1 00:00:02,759 --> 00:00:07,000 Speaker 1: This is Bloomberg Law with June Grossel from Bloomberg Radio. 2 00:00:08,960 --> 00:00:12,240 Speaker 2: Elon Musk and Sam Altman are facing off in a 3 00:00:12,320 --> 00:00:16,720 Speaker 2: courtroom in California as their decades long fight over open 4 00:00:16,800 --> 00:00:21,400 Speaker 2: Ai plays out before a jury. The high profile showdown 5 00:00:21,440 --> 00:00:25,919 Speaker 2: between the billionaires is the culmination of years of animosity 6 00:00:26,000 --> 00:00:29,720 Speaker 2: and public feuding over the startup that the pair founded 7 00:00:29,720 --> 00:00:34,280 Speaker 2: together more than a decade ago, before their relationship soured 8 00:00:34,280 --> 00:00:38,960 Speaker 2: and they became rivals. Musk alleges that Altman and others 9 00:00:39,000 --> 00:00:44,159 Speaker 2: at open Ai enriched themselves by abandoning its altruistic principles 10 00:00:44,479 --> 00:00:48,239 Speaker 2: and converting it to a for profit company with billions 11 00:00:48,240 --> 00:00:52,560 Speaker 2: of dollars in support from Microsoft. Altman and open Ai 12 00:00:52,840 --> 00:00:56,440 Speaker 2: accused Musk of harassment and say the real goal of 13 00:00:56,480 --> 00:01:00,680 Speaker 2: the lawsuit is to undercut competition with his own startup 14 00:01:00,760 --> 00:01:05,440 Speaker 2: that he co founded in twenty twenty three XAI. Joining 15 00:01:05,480 --> 00:01:09,640 Speaker 2: me is Bloomberg Legal reporter Madlin Meckelberg, who's covering the trial. 16 00:01:10,080 --> 00:01:14,600 Speaker 2: They started open Ai a decade ago, when their relationship 17 00:01:14,760 --> 00:01:15,640 Speaker 2: was quite different. 18 00:01:15,720 --> 00:01:20,520 Speaker 1: I mean, what happened that is the question. I think 19 00:01:20,600 --> 00:01:22,720 Speaker 1: that's what we're going to find out over the course 20 00:01:22,720 --> 00:01:26,520 Speaker 1: of the next three weeks at this trial. Certainly they 21 00:01:26,520 --> 00:01:30,240 Speaker 1: were partners at the beginning of this enterprise, and obviously 22 00:01:30,400 --> 00:01:34,800 Speaker 1: their relationship has soured since then. They've become very public 23 00:01:34,920 --> 00:01:39,680 Speaker 1: bitter rivals, fighting with each other about Ai and specifically 24 00:01:39,720 --> 00:01:42,480 Speaker 1: about open Ai, this company that they founded, and what 25 00:01:42,520 --> 00:01:45,560 Speaker 1: should happen there. I think we heard from Elon Musk 26 00:01:45,760 --> 00:01:49,600 Speaker 1: when he initially left open Ai that he disagreed about 27 00:01:49,680 --> 00:01:52,160 Speaker 1: the direction that they wanted to take things in. But 28 00:01:52,520 --> 00:01:55,800 Speaker 1: I don't think that we've gotten much more specifics from 29 00:01:55,840 --> 00:01:59,920 Speaker 1: them about what exactly happened there to prompt this falling out, 30 00:02:00,320 --> 00:02:02,760 Speaker 1: and so I think that's something that eager watchers in 31 00:02:02,760 --> 00:02:04,520 Speaker 1: this space are going to be helping to hear more 32 00:02:04,560 --> 00:02:06,120 Speaker 1: about over the course of this trial. 33 00:02:06,600 --> 00:02:10,040 Speaker 2: So Elon Musk brought the lawsuit, and he's looking for 34 00:02:10,360 --> 00:02:13,840 Speaker 2: one hundred and thirty four million dollars, an eye popping 35 00:02:13,880 --> 00:02:18,480 Speaker 2: amount is the basic claim that open ai was converted 36 00:02:18,560 --> 00:02:20,720 Speaker 2: into a for profit company. 37 00:02:21,240 --> 00:02:24,560 Speaker 1: So, if you'll recall when this case was first filed, 38 00:02:24,639 --> 00:02:27,360 Speaker 1: it was massive. There were a lot of allegations, and 39 00:02:27,440 --> 00:02:30,720 Speaker 1: it's been seriously trimmed down since then by the judge 40 00:02:30,760 --> 00:02:34,480 Speaker 1: and also by Musk himself. Withdrawing some of the allegations. 41 00:02:34,560 --> 00:02:37,880 Speaker 1: But the crux of the argument here is that open ai, 42 00:02:38,440 --> 00:02:43,160 Speaker 1: Microsoft and its founders violated the founding mission of open 43 00:02:43,200 --> 00:02:47,840 Speaker 1: ai to pursue this AI for all mentality by converting 44 00:02:47,880 --> 00:02:51,120 Speaker 1: from a nonprofit to a for profit entity well through 45 00:02:51,120 --> 00:02:54,640 Speaker 1: the process they finished in October after quite an undertaking 46 00:02:54,680 --> 00:02:57,160 Speaker 1: that involved a lot of different parties. So that's the 47 00:02:57,240 --> 00:03:01,200 Speaker 1: central allegation here. But technically, the two claims that are 48 00:03:01,200 --> 00:03:03,960 Speaker 1: going to be up before this jury are breach of 49 00:03:04,080 --> 00:03:07,519 Speaker 1: charitable trust and unjust enrichment. 50 00:03:07,639 --> 00:03:12,280 Speaker 2: And how do Altman and open ai respond to those allegations. 51 00:03:12,760 --> 00:03:16,000 Speaker 1: So open ai and Sam Altman stay first of all, 52 00:03:16,040 --> 00:03:19,680 Speaker 1: deny these allegations, and they say that Elon Musk is 53 00:03:19,720 --> 00:03:22,519 Speaker 1: harassing them through litigate in this is not the only 54 00:03:22,600 --> 00:03:26,679 Speaker 1: lawsuit he has involving one of these entities. And they 55 00:03:26,720 --> 00:03:29,840 Speaker 1: say that it's a clear attempt by him to undercut 56 00:03:29,880 --> 00:03:32,840 Speaker 1: a competitor in the AI space, because, as you and 57 00:03:32,880 --> 00:03:35,840 Speaker 1: your listeners know, Elon Musk started his own AI company 58 00:03:35,960 --> 00:03:39,560 Speaker 1: in twenty twenty three Xai, And so they say that 59 00:03:39,640 --> 00:03:42,880 Speaker 1: this is clearly a competitive beef between the two. The 60 00:03:42,960 --> 00:03:45,920 Speaker 1: charges are unfounded and there are plenty to fight them 61 00:03:45,960 --> 00:03:46,520 Speaker 1: to the noil. 62 00:03:46,960 --> 00:03:49,440 Speaker 2: And Microsoft is also a defendant. 63 00:03:49,000 --> 00:03:52,520 Speaker 1: Here, right. Microsoft is a defendant here, and that's because 64 00:03:52,560 --> 00:03:55,600 Speaker 1: of their significant investments that they made in open Ai, 65 00:03:56,160 --> 00:03:58,880 Speaker 1: and that funding was part of what made it possible 66 00:03:58,880 --> 00:04:02,000 Speaker 1: for open Ai to pursue this for profit conversion, because 67 00:04:02,040 --> 00:04:04,440 Speaker 1: that's what we heard from Sam Altman when all this 68 00:04:04,680 --> 00:04:07,400 Speaker 1: was happening that in order for them to sustain and 69 00:04:07,440 --> 00:04:11,080 Speaker 1: continue to meet this mission of providing this tool and 70 00:04:11,120 --> 00:04:14,280 Speaker 1: service in the way that it's accessible now is because 71 00:04:14,280 --> 00:04:17,800 Speaker 1: they need private funding. They need to convert to this 72 00:04:17,920 --> 00:04:20,560 Speaker 1: kind of entity. So, yes, Microsoft is a party as well. 73 00:04:20,560 --> 00:04:23,560 Speaker 1: We're expecting to hear In addition to hearing from witnesses 74 00:04:23,600 --> 00:04:26,880 Speaker 1: from open Ai and from Musk Camp, we're also going 75 00:04:26,920 --> 00:04:28,919 Speaker 1: to hear from executives from Microsoft. 