar market on whether
28:19
Speaker 2: Commania would be ousted, and they actually issued refunds on
28:24
Speaker 2: the market citing regulations barring wagers on death. Yeah, so
28:29
Speaker 2: they self regulated.
28:31
Speaker 5: They sort of self regulated, and you know, I think
28:34
Speaker 5: that there is you know, in some ways because a
28:37
Speaker 5: lot of these bets were very very one sided. Calshi
28:40
Speaker 5: actually you know, faced possibly a little bit of exposure
28:43
Speaker 5: on this as well, and so I think, you know,
28:46
Speaker 5: some people are trying to say, was this Calshi basically
28:48
Speaker 5: trying to cover their own backsides, or were they legitimately
28:52
Speaker 5: trying to enforce a prohibition on various types of effectively
28:57
Speaker 5: what becomes wagering at the form level, you know, where
29:01
Speaker 5: they ended up sort of coming down was this sort
29:03
Speaker 5: of I think a little bit of a messy distinction
29:07
Speaker 5: between you know, were they going to pay off at all?
29:09
Speaker 5: And if they were, were they going to pay off
29:11
Speaker 5: only a portion of the wager that was put down?
29:14
Speaker 5: And you know, I think that you know, created a
29:16
Speaker 5: lot of ire amongst their clients who felt, you know,
29:19
Speaker 5: maybe some of them honestly were you know, making a
29:21
Speaker 5: wager in a direction that paid off and they didn't
29:24
Speaker 5: have any inside information on and suddenly they were getting
29:27
Speaker 5: short changed on it by the same token.
29:30
Speaker 4: You know, these platforms absolutely have an incentive not to
29:34
Speaker 4: develop a reputation as being kind of the place where
29:37
Speaker 4: suckers go to lose their money.
29:39
Speaker 2: Coming up next, what about possible prosecutions? This is Bloomberg.
29:46
Speaker 2: I've been talking to Columbia Law School professor Eric Talley
29:49
Speaker 2: about the controversy over Bett's placed on the prediction market
29:54
Speaker 2: platform Polymarket, correctly predicting the US strike on Iran. So Liebruary,
30:00
Speaker 2: Israeli authorities arrested several people and charged to a civilian
30:05
Speaker 2: and a military reservist with using classified information to place
30:10
Speaker 2: bets on Polymarket. Anyone in the US who used classified
30:14
Speaker 2: information to place a bet, I mean it would be
30:17
Speaker 2: subject to criminal prosecution. Right Is anybody looking into that?
30:23
Speaker 2: Is there an agency besides the CFTC.
30:26
Speaker 5: I'm pretty positive there are some state attorneys general that
30:29
Speaker 5: are looking at this as well. One of the things
30:31
Speaker 5: that's kind of interesting about this June is that it
30:34
Speaker 5: gets a little bit into the details of how insider
30:37
Speaker 5: trading law works, and there are a couple of theories
30:40
Speaker 5: behind it, but the one that would most likely apply
30:42
Speaker 5: to this situation is something that lawyers call the misappropriation theory,
30:47
Speaker 5: and what it basically means is if my employer or
30:52
Speaker 5: someone with whom I have some kind of a relationship
30:54
Speaker 5: of trust and confidence reveals inside information to me that
31:00
Speaker 5: is gonna happen with either the stated or implied a
31:04
Speaker 5: restriction that I have to keep that confidential. So if
31:07
Speaker 5: I go out and trade on it, then I have
31:09
Speaker 5: breached that confidentiality, and that is effectively what triggers a
31:14
Speaker 5: lot of criminal and civil liability for insider trading, the
31:17
Speaker 5: fact that I've misappropriated, I've violated this order or this
31:22
Speaker 5: command of confidentiality that came from the source, maybe it's
31:25
Speaker 5: my employer or someone else. But the thing it's always
31:28
Speaker 5: been weird about this theory, and that applies also in
31:31
Speaker 5: the derivatives context, is that it hinges very very critically
31:36
