Before Fifth Circuit Court of Appeals Judges, parties representing PredictIt made their case as to why the site should not be shut down after the Commodity Futures Trading Commission (CFTC) pulled a 2014 no-action letter that had allowed the site to operate.
The CFTC argued that it was well within its rights to rescind the protection provided in the letter, and that revoking the no-action letter, on its own, does not cause an event that allows the plaintiffs to challenge the action under the Administrative Procedure Act.
The oral arguments lasted under an hour, and now the waiting begins. While appellate decisions can sometimes take more than a year, the fast track that this case was placed on might indicate that we can expect a decision in shorter order, though that is far from certain. In the meantime, PredictIt will be allowed to continue operating as the result of an injunction issued by a separate Fifth Circuit three-judge panel.
Judges in PredictIt hearing
Oral arguments took place before a three-judge panel:
- Judge James E. Graves – 2011 appointee of President Obama
- Judge James C. Ho – 2018 appointee of President Trump
- Judge Stuart Kyle Duncan – 2018 appointee of President Trump
While it is a fool’s game to attempt to read too much into the judges hearing the cases, some judges appointed by President Trump have been critical of agencies’ authority under the Administrative Procedure Act.
The case opened with one of the Judges cracking a joke about how many notebooks can come out of one briefcase. However, counsel for PredictIt quickly got serious and framed the case as whether the CFTC’s decision is subject to judicial review.
Without that, the CFTC can shut down the markets and order liquidation with no ability to question decisions.
One of the first questions asked was whether PredictIt is a regulated entity. Counsel for PredictIt responded that they do not file annual reports and before finishing was interrupted by one of the Judges who said that the letter states the contracts should be closed out, “if that’s not regulated, I don’t know what is.”
The appellants’ counsel jumped at the friendly reception from the bench and argued that the letter was a directive to PredictIt, and that the CFTC’s position does not leave any meaningful path to appeal a revocation of a no-action letter.
How else could it stay open?
Counsel was then asked whether there were other potential paths that would allow PredictIt to continue operating, to which he responded “no.”
Counsel highlighted that the CFTC’s 2012 decision involving NADEX foreclosed on any possibility that PredictIt could charter a path as a registered market participant. The second option would be to seek authorization as an exempt entity; however, that would only allow qualified investors to participate, something that would undermine fundamental aspects of what PredictIt launched for, being a market seeking a broad and diverse range of participants.
One of the final questions that PredictIt’s counsel was asked before his time expired related to whether there was a need to wait for the CFTC to take action. Counsel articulated that a sufficient threat of the CFTC taking the next step which could include criminal or civil penalties existed.
Counsel for PredictIt concluded by saying that if the CFTC wants to revoke the no-action letter, it must explain why, because people rely on it.
The CFTC’s case began by trying to argue that “PredictIt is unregulated” by the agency. Counsel for the agency argued that PredictIt breached advertising requirements in the no-action letter.
This was one of the first indications as to what the CFTC was referencing in the revocation letter when it specified that there were violations of the 2014 no-action letter.
The bench, which appeared skeptical of the suggestion that PredictIt was not being regulated through the no-action letter and subsequent revocation, asked, “what does it mean to be regulated?” Counsel for the CFTC argued that it refers to a need to effectively follow certain regulations, and the no-action letter does not reach that standard.
Counsel tried to frame the letter as similar to informal guidance provided by the Commission. He argued that while a no-action letter is in effect, Division of Market Oversight staff will not make enforcement recommendations. Counsel said no-action letters are staff-level informal guidance. They are the expression of staff-level opinion, based on their experience of what the staff is likely to do but it is not binding on the Commission, counsel articulated.
Tell it to the judge(s)
The bench was skeptical of the argument that the revocation was not a command from the Division of Market Oversight, with one judge calling the instruction that markets should be shut down on February 15 “like sending a death threat.”
When asked about the possibility of appealing the revocation of a no-action letter, counsel for the CFTC articulated that a party could go back to the group (most likely the Division of Market Oversight) and ask for them to reconsider their recommendation.
Toward the tail end of counsel for the CFTC’s arguments, we were given a second glimpse into possible objections that the CFTC had with PredictIt’s alleged non-compliance with the 2014 no-action letter when, again, advertising violations were mentioned, along with 2014 contracts relating to the number of ebola cases in the United States.
In a brief rebuttal, PredictIt’s counsel argued that there was no real choice made with the revocation.
The site faces the threat of enforcement action if they were to continue operating.
Quick take on the arguments
At least two of the judges on the panel appeared skeptical of the arguments advanced by the CFTC with the third arguably neutral, if not also in the skeptical camp. The question is whether that translates into a favorable decision for PredictIt, which time will tell.
In the meantime, the clock starts ticking for a decision, though the immediate pressure is off PredictIt with the injunction allowing the site to continue operating after the original shutdown date, which would have been this week.
Author’s note: This article was written contemporaneously with oral arguments and therefore may have minor transcription discrepancies from the transcript.