76 00:04:29,720 --> 00:04:34,240 Speaker 2: Musk and Altman will both be testifying. Musk is very 77 00:04:34,320 --> 00:04:39,000 Speaker 2: practiced at testifying and he's been called teflon Elon for 78 00:04:39,080 --> 00:04:41,760 Speaker 2: his success at trial. What about Altman? 79 00:04:42,520 --> 00:04:44,240 Speaker 1: I think this is going to be the first time 80 00:04:44,279 --> 00:04:47,719 Speaker 1: that Altman will be testifying in any kind of trial 81 00:04:47,839 --> 00:04:50,840 Speaker 1: like this. We've heard him speak in committee hearings on 82 00:04:50,920 --> 00:04:53,760 Speaker 1: Capitol Hill, which you know can have some of the 83 00:04:53,800 --> 00:04:57,480 Speaker 1: same characteristics of sitting in a jury box, but obviously 84 00:04:57,520 --> 00:05:00,719 Speaker 1: the stakes here are really different because he defending his 85 00:05:00,800 --> 00:05:04,080 Speaker 1: business practices as a CEO and decisions that he made 86 00:05:04,400 --> 00:05:07,720 Speaker 1: in leading this company. So definitely, I think a lot 87 00:05:07,760 --> 00:05:11,359 Speaker 1: of attention, rightfully so, is being paid to the just 88 00:05:11,720 --> 00:05:14,919 Speaker 1: huge characters and personalities that these guys are. I mean, 89 00:05:15,000 --> 00:05:17,200 Speaker 1: when they're coming into the courtroom, they're bringing with them 90 00:05:17,360 --> 00:05:21,560 Speaker 1: billions of dollars and huge public personas and reputations. 91 00:05:22,120 --> 00:05:24,960 Speaker 2: Besides testimony, what other evidence do you expect. 92 00:05:25,600 --> 00:05:28,200 Speaker 1: My understanding is that the evidence that we're going to 93 00:05:28,200 --> 00:05:30,480 Speaker 1: be able to see at trial is going to include 94 00:05:30,760 --> 00:05:34,480 Speaker 1: a lot of internal documents about the mission of Open AI. 95 00:05:34,760 --> 00:05:38,200 Speaker 1: We're going to see emails and messages from executives at 96 00:05:38,200 --> 00:05:41,480 Speaker 1: these companies talking about what they want the mission to be. 97 00:05:42,040 --> 00:05:45,400 Speaker 1: We're going to see text messages between Elon Musk and 98 00:05:45,520 --> 00:05:49,560 Speaker 1: some of his close allies talking about frustrations about the 99 00:05:49,640 --> 00:05:51,919 Speaker 1: direction that things are heading in. I think we're going 100 00:05:52,000 --> 00:05:53,960 Speaker 1: to see a lot of internal We've seen quite a 101 00:05:54,000 --> 00:05:56,200 Speaker 1: few come out already through the course of discovery, but 102 00:05:56,320 --> 00:05:58,719 Speaker 1: I think we're expecting quite a bit more. Hard to 103 00:05:58,720 --> 00:06:00,719 Speaker 1: say at this point what that will entail. 104 00:06:01,279 --> 00:06:07,039 Speaker 2: So we've seen Mosk called Altman quote scam, Altman accusing 105 00:06:07,120 --> 00:06:12,679 Speaker 2: him of betrayal of Shakespearean proportions, and Altman claiming Musk 106 00:06:12,880 --> 00:06:16,479 Speaker 2: is insecure and not a happy person. Are we likely 107 00:06:16,520 --> 00:06:19,239 Speaker 2: to see some of these personal attacks at trial. 108 00:06:19,760 --> 00:06:22,640 Speaker 1: I think that's kind of what people are expecting, just 109 00:06:22,680 --> 00:06:25,400 Speaker 1: based on what we've seen from these two guys in 110 00:06:25,480 --> 00:06:28,440 Speaker 1: the public sphere. You know, they've been even leading up 111 00:06:28,480 --> 00:06:30,760 Speaker 1: to this trial, they've been posting on social media about 112 00:06:30,800 --> 00:06:34,159 Speaker 1: it about each other. They're not strangers to talking about 113 00:06:34,160 --> 00:06:37,400 Speaker 1: their very strong feelings about the other in a public way. 114 00:06:37,960 --> 00:06:40,200 Speaker 1: But I think one thing that's going to be different 115 00:06:40,240 --> 00:06:42,159 Speaker 1: here is that we have a judge who has said 116 00:06:42,200 --> 00:06:45,359 Speaker 1: previously that she doesn't want this case to be about 117 00:06:45,400 --> 00:06:48,520 Speaker 1: billionaire versus billionaire. She really wants it to be about 118 00:06:48,520 --> 00:06:50,960 Speaker 1: the issues, and so I think we're going to see 119 00:06:50,960 --> 00:06:54,039 Speaker 1: her trying to limit some of that. I know that 120 00:06:54,120 --> 00:06:57,000 Speaker 1: she's restricted what some of the questions that can be 121 00:06:57,080 --> 00:07:00,479 Speaker 1: asked are specifically open. Aye was hoping to ask must 122 00:07:00,560 --> 00:07:03,359 Speaker 1: about his Ketemie news. She said that's going to be 123 00:07:03,360 --> 00:07:05,440 Speaker 1: a no go. But they are going to be allowed 124 00:07:05,440 --> 00:07:07,880 Speaker 1: to ask him about his attendance at Burning Man, which 125 00:07:07,960 --> 00:07:11,200 Speaker 1: was apparently during some of the years of some negotiations 126 00:07:11,200 --> 00:07:13,200 Speaker 1: with open AI. So I think we're going to get 127 00:07:13,240 --> 00:07:15,560 Speaker 1: a little bit a little taste of that. It's hard 128 00:07:15,600 --> 00:07:18,760 Speaker 1: to say exactly right now how into the weeds this 129 00:07:18,840 --> 00:07:20,280 Speaker 1: is going to get on the personal level. 130 00:07:20,840 --> 00:07:24,280 Speaker 2: So I know, let's talk about the stakes of this 131 00:07:24,440 --> 00:07:28,559 Speaker 2: trial for open AI. It goes beyond the one hundred 132 00:07:28,600 --> 00:07:32,640 Speaker 2: and thirty four billion dollars in damages that Musk is 133 00:07:32,680 --> 00:07:33,360 Speaker 2: asking for. 134 00:07:33,680 --> 00:07:36,760 Speaker 1: The steaks are huge for open AI. The judges divided 135 00:07:36,760 --> 00:07:39,960 Speaker 1: this case into two separate sections. One is going to 136 00:07:40,000 --> 00:07:42,840 Speaker 1: be the liability section, where they're going to decide whether 137 00:07:42,960 --> 00:07:45,480 Speaker 1: or not the claims are legitimate. But the judge is 138 00:07:45,520 --> 00:07:48,640 Speaker 1: going to have a whole separate set of arguments about 139 00:07:48,800 --> 00:07:52,080 Speaker 1: what the remedies should be should she and the jury 140 00:07:52,120 --> 00:07:55,320 Speaker 1: find in musks favor. And as you said, he's seeking 141 00:07:55,360 --> 00:07:57,440 Speaker 1: as much as one hundred and thirty four billion dollars 142 00:07:57,480 --> 00:07:59,720 Speaker 1: that he has said that he would like to give 143 00:07:59,720 --> 00:08:02,920 Speaker 1: to Verity. He's not intending to keep that money for himself. 