Speaker 5: on what does your employer permit and not permit, right,
31:41
Speaker 5: And so you could, in principle, have an employer who
31:44
Speaker 5: develops a lot of confidential information and their inside employee
31:48
Speaker 5: policies say, you know what, rather than paying you salaries,
31:51
Speaker 5: we're just going to let you trade rampantly on this
31:54
Speaker 5: inside information. And the third parties, the third party suckers
31:57
Speaker 5: who trade with these informed folks, they have no idea
31:59
Speaker 5: even who they're trading with or what the inside policy
32:02
Speaker 5: is of the employer. But that's going to have a
32:04
Speaker 5: huge effect on whether there will be civil or criminal liability,
32:08
Speaker 5: whether there was such a prohibition. So you transport this
32:11
Speaker 5: over to the administration in which clearly for classified information
32:16
Speaker 5: there's both an implicit and an explicit prohibition on, you know,
32:21
Speaker 5: trying to make money off of your own private knowledge
32:24
Speaker 5: of classified information. On the other hand, as we learned
32:29
Speaker 5: from the first Trump administration's you know, classified documents Gate, right,
32:34
Speaker 5: there's a big question about, well, what constitutes classified and
32:37
Speaker 5: not classified and who gets to determine when something is
32:40
Speaker 5: suddenly classified or declassified and when? And President Trump basically
32:46
Speaker 5: made the claim on behalf of himself that as he
32:49
Speaker 5: spirited these documents out of the White House at the
32:51
Speaker 5: end of his first administration, he basically declared, possibly to
32:56
Speaker 5: himself or possibly in passing, that they're all declassified now
33:00
Speaker 5: therefore he doesn't have any liability. So query whether I
33:04
Speaker 5: don't know some some staffer, employee or you know, person
33:09
Speaker 5: higher up in the administration was placing some of these bets.
33:13
Speaker 5: The way that it would trigger, you know, most directly
33:17
Speaker 5: inside of trading prohibitions is because they were classified. If
33:20
Speaker 5: you know, President Trump said, oh, no, I de classified
33:22
Speaker 5: that in a meeting, that I did it orally, But
33:25
Speaker 5: it's totally fine.
33:27
Speaker 4: Who knows what's going to happen there now?
33:29
Speaker 5: Having said that that doesn't necessarily take these folks off
33:31
Speaker 5: the hook for state level offenses, and there are some
33:34
Speaker 5: state level offenses that easily could be applied here. California
33:37
Speaker 5: and New York have pretty rigorous prohibitions on inside trading transactions.
33:42
Speaker 5: There are also various other types of provisions out there,
33:46
Speaker 5: the wire fraud acts, the computer fraud and abuse acts
33:49
Speaker 5: that might also kind of play a peripheral role in
33:53
Speaker 5: this context. You know, at the federal level, that's only
33:57
Speaker 5: going to be as strong as the stomach of the
33:59
Speaker 5: federal prosecutors who are going to bring these cases. And
34:02
Speaker 5: if they've gotten a command from on high that they
34:05
Speaker 5: shouldn't bring any of them, then I think we're going
34:07
Speaker 5: to be largely going to be left up to state
34:10
Speaker 5: attorneys general.
34:11
Speaker 2: Are they difficult to investigate because the main prediction platform
34:16
Speaker 2: operates offshore, the bets are placed on the blockchain, the
34:21
Speaker 2: identities of the accounts making the trades are anonymous. I mean,
34:25
Speaker 2: let's say state attorneys general, would it be difficult for
34:27
Speaker 2: them to get through all those layers?
34:30
Speaker 5: Yeah, this has always been a difficult thing in investigating
34:33
Speaker 5: trades made on the blockchain. Compared to ten years ago,
34:36
Speaker 5: it's much easier to trace who, you know, the identity
34:39
Speaker 5: of who was making these trades.
34:40
Speaker 4: You know, where was this.