144 00:08:03,160 --> 00:08:05,240 Speaker 1: He wants to give it back to the open AI's 145 00:08:05,760 --> 00:08:08,400 Speaker 1: charitable arm. At the conclusion of this, should he be 146 00:08:08,480 --> 00:08:11,480 Speaker 1: awarded that, but you're right, there are other stakes here 147 00:08:11,520 --> 00:08:14,920 Speaker 1: besides the dollar amount, and that includes a request from 148 00:08:15,040 --> 00:08:18,480 Speaker 1: Musk that Altman and the president of open AI, Greg Brockman, 149 00:08:18,600 --> 00:08:22,320 Speaker 1: be removed from their leadership positions. And he's also seeking 150 00:08:22,360 --> 00:08:26,480 Speaker 1: to restore the startup status as a full nonprofit research organization, 151 00:08:26,680 --> 00:08:29,800 Speaker 1: so unwinding this for profit conversion that we saw them 152 00:08:29,960 --> 00:08:33,760 Speaker 1: spend the past year trying to achieve, and so there's 153 00:08:33,880 --> 00:08:37,760 Speaker 1: definite concern that that could destabilize the company, especially during 154 00:08:37,840 --> 00:08:40,280 Speaker 1: kind of this critical moment when there's this kind of 155 00:08:40,280 --> 00:08:44,080 Speaker 1: public offering maybe in the future, So the stakes are huge. 156 00:08:44,120 --> 00:08:46,640 Speaker 1: It's hard to say right now whether any of those remedies, 157 00:08:46,840 --> 00:08:49,520 Speaker 1: of course, are actually going to be awarded. They are 158 00:08:49,720 --> 00:08:53,079 Speaker 1: huge asks that can't be overstated. But yeah, if they 159 00:08:53,080 --> 00:08:55,160 Speaker 1: were to come to pass, I think open AI would 160 00:08:55,200 --> 00:08:57,760 Speaker 1: definitely be facing a big question mark about what the 161 00:08:57,760 --> 00:08:58,520 Speaker 1: future holds. 162 00:08:59,200 --> 00:09:02,240 Speaker 2: The jury verdict is only going to be advisory. Do 163 00:09:02,320 --> 00:09:06,040 Speaker 2: you know why the judge chose an advisory opinion. 164 00:09:06,480 --> 00:09:09,720 Speaker 1: It's quite unusual to have an advisory opinion for the 165 00:09:09,800 --> 00:09:12,920 Speaker 1: liabilities phase of a trial. Sometimes you'll see that where 166 00:09:12,920 --> 00:09:15,840 Speaker 1: a jury can offer suggestions to the judge when it 167 00:09:15,840 --> 00:09:18,920 Speaker 1: comes to damages how much money they think should be awarded, 168 00:09:18,920 --> 00:09:20,760 Speaker 1: and the judge will come in and say, actually, no, 169 00:09:21,040 --> 00:09:23,040 Speaker 1: we're going to cut this down or it should be higher. 170 00:09:23,240 --> 00:09:25,920 Speaker 1: I'm not exactly sure why the judge decided to do 171 00:09:25,960 --> 00:09:28,520 Speaker 1: that in this case, but what we do know is 172 00:09:28,559 --> 00:09:31,640 Speaker 1: that once the jury hands in its verdict, once they've 173 00:09:31,640 --> 00:09:33,880 Speaker 1: made these arguments about remedies, the judge is going to 174 00:09:33,880 --> 00:09:35,840 Speaker 1: take all of that back. She's going to be sitting 175 00:09:35,880 --> 00:09:37,760 Speaker 1: there through all the arguments and she's going to be 176 00:09:37,800 --> 00:09:41,880 Speaker 1: weighing her own view of the arguments and the legal 177 00:09:41,960 --> 00:09:46,120 Speaker 1: arguments being presented, but also taking into consideration this suggestion 178 00:09:46,520 --> 00:09:49,320 Speaker 1: from the jury about what should be done and how 179 00:09:49,360 --> 00:09:52,960 Speaker 1: to resolve this very complicated case that involves so many 180 00:09:53,280 --> 00:09:57,360 Speaker 1: huge public figures and huge companies and this hot button 181 00:09:57,600 --> 00:09:59,439 Speaker 1: issue of artificial intelligence. 182 00:10:00,080 --> 00:10:02,960 Speaker 2: There'll be nine people on the jury. What are some 183 00:10:03,000 --> 00:10:05,760 Speaker 2: of the concerns about jury selection when you have two 184 00:10:05,800 --> 00:10:09,800 Speaker 2: such well known billionaires opposing each other. 185 00:10:10,240 --> 00:10:12,640 Speaker 1: That's a great question. I mean, when you're talking about 186 00:10:12,679 --> 00:10:15,559 Speaker 1: these huge companies and these huge names, a lot of 187 00:10:15,640 --> 00:10:18,800 Speaker 1: people are going to come in with reconceived notions about them. 188 00:10:18,800 --> 00:10:21,520 Speaker 1: They're going to have strong opinions about them. Least if 189 00:10:21,520 --> 00:10:23,319 Speaker 1: they don't have strong opinions about them, they're going to 190 00:10:23,440 --> 00:10:25,920 Speaker 1: know who they are. And I think it's always a 191 00:10:25,920 --> 00:10:30,240 Speaker 1: complicating factor when one of your parties is incredibly wealthy 192 00:10:30,360 --> 00:10:32,840 Speaker 1: and known for being incredibly wealthy, and in this case, 193 00:10:33,120 --> 00:10:35,440 Speaker 1: there is more than one person in that room that's 194 00:10:35,480 --> 00:10:37,680 Speaker 1: got applied a lot of money to their name, and 195 00:10:37,720 --> 00:10:40,520 Speaker 1: so I think that's definitely a factor for jurors. There's 196 00:10:40,559 --> 00:10:43,240 Speaker 1: also going to be like a technological element of this 197 00:10:43,480 --> 00:10:47,840 Speaker 1: and their familiarity with artificial intelligence and whether that's you know, 198 00:10:48,120 --> 00:10:51,320 Speaker 1: do they use CHATGPT, do they use XAI, do they 199 00:10:51,400 --> 00:10:54,319 Speaker 1: use rock any of these tools, because that could certainly 200 00:10:54,360 --> 00:10:56,920 Speaker 1: factor into how they view this case. So those are 201 00:10:56,960 --> 00:10:59,319 Speaker 1: all kind of thorny issues that lawyers are going to 202 00:10:59,360 --> 00:11:01,480 Speaker 1: be navigating. They're trying to nail down who's going to 203 00:11:01,520 --> 00:11:04,800 Speaker 1: sit in the jury box during jury selection. Sam Altman 204 00:11:04,840 --> 00:11:07,600 Speaker 1: and Greg Brockman actually were there in the room as 205 00:11:07,679 --> 00:11:11,560 Speaker 1: jurors were being questioned, which is I think quite unusual 206 00:11:11,760 --> 00:11:15,040 Speaker 1: for someone of that high profile to attend jury selection. 207 00:11:15,600 --> 00:11:18,240 Speaker 2: That looks like a good strategic move to me, letting 208 00:11:18,240 --> 00:11:22,640 Speaker 2: the jurorsye your concerned and involved in the case. Thanks 209 00:11:22,640 --> 00:11:24,840 Speaker 2: so much, Madlin. We'll check back with you as the 210 00:11:24,920 --> 00:11:29,560 Speaker 2: trial goes on. That's Bloomberg. Legal reporter Madelein Mecklberg. Coming 211 00:11:29,640 --> 00:11:32,960 Speaker 2: up next. A soldier will be arraigned on charges of 212 00:11:33,080 --> 00:11:37,880 Speaker 2: using classified information to make four hundred thousand dollars trading 213 00:11:37,920 --> 00:11:41,640 Speaker 2: on the timing of the capture of Nicolas Maduro. This 214 00:11:41,760 --> 00:11:48,680 Speaker 2: is Bloomberg. A US Army soldier has been charged with 215 00:11:48,920 --> 00:11:53,200 Speaker 2: using classified information about the timing of the capture of 216 00:11:53,280 --> 00:11:58,120 Speaker 2: then Venezuelan President Nicolas Maduro to make more than four 217 00:11:58,200 --> 00:12:02,160 Speaker 2: hundred thousand dollars on polymarkets prediction market. 218 00:12:02,480 --> 00:12:04,559 Speaker 3: It's a little like Peter Rose. Peter Rose, he kept 219 00:12:04,640 --> 00:12:06,280 Speaker 3: him out of the Hall of Fame because he bet 220 00:12:06,280 --> 00:12:07,199 Speaker 3: on his own team. 221 00:12:07,559 --> 00:12:12,000 Speaker 2: Federal prosecutors say Master Sergeant Gannon Ken van Dyke, a 222 00:12:12,040 --> 00:12:15,480 Speaker 2: Special Forces soldier who was involved in the planning and 223 00:12:15,600 --> 00:12:22,120 Speaker 2: execution of Operation Absolute Resolve, the military effort to capture Maduro, 224 00:12:22,640 --> 00:12:26,360 Speaker 2: placed a total of about thirteen bets from December twenty 225 00:12:26,440 --> 00:12:31,120 Speaker 2: seventh through the evening of January second, all taking yes 226 00:12:31,280 --> 00:12:36,320 Speaker 2: positions on various Maduro related questions posed by the trading platform. 227 00:12:36,960 --> 00:12:40,120 Speaker 2: President Trump said last week that he has issues with 228 00:12:40,200 --> 00:12:43,120 Speaker 2: the concept of event betting platforms. 229 00:12:43,720 --> 00:12:48,080 Speaker 3: The whole world unfortunately, has become somewhat of a casino, 230 00:12:48,880 --> 00:12:51,079 Speaker 3: and you look at what's going on all over the world, 231 00:12:51,160 --> 00:12:54,040 Speaker 3: in Europe and every place, they're doing these betting things. 232 00:12:54,040 --> 00:12:55,880 Speaker 3: I was never much in favor of that. I don't 233 00:12:56,120 --> 00:12:59,480 Speaker 3: like it conceptually, but it is what it is. No 234 00:12:59,840 --> 00:13:02,360 Speaker 3: I think that I'm not happy with any of those. 235 00:13:03,080 --> 00:13:06,680 Speaker 2: However, His son, Donald Trump Junior, is an advisor to 236 00:13:06,720 --> 00:13:11,720 Speaker 2: both Calshi and Polymarket, and an investor in Polymarket through 237 00:13:11,720 --> 00:13:14,400 Speaker 2: the venture fund where he's a partner. My guest is 238 00:13:14,480 --> 00:13:17,880 Speaker 2: Joshua Mitt's, a professor at Columbia Law School and an 239 00:13:17,880 --> 00:13:22,600 Speaker 2: authority on insider trading, securities law, and corporate law. Explain 240 00:13:22,679 --> 00:13:24,280 Speaker 2: what the sergeant's accused of? 241 00:13:24,800 --> 00:13:31,720 Speaker 4: Sure, So, these websites known as betting markets sometimes prediction markets. 242 00:13:32,480 --> 00:13:39,360 Speaker 4: They are platforms which allow individuals to essentially purchase a 243 00:13:39,520 --> 00:13:43,920 Speaker 4: contract that pays off if in a future event happens, 244 00:13:44,240 --> 00:13:46,840 Speaker 4: and if the event does not happen, then you lose 245 00:13:46,880 --> 00:13:49,040 Speaker 4: all the money you paid. So is there like any 246 00:13:49,080 --> 00:13:51,920 Speaker 4: other markets where you might pay you twenty cents then 247 00:13:51,960 --> 00:13:53,880 Speaker 4: you can make a dollar or lose all of your 248 00:13:53,960 --> 00:13:58,320 Speaker 4: twenty cents, and these markets on a website known as 249 00:13:58,400 --> 00:14:02,440 Speaker 4: polymarket have I've sort of sprung into existence for all 250 00:14:02,480 --> 00:14:06,440 Speaker 4: sorts of future events. And in this case, the sergeant 251 00:14:06,600 --> 00:14:12,600 Speaker 4: purchased contracts which paid off one dollar if Maduro was 252 00:14:13,000 --> 00:14:15,920 Speaker 4: I think it was deposed as leader of Venezuelers, might 253 00:14:15,920 --> 00:14:18,400 Speaker 4: have been madurou out by a certain date, something of 254 00:14:18,400 --> 00:14:23,440 Speaker 4: that effect. And the sergeant purchased these contracts when they 255 00:14:23,520 --> 00:14:27,400 Speaker 4: were relatively inexpensive, so I think in the order of 256 00:14:27,440 --> 00:14:30,360 Speaker 4: single digit sense, maybe around seven cents or so of contract. 257 00:14:30,840 --> 00:14:34,880 Speaker 4: And of course he knew, very few people knew at 258 00:14:34,880 --> 00:14:38,640 Speaker 4: the time he purchased the contract that the operation was underway. 259 00:14:38,960 --> 00:14:45,440 Speaker 4: And so when the operation occurred and the contracts value 260 00:14:45,480 --> 00:14:48,880 Speaker 4: went from whatever it was seven cents eight cents to 261 00:14:48,880 --> 00:14:52,040 Speaker 4: one dollar per contract, and he had purchased a large 262 00:14:52,080 --> 00:14:56,040 Speaker 4: number of contracts, he made just short of half a 263 00:14:56,040 --> 00:14:57,880 Speaker 4: million dollars or so in profit. 264 00:14:58,640 --> 00:15:02,400 Speaker 2: And is he being charged because he used classified information 265 00:15:02,680 --> 00:15:03,680 Speaker 2: to make the bets? 266 00:15:04,440 --> 00:15:11,280 Speaker 4: That's exactly right. I mean, the operation itself was classified information, 267 00:15:11,680 --> 00:15:18,200 Speaker 4: so the capture of rendition of Maduro was non public 268 00:15:18,240 --> 00:15:20,560 Speaker 4: information that it was going to happen. When it happened, 269 00:15:20,600 --> 00:15:24,200 Speaker 4: and so the way that prosecutors have set forth the 270 00:15:24,200 --> 00:15:28,200 Speaker 4: theory of criminal liability here is that he was essentially 271 00:15:28,280 --> 00:15:33,400 Speaker 4: misappropriating information that belonged to the federal government and information 272 00:15:33,560 --> 00:15:38,040 Speaker 4: that was non public information that was classified for personal gain. 273 00:15:38,320 --> 00:15:41,720 Speaker 2: He placed a total of thirteen bets from December twenty 274 00:15:41,800 --> 00:15:48,040 Speaker 2: seventh through January tewod All yes on various Maduro related questions. 275 00:15:48,560 --> 00:15:50,600 Speaker 2: Is that an any defense for him that he was 276 00:15:51,120 --> 00:15:53,960 Speaker 2: placing thirteen and making different predictions. 277 00:15:54,600 --> 00:15:58,000 Speaker 4: So there's two questions here. I mean, they're on polymarket, 278 00:15:58,080 --> 00:16:02,240 Speaker 4: you'll often see minor vary and variations of the same 279 00:16:02,400 --> 00:16:06,400 Speaker 4: underlying contract or. It could be that an event happens 280 00:16:06,400 --> 00:16:09,240 Speaker 4: by a particular date, but there might be slight variations 281 00:16:09,280 --> 00:16:10,960 Speaker 4: in the date. It could be a day before, a 282 00:16:11,080 --> 00:16:14,480 Speaker 4: day after. So an individual who is in possession of 283 00:16:14,600 --> 00:16:18,240 Speaker 4: material non public information about one of these future events 284 00:16:18,800 --> 00:16:23,880 Speaker 4: may decide to trade in connection with that information without 285 00:16:24,280 --> 00:16:27,680 Speaker 4: necessarily pinning themselves down to one specific date. It could 286 00:16:27,720 --> 00:16:30,680 Speaker 4: be that you are highly highly confident that an event 287 00:16:30,760 --> 00:16:33,600 Speaker 4: is going to happen by a particular point in time, 288 00:16:34,080 --> 00:16:36,320 Speaker 4: but you're not sure exactly when, so you hedge your 289 00:16:36,360 --> 00:16:39,120 Speaker 4: bets a little bit on the specific contract. I think 290 00:16:39,160 --> 00:16:41,600 Speaker 4: your question, though, is getting at a broader question, which 