34:41
Speaker 5: Wallet created, Who did the creation of this wallet. It's
34:45
Speaker 5: possible to get that information. LIVA would rest on subpoena
34:48
Speaker 5: power that might have to be applied extra territorially right
34:51
Speaker 5: outside the country, because ice companies are based in Ireland
34:55
Speaker 5: or England or Europe and so forth. So that creates
34:58
Speaker 5: a stumbling block, not one that is necessarily insurmountable. I
35:03
Speaker 5: could certainly imagine various regulators inside the EU or the
35:09
Speaker 5: UK being equally worried about the use of prediction markets
35:13
Speaker 5: for insider trading, and being perfectly willing to assist a
35:17
Speaker 5: request from say the New York State Attorney General or
35:20
Speaker 5: the California State Attorney General for some of that information,
35:24
Speaker 5: or at least to say, yeah, we were willing to
35:26
Speaker 5: serve your subpoena in Europe.
35:30
Speaker 2: So, finally, Eric, what do you think about You know,
35:32
Speaker 2: you talked about bills, and yesterday Senator Adam Schiff, Democrat
35:36
Speaker 2: of California, introduced legislation seeking to explicitly ban any entity
35:41
Speaker 2: regulated by the CFTC from listing a contract that involves
35:44
Speaker 2: relates to a references terrorism, assassination, war or death. I mean,
35:49
Speaker 2: what do you think about these bills? Long chances they
35:51
Speaker 2: go through, But if they did, I think it's.
35:54
Speaker 5: A valued attempt by center shif. I think there's a
35:57
Speaker 5: couple things that are going to be challenged for it.
36:00
Speaker 5: So thing one is that if you take a look
36:03
Speaker 5: at that distinction that we talked about earlier between you know,
36:07
Speaker 5: events that no one has much control over practically versus
36:11
Speaker 5: events that that you know, decision makers do have control over.
36:16
Speaker 4: You know, these things sit.
36:17
Speaker 5: Right in the middle, right, terrorist events, war, you know,
36:21
Speaker 5: in a lot of circumstances, those are completely extraneous events
36:25
Speaker 5: to a lot of participants in these markets. And these
36:28
Speaker 5: markets June are also you know, potentially helpful ways to
36:31
Speaker 5: hedge various types of risk that you might bear. Right,
36:33
Speaker 5: if you're running, I don't know, a wholesale operation that
36:36
Speaker 5: requires shipping things through the strait of horror moves and
36:41
Speaker 5: and you're quite worried that war is basically going to
36:43
Speaker 5: shut down your business, you know, having some type of
36:47
Speaker 5: insurance or a more exciting version of insurance, right, taking
36:50
Speaker 5: a position in these in these prediction markets might be
36:54
Speaker 5: a particularly good way to to try to hedge those risks.
36:57
Speaker 5: So on some level, you know, is this just gonna
37:00
Speaker 5: push things back into insurance markets that may be less
37:04
Speaker 5: competitive than having more choices out there, So, you know,
37:08
Speaker 5: I think that's gonna be, you know, potentially a problem.
37:10
Speaker 5: I think another one is, you know, we're exactly do
37:12
Speaker 5: you set the boundaries things like terrorism and war affect
37:15
Speaker 5: a lot of other things that don't at least optically
37:18
Speaker 5: look like their terrorism and war. Right, Like, you know,
37:21
Speaker 5: does a prediction market contract that says, you know, we're
37:25
Speaker 5: making predictions on how many ships are going to pass
37:28
Speaker 5: through the strait of horror moves? Is it going to
37:30
Speaker 5: be more than a hundred or less than one hundred,
37:32
Speaker 5: you know a day in the month of April. Is
37:35
Speaker 5: that a war contract? Or is that a shipping contract?
37:38
Speaker 4: Right?
37:39
Speaker 5: And you know, on some level it could be both.
37:42
Speaker 5: And so I envision a lot a lot of sort
37:45
Speaker 5: of boundary marking that's going to be heavily freighted, and
37:48
Speaker 5: there's easy it's going to be easy to spot things
37:50
Speaker 5: that ended up on the permitted side of the boundary
37:53
Speaker 5: that pretty much look and walk and talk and act
37:56
Speaker 5: as though they're a bet on war or terrorism, a lot.
37:59
Speaker 2: More to come with these platforms. Thanks so much.
38:02
Speaker 4: Eric.
38:03
Speaker 2: That's Professor Eric Tally of Columbia Law School. His podcast
38:07
Speaker 2: is called Beyond Unprecedented. And that's it for this edition
38:11
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38:14
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38:17
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38:21
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