291 00:16:41,640 --> 00:16:44,760 Speaker 4: is that there isn't a lot of case law, or 292 00:16:44,800 --> 00:16:47,600 Speaker 4: it's not very clear, and this is such a new 293 00:16:47,600 --> 00:16:51,120 Speaker 4: and emerging area what it means for information to be 294 00:16:51,200 --> 00:16:54,840 Speaker 4: material in this context and for the misappropriation of information 295 00:16:55,360 --> 00:16:59,160 Speaker 4: to be more than the sort of garden variety, you know, 296 00:16:59,360 --> 00:17:02,960 Speaker 4: general in tuitions that people have from their exposure to 297 00:17:04,119 --> 00:17:08,600 Speaker 4: ordinary speculation about the future. And I would imagine that 298 00:17:08,680 --> 00:17:12,919 Speaker 4: the sergeant will try to make the argument that he 299 00:17:13,000 --> 00:17:17,000 Speaker 4: did not necessarily have this level of specificity which would 300 00:17:17,040 --> 00:17:21,840 Speaker 4: be required to render this an actual misappropriation of information, 301 00:17:22,000 --> 00:17:25,240 Speaker 4: but simply that he had a general sense that something 302 00:17:25,320 --> 00:17:28,399 Speaker 4: was going to happen, and that general sense was not 303 00:17:28,880 --> 00:17:33,200 Speaker 4: any sort of information that had been misappropriated, but rather 304 00:17:33,600 --> 00:17:37,239 Speaker 4: his own impression or analysis of what he had been 305 00:17:37,280 --> 00:17:37,800 Speaker 4: exposed to. 306 00:17:38,160 --> 00:17:40,600 Speaker 2: And it was poly Market that turned him in, that 307 00:17:40,720 --> 00:17:41,960 Speaker 2: alerted the authorities. 308 00:17:42,520 --> 00:17:45,520 Speaker 4: Poly Market did, and one of the facts from the 309 00:17:45,560 --> 00:17:49,560 Speaker 4: indictment we see is that he used a virtual private network. 310 00:17:49,600 --> 00:17:54,080 Speaker 4: Because poly market is actually not accessible under essentially an 311 00:17:54,119 --> 00:17:57,960 Speaker 4: agreement with the CFTC. They do have a small US 312 00:17:58,480 --> 00:18:01,480 Speaker 4: market that they've been working with, but the poly markets 313 00:18:01,600 --> 00:18:07,000 Speaker 4: primary markets are not accessible to US residents, so he 314 00:18:07,119 --> 00:18:09,399 Speaker 4: had to use a VPN to use poly Market. That 315 00:18:09,520 --> 00:18:12,040 Speaker 4: wasn't the problem, but it did explain why it was 316 00:18:12,080 --> 00:18:15,879 Speaker 4: a little difficult for poly Market. Polymarket, you know, they 317 00:18:15,880 --> 00:18:19,200 Speaker 4: didn't have an obvious indication based on his IP address 318 00:18:19,480 --> 00:18:22,800 Speaker 4: that he was coming from the United States. He did. However, 319 00:18:23,720 --> 00:18:26,320 Speaker 4: my understanding from the indictment is that he had shared 320 00:18:26,320 --> 00:18:29,399 Speaker 4: his actual email address with poly market and that is 321 00:18:29,440 --> 00:18:32,800 Speaker 4: what gave them a trail, if you will, back to 322 00:18:32,880 --> 00:18:33,600 Speaker 4: this individual. 323 00:18:34,280 --> 00:18:38,160 Speaker 2: So last week Calsha, another predictions platform, said it had 324 00:18:38,200 --> 00:18:41,040 Speaker 2: fined and banned three political candidates who had bet on 325 00:18:41,119 --> 00:18:45,040 Speaker 2: their own elections. So is it up to the prediction 326 00:18:45,400 --> 00:18:48,080 Speaker 2: platforms themselves to police themselves. 327 00:18:48,720 --> 00:18:53,199 Speaker 4: Well, we are seeing increased regulatory and enforcement attention on this. 328 00:18:53,359 --> 00:18:56,919 Speaker 4: Jake Clayton gave a speech a couple months ago, this 329 00:18:57,080 --> 00:18:58,760 Speaker 4: was back in February, that this was going to be 330 00:18:58,760 --> 00:19:02,680 Speaker 4: an area of priority the most recent indictment, so all 331 00:19:02,760 --> 00:19:06,040 Speaker 4: this suggests that this is growing in importance and focus 332 00:19:06,160 --> 00:19:11,080 Speaker 4: for federal prosecutors. The reality is that most cases are 333 00:19:11,160 --> 00:19:15,199 Speaker 4: unlikely to be as simple as this one. And you 334 00:19:15,280 --> 00:19:19,880 Speaker 4: mentioned these three congressional candidates who had placed bets essentially 335 00:19:19,920 --> 00:19:25,119 Speaker 4: on their own markets and markets concerning their own campaigns. 336 00:19:25,240 --> 00:19:29,280 Speaker 4: That's a form of manipulation or a form of influencing 337 00:19:29,359 --> 00:19:33,000 Speaker 4: the outcome of a contract, which is also prohibited. But 338 00:19:33,160 --> 00:19:35,920 Speaker 4: these are again the exception. I have a new paper 339 00:19:35,960 --> 00:19:41,159 Speaker 4: which looked systematically at polymarket, and we think that there's 340 00:19:41,359 --> 00:19:44,199 Speaker 4: quite a bit of informed trading. Not all of this 341 00:19:44,359 --> 00:19:50,080 Speaker 4: will be illegal misappropriation of information, but anomalous or suspicious trading, 342 00:19:50,119 --> 00:19:54,359 Speaker 4: which suggests that perhaps there could be much more widespread 343 00:19:54,400 --> 00:19:59,600 Speaker 4: exploitation of this sort of information than these individual idiosyncratic 344 00:19:59,640 --> 00:20:00,760 Speaker 4: cases might suggest. 345 00:20:01,160 --> 00:20:06,680 Speaker 2: Yeah, what about there was apparently there was also trading 346 00:20:06,960 --> 00:20:10,640 Speaker 2: on the Iran war, and then the White House put 347 00:20:10,680 --> 00:20:16,320 Speaker 2: out a statement warning against insider trading. Yeah. 348 00:20:16,359 --> 00:20:18,359 Speaker 4: Well, as we explain in the paper, I mean this 349 00:20:18,400 --> 00:20:22,600 Speaker 4: happened in a number of cases, both before the February 350 00:20:23,320 --> 00:20:27,159 Speaker 4: Iran War, the Second Ran War, as well as the 351 00:20:27,359 --> 00:20:31,680 Speaker 4: June twenty twenty five Iran War. There were other events, 352 00:20:32,040 --> 00:20:37,200 Speaker 4: So we do see anomalist trading, large purchases. Again, unless 353 00:20:37,240 --> 00:20:39,440 Speaker 4: someone is going to put their email address in, it's 354 00:20:39,480 --> 00:20:42,639 Speaker 4: going to be quite hard for poly Market in particular 355 00:20:42,680 --> 00:20:46,320 Speaker 4: poly market runs on the blockchain. The blockchain is much 356 00:20:46,359 --> 00:20:51,000 Speaker 4: more anonymous in its structure than a traditional market, so 357 00:20:51,480 --> 00:20:56,000 Speaker 4: there's very little know your customer or similar regulatory disclosures 358 00:20:56,040 --> 00:20:59,000 Speaker 4: which are required. So it's going to be more difficult 359 00:20:59,160 --> 00:21:04,040 Speaker 4: formarket and regulators to chase down whoever might have been 360 00:21:04,080 --> 00:21:07,480 Speaker 4: trading in advance of these events. And the other thing 361 00:21:07,560 --> 00:21:11,479 Speaker 4: is it's important to recognize that not all lucky trading 362 00:21:11,560 --> 00:21:13,959 Speaker 4: is on the basis of inside information. Some of it 363 00:21:14,000 --> 00:21:16,560 Speaker 4: may be on the basis of putting lots of pieces 364 00:21:16,560 --> 00:21:21,280 Speaker 4: of information together, but it's not necessarily using some misappropriated 365 00:21:21,320 --> 00:21:24,199 Speaker 4: facts that only you possess. And so we don't know 366 00:21:24,240 --> 00:21:27,280 Speaker 4: in any of these cases whether the traders might have 367 00:21:27,520 --> 00:21:29,879 Speaker 4: just connected some dots that the rest of us had 368 00:21:29,920 --> 00:21:32,560 Speaker 4: not yet connected, in which case, under the law, they're 369 00:21:33,119 --> 00:21:36,679 Speaker 4: entirely entitled to benefit from the profits of that work. 370 00:21:37,240 --> 00:21:41,280 Speaker 2: What concerns do you have about the prediction markets. 371 00:21:42,560 --> 00:21:47,560 Speaker 4: Well, if in fact there are episodes even episodically even 372 00:21:47,600 --> 00:21:52,200 Speaker 4: here there where government officials or those like the sergeant 373 00:21:52,240 --> 00:21:54,920 Speaker 4: and possession of this sort of information are rushing out 374 00:21:54,920 --> 00:21:58,280 Speaker 4: to these markets to profit off of that information, there 375 00:21:58,280 --> 00:22:02,680 Speaker 4: can be a number of concerning collateral consequences. So one 376 00:22:02,720 --> 00:22:06,280 Speaker 4: could be that our adversaries learn from this sort of trading. 377 00:22:06,359 --> 00:22:09,879 Speaker 4: So if there's any exploitation of information that takes the 378 00:22:09,920 --> 00:22:15,359 Speaker 4: form of large transactions prior to national security or military actions, 379 00:22:15,640 --> 00:22:19,680 Speaker 4: that information is broadcast immediately globally, and so it could 380 00:22:19,680 --> 00:22:22,000 Speaker 4: in fact put our soldiers in harms way. And I 381 00:22:22,040 --> 00:22:26,560 Speaker 4: believe the prosecution referred to this as betrayal of his 382 00:22:26,720 --> 00:22:29,879 Speaker 4: fellows servicemen, and I think there's definitely truth to that. 383 00:22:30,280 --> 00:22:34,480 Speaker 4: There's also a question around whether the profits that could 384 00:22:34,520 --> 00:22:37,840 Speaker 4: be made from these sorts of contracts may have a 385 00:22:37,880 --> 00:22:41,240 Speaker 4: first order of factor, may skew the way that individuals 386 00:22:41,280 --> 00:22:43,159 Speaker 4: behave So if I know that if I take a 387 00:22:43,200 --> 00:22:47,119 Speaker 4: certain action, I'm going to profit personally or my friends 388 00:22:47,119 --> 00:22:50,240 Speaker 4: are going to profit personally, that might introduce a form 389 00:22:50,280 --> 00:22:54,840 Speaker 4: of corruption to my decisions. We see certain forms of 390 00:22:54,880 --> 00:22:58,600 Speaker 4: this in the extreme, so called mention markets, where contracts 391 00:22:58,600 --> 00:23:01,280 Speaker 4: that pay out if a public says something. And you 392 00:23:01,320 --> 00:23:04,240 Speaker 4: can start to imagine how this can create incentives to 393 00:23:04,280 --> 00:23:09,359 Speaker 4: say certain things and essentially, you know, redirect and redistribute 394 00:23:09,480 --> 00:23:13,240 Speaker 4: who's winning from these mentioned market bets. So this sort 395 00:23:13,280 --> 00:23:16,320 Speaker 4: of activity, if it continues to grow and aggregate, and 396 00:23:16,840 --> 00:23:20,520 Speaker 4: it's not just widespread gambling or widespread betting. It can 397 00:23:20,560 --> 00:23:23,639 Speaker 4: actually change potentially the way people behave. 398 00:23:24,280 --> 00:23:27,120 Speaker 2: Coming up next on the Bloomberg Law Show, I'll continue 399 00:23:27,119 --> 00:23:31,679 Speaker 2: this conversation with Professor Mitz. The Commodity Futures Trading Commission 400 00:23:32,040 --> 00:23:36,040 Speaker 2: lodged a parallel civil complaint against the soldier, the first 401 00:23:36,040 --> 00:23:40,159 Speaker 2: time the regulator filed a prediction markets insider trading case. 402 00:23:40,720 --> 00:23:43,800 Speaker 2: Also the first time the agency used what's known as 403 00:23:43,840 --> 00:23:47,520 Speaker 2: the Eddie Murphy rule in an insider trading case. I'm 404 00:23:47,600 --> 00:23:51,480 Speaker 2: June Grosso and you're listening to Bloomberg. A US Army 405 00:23:51,560 --> 00:23:55,000 Speaker 2: soldier will be arranged tomorrow in New York for using 406 00:23:55,119 --> 00:23:58,760 Speaker 2: classified information about the timing of the capture of then 407 00:23:58,880 --> 00:24:03,120 Speaker 2: Venezuela and pressident Nicolas Maduro to make more than four 408 00:24:03,200 --> 00:24:08,080 Speaker 2: hundred thousand dollars trading on polymarkets prediction market. I've been 409 00:24:08,119 --> 00:24:12,240 Speaker 2: talking to Columbia Law School professor Joshua Mittz. I mean 410 00:24:12,280 --> 00:24:15,080 Speaker 2: it sounds like gambling, you place a bet on something. 411 00:24:15,400 --> 00:24:19,800 Speaker 2: Yet there is this battle between some states and the 412 00:24:19,880 --> 00:24:25,720 Speaker 2: commadi's Future Trading Commission about who will regulate the markets 413 00:24:25,960 --> 00:24:30,199 Speaker 2: and the States say it's gambling and they should regulate it. 414 00:24:30,560 --> 00:24:34,400 Speaker 2: The CFTC says, no, it's not, and they've sued three states. 415 00:24:34,680 --> 00:24:36,320 Speaker 2: I mean, what do you think. 416 00:24:37,440 --> 00:24:42,360 Speaker 4: Well, these contracts in many ways very similar to the 417 00:24:42,400 --> 00:24:45,040 Speaker 4: sort of if you look at the definition of a 418 00:24:45,080 --> 00:24:47,240 Speaker 4: swap or of a future that you know, they seem 419 00:24:47,359 --> 00:24:53,200 Speaker 4: to satisfy these definitions that the CFTC has statutorily. In part, 420 00:24:53,520 --> 00:24:56,680 Speaker 4: they lend themselves very naturally to the CFTC framework because 421 00:24:56,720 --> 00:25:02,200 Speaker 4: they are traded on markets with trading price. Whereas traditionally 422 00:25:02,440 --> 00:25:05,720 Speaker 4: betting was against some house accounts, so you would you 423 00:25:05,760 --> 00:25:09,359 Speaker 4: would open a bet against let's say the dealer, and 424 00:25:09,400 --> 00:25:12,840 Speaker 4: the dealer would take a particular position, whereas these platforms 425 00:25:13,000 --> 00:25:15,880 Speaker 4: look more like financial markets and that they match buyers 426 00:25:15,880 --> 00:25:19,800 Speaker 4: and sellers. The reality is that this is this is 427 00:25:19,840 --> 00:25:22,560 Speaker 4: an area of ongoing litigation, and I would expect to 428 00:25:22,600 --> 00:25:25,760 Speaker 4: see potentially this reached the Supreme Court. I believe CALCI 429 00:25:25,920 --> 00:25:28,640 Speaker 4: just won in the Third Circuit against an attempt by 430 00:25:28,680 --> 00:25:32,280 Speaker 4: States New Jersey to regulate its activities. So I think 431 00:25:32,320 --> 00:25:36,959 Speaker 4: we will see increasing litigation around the scope of the 432 00:25:37,000 --> 00:25:40,800 Speaker 4: CFTC statutory authority. If I had to place a bet 433 00:25:40,840 --> 00:25:43,520 Speaker 4: on it no pun intended. I would say that perhaps 434 00:25:43,560 --> 00:25:46,400 Speaker 4: the CFTC is likely to win this in the end. 435 00:25:46,800 --> 00:25:51,160 Speaker 2: I mean, the chairman of the CFTC, Mike Zellig, seems 436 00:25:51,320 --> 00:25:57,160 Speaker 2: very supportive of the prediction markets. He called them exciting products, 437 00:25:57,200 --> 00:26:01,840 Speaker 2: and he scrapped a Biden rule that would have restricted 438 00:26:01,880 --> 00:26:04,280 Speaker 2: them like everything else. I guess, and life does it 439 00:26:04,280 --> 00:26:06,679 Speaker 2: depend on who's in charge of the CFTC. 440 00:26:07,640 --> 00:26:10,879 Speaker 4: I think that's right. I also think that there's regulators 441 00:26:11,160 --> 00:26:15,520 Speaker 4: prefer to establish a sort of area of the market 442 00:26:15,560 --> 00:26:17,879 Speaker 4: that they consider legitimate and then an area of the 443 00:26:17,880 --> 00:26:20,919 Speaker 4: market that they consider illegitimate. This is also true for 444 00:26:20,960 --> 00:26:25,119 Speaker 4: industry participants. Industry participants and regulators in any industry would 445 00:26:25,160 --> 00:26:28,760 Speaker 4: like to have sort of the accepted safe activity and 446 00:26:28,800 --> 00:26:32,639 Speaker 4: then the unacceptable dangerous activity, and the latter is what 447 00:26:32,680 --> 00:26:35,640 Speaker 4: the regulators cracked down on. It creates a need both 448 00:26:35,680 --> 00:26:39,119 Speaker 4: for the regulation and it legitimizes the industry. If you 449 00:26:39,119 --> 00:26:41,720 Speaker 4: had no industry, you would have no regulators. So they 450 00:26:41,720 --> 00:26:45,280 Speaker 4: both have an interest in this outcome, whether it's good 451 00:26:45,359 --> 00:26:48,359 Speaker 4: or not for society. There is an economic argument that 452 00:26:48,440 --> 00:26:52,080 Speaker 4: it is beneficial for society to have this information, particularly 453 00:26:52,160 --> 00:26:56,080 Speaker 4: in the context of macroeconomic or geopolitical events because there's 454 00:26:56,119 --> 00:26:59,720 Speaker 4: an aggregation of information that happens, So every participant has 455 00:26:59,760 --> 00:27:02,280 Speaker 4: a particular view, and in the end, the one who's 456 00:27:02,280 --> 00:27:04,840 Speaker 4: willing to put the most money behind their view determines 457 00:27:04,880 --> 00:27:06,840 Speaker 4: the price, and we all can look and learn. It's 458 00:27:06,920 --> 00:27:09,919 Speaker 4: kind of like a live poll, and this gives some 459 00:27:10,040 --> 00:27:12,760 Speaker 4: information about the likelihood of future events and we can 460 00:27:12,880 --> 00:27:16,360 Speaker 4: organize our activity accordingly. That's a little bit of an 461 00:27:16,359 --> 00:27:20,200 Speaker 4: idealistic notion, but it may bear out in some cases 462 00:27:20,280 --> 00:27:23,280 Speaker 4: that there's value in having this sort of this sort 463 00:27:23,280 --> 00:27:25,680 Speaker 4: of market. At the end of the day, the question 464 00:27:25,880 --> 00:27:27,920 Speaker 4: is are there steps that can be taken that make 465 00:27:27,960 --> 00:27:32,400 Speaker 4: these markets safer, that make them less dangerous for ordinary 466 00:27:32,440 --> 00:27:35,200 Speaker 4: participants who may not have this sort of non public 467 00:27:35,280 --> 00:27:39,760 Speaker 4: information that we're talking about, And are there potentially, you know, 468 00:27:39,880 --> 00:27:44,320 Speaker 4: external effects like leaking information out or changing the way 469 00:27:44,400 --> 00:27:47,960 Speaker 4: people make decisions which weren't particular regulatory scrutiny. 470 00:27:48,320 --> 00:27:53,120 Speaker 2: The CFTC has filed a civil complaint against the soldier. 471 00:27:53,119 --> 00:27:56,240 Speaker 2: It's the first time it filed a complaint in connection 472 00:27:56,280 --> 00:27:59,040 Speaker 2: with the prediction markets. It's also the first time the 473 00:27:59,119 --> 00:28:02,600 Speaker 2: agency has used what's known as the Eddie Murphy rule 474 00:28:03,119 --> 00:28:06,280 Speaker 2: in an insider trading case tell us about that. 475 00:28:06,680 --> 00:28:09,400 Speaker 4: This is a rule which basically prohibits for Synthon Dot 476 00:28:09,400 --> 00:28:14,680 Speaker 4: Frankact prohibits the misappropriation of information that is held by 477 00:28:14,720 --> 00:28:18,280 Speaker 4: the government. And there's some technical history here in the 478 00:28:18,320 --> 00:28:21,320 Speaker 4: context of insider trading law that I won't get into 479 00:28:21,359 --> 00:28:25,280 Speaker 4: all the details right now, but basically, traditionally there was 480 00:28:25,320 --> 00:28:29,600 Speaker 4: some question around whether information held by the government could 481 00:28:29,880 --> 00:28:34,240 Speaker 4: satisfy these fraud statutes which are used for insider trading law. 482 00:28:34,680 --> 00:28:38,320 Speaker 4: The classical sort of view of insider trading was that 483 00:28:38,360 --> 00:28:42,920 Speaker 4: it involved information that belonged to a company, and trading 484 00:28:42,960 --> 00:28:45,440 Speaker 4: on the basis of that information was a kind of 485 00:28:45,520 --> 00:28:49,280 Speaker 4: deception of the shareholders of the company or a deception 486 00:28:49,480 --> 00:28:52,840 Speaker 4: of the source of the information, and it had a 487 00:28:53,000 --> 00:28:57,320 Speaker 4: very commercial context in which it arose. Now, these cases, 488 00:28:58,000 --> 00:29:02,240 Speaker 4: like the case of the Urgent, are cases involving the 489 00:29:02,280 --> 00:29:06,720 Speaker 4: misappropriation of information received from the government or received pursu 490 00:29:06,800 --> 00:29:11,600 Speaker 4: into a governmental role, and the Eddie Murphy rule clarifies 491 00:29:11,720 --> 00:29:17,000 Speaker 4: that that information can also be misappropriated. So what we're 492 00:29:17,040 --> 00:29:20,120 Speaker 4: seeing now are new ways to exploit information. I mean, 493 00:29:20,320 --> 00:29:23,160 Speaker 4: you might say from the standpoint of what's good for society. 494 00:29:23,760 --> 00:29:27,960 Speaker 4: It's better to have these misappropriation rules because the risk 495 00:29:28,000 --> 00:29:31,640 Speaker 4: to society of stealing information that belongs to the public 496 00:29:31,720 --> 00:29:35,720 Speaker 4: is greater. But it is a different context than we 497 00:29:35,760 --> 00:29:40,200 Speaker 4: initially thought traditionally of insider trading as applying to individual companies. 498 00:29:39,840 --> 00:29:43,120 Speaker 2: And the rule is nicknamed the Eddie Murphy rule after 499 00:29:43,200 --> 00:29:47,520 Speaker 2: the nineteen eighty three movie Trading Places, where the characters 500 00:29:47,640 --> 00:29:52,040 Speaker 2: use a stolen Department of Agriculture report to manipulate the 501 00:29:52,080 --> 00:29:56,120 Speaker 2: orange juice market that was part of the Dodd Frank law. 502 00:29:56,640 --> 00:29:58,680 Speaker 2: Do you think we need a federal law to handle 503 00:29:58,680 --> 00:30:00,320 Speaker 2: the prediction markets. 504 00:30:00,400 --> 00:30:04,160 Speaker 4: Well, we definitely need to see more work on the 505 00:30:04,200 --> 00:30:08,400 Speaker 4: prediction markets more generally, and there are some proposals. The CFTC, 506 00:30:08,520 --> 00:30:11,840 Speaker 4: for example, has a Notice of Proposed Rulemaking comment period 507 00:30:11,840 --> 00:30:15,040 Speaker 4: that's ending in a few days on April thirtieth, and 508 00:30:15,120 --> 00:30:18,200 Speaker 4: the CFTC has invited commentary on the question of whether 509 00:30:18,240 --> 00:30:22,000 Speaker 4: the prediction markets should be regulated more that could take 510 00:30:22,040 --> 00:30:25,600 Speaker 4: the form of rulemaking. There are some legislative proposals to 511 00:30:25,640 --> 00:30:30,000 Speaker 4: clarify other settings, such as congressional settings. For example, congressional 512 00:30:30,000 --> 00:30:32,480 Speaker 4: staffers and others who may want to rush out and 513 00:30:32,520 --> 00:30:35,960 Speaker 4: trade on prediction markets on the basis of information, and 514 00:30:36,360 --> 00:30:41,240 Speaker 4: this legislation would clarify that that that's not permitted. Beyond that, 515 00:30:41,440 --> 00:30:44,680 Speaker 4: I think there's a broader challenge here that's really more 516 00:30:44,720 --> 00:30:48,320 Speaker 4: of an enforcement challenge than a legislative challenge. If you 517 00:30:48,360 --> 00:30:52,160 Speaker 4: look globally at the activity here and you think, well, 518 00:30:52,240 --> 00:30:56,160 Speaker 4: it could be originating anywhere around the world. The challenge 519 00:30:56,200 --> 00:31:01,680 Speaker 4: I see it is more of a cooperation and coordination challenge. 520 00:31:01,680 --> 00:31:05,800 Speaker 4: How do you get different components of the regulatory and 521 00:31:05,920 --> 00:31:08,840 Speaker 4: enforcement apparatus around the world to work together, whether that's 522 00:31:08,880 --> 00:31:13,360 Speaker 4: financial institutions, whether that's prosecutors, whether that's market regulators. And 523 00:31:13,440 --> 00:31:16,520 Speaker 4: that's more of an institutional challenge than it is a 524 00:31:16,600 --> 00:31:19,680 Speaker 4: legislative challenge. How you need to get national governments to 525 00:31:19,720 --> 00:31:24,560 Speaker 4: cooperate and root out essentially this sort of transnational exploitation 526 00:31:24,920 --> 00:31:27,840 Speaker 4: of information, because in many cases it's not going to 527 00:31:27,880 --> 00:31:29,720 Speaker 4: be only in the United States. It's going to be 528 00:31:29,840 --> 00:31:32,720 Speaker 4: especially on poly market on the blockchain, could be anywhere 529 00:31:32,720 --> 00:31:33,560 Speaker 4: around the world. 530 00:31:33,760 --> 00:31:36,200 Speaker 2: Why do you think these prediction markets have become so 531 00:31:36,440 --> 00:31:38,040 Speaker 2: popular so fast? 532 00:31:38,640 --> 00:31:41,920 Speaker 4: Well, just say, I think what's important for you know, 533 00:31:41,960 --> 00:31:44,680 Speaker 4: someone who's never thought about this, I think to understand 534 00:31:44,760 --> 00:31:47,520 Speaker 4: is the context that you know, this is not the 535 00:31:47,560 --> 00:31:51,320 Speaker 4: first iteration of sort of gambling that we've seen in 536 00:31:51,360 --> 00:31:55,680 Speaker 4: the financial world in recent years. I would say traditionally 537 00:31:56,200 --> 00:32:01,000 Speaker 4: speculation was viewed as almost a necessary by product of investing. 538 00:32:01,120 --> 00:32:03,840 Speaker 4: So you might buy or sell stocks, but you kind 539 00:32:03,840 --> 00:32:05,280 Speaker 4: of knew that what you at the end of the 540 00:32:05,360 --> 00:32:08,560 Speaker 4: day needed to do was to buy and invest in companies. 541 00:32:08,920 --> 00:32:13,880 Speaker 4: Then we started to see more gambling and gamification of 542 00:32:13,920 --> 00:32:16,240 Speaker 4: the financial markets in the last five or six years. 543 00:32:16,240 --> 00:32:19,480 Speaker 4: It started with Game Stop, we saw with meme stocks, 544 00:32:19,560 --> 00:32:22,720 Speaker 4: We saw with crypto, a sort of increasing acceptance of 545 00:32:22,800 --> 00:32:26,880 Speaker 4: this sort of gambling and risk taking that had very 546 00:32:26,880 --> 00:32:30,800 Speaker 4: little connection with any kind of underlying investment thesis. And 547 00:32:30,880 --> 00:32:34,080 Speaker 4: so it probably should not surprise us that the prediction 548 00:32:34,200 --> 00:32:37,440 Speaker 4: markets emerged on the backdrop of this societal trend. And 549 00:32:37,520 --> 00:32:39,480 Speaker 4: so I think the broader question here really to think 550 00:32:39,480 --> 00:32:42,280 Speaker 4: about is why is it that these prediction markets have 551 00:32:42,320 --> 00:32:46,080 Speaker 4: in fact become as popular as they have the insider 552 00:32:46,160 --> 00:32:49,280 Speaker 4: trading opportunities that we document in our research, and that 553 00:32:49,400 --> 00:32:52,920 Speaker 4: the basis of this indictment, they wouldn't exist if you 554 00:32:52,960 --> 00:32:56,600 Speaker 4: did not have an active, frothy market for people to 555 00:32:56,680 --> 00:32:58,720 Speaker 4: trade in and out of four hundred and fifty five 556 00:32:58,760 --> 00:33:02,440 Speaker 4: hundred thousand dollars that a particular trader made, where four 557 00:33:02,480 --> 00:33:05,560 Speaker 4: and fifty five hundred thousand dollars of losses suffered by 558 00:33:05,560 --> 00:33:07,520 Speaker 4: others in the market. So that means that there's a 559 00:33:07,560 --> 00:33:11,040 Speaker 4: lot of activity out there that can be exploited. And 560 00:33:11,120 --> 00:33:14,280 Speaker 4: there's a broader question as to why these markets have 561 00:33:14,440 --> 00:33:19,000 Speaker 4: exploded in popularity and the increasing acceptance perhaps societally, of 562 00:33:19,080 --> 00:33:21,440 Speaker 4: this sort of activity may have something to do with it. 563 00:33:21,720 --> 00:33:24,400 Speaker 2: This is a topic I'm sure we'll hear more and 564 00:33:24,440 --> 00:33:27,080 Speaker 2: more about in the coming days. Thanks so much for 565 00:33:27,160 --> 00:33:31,920 Speaker 2: joining me. That's Columbia Law School professor Joshua Mitts, and 566 00:33:31,960 --> 00:33:34,160 Speaker 2: that's it for this edition of The Bloomberg Law Show. 567 00:33:34,480 --> 00:33:36,840 Speaker 2: Remember you can always get the latest legal news on 568 00:33:36,880 --> 00:33:41,160 Speaker 2: our Bloomberg Law Podcast. You can find them on Apple Podcasts, Spotify, 569 00:33:41,320 --> 00:33:46,360 Speaker 2: and at www dot Bloomberg dot com, slash podcast Slash Law, 570 00:33:46,760 --> 00:33:49,360 Speaker 2: and remember to tune into The Bloomberg Law Show every 571 00:33:49,400 --> 00:33:53,320 Speaker 2: weeknight at ten pm Wall Street Time. I'm Junie Grosso, 572 00:33:53,440 --> 00:33:55,040 Speaker 2: and you're listening to Bloomberg