# Musk vs Altman & Prediction Markets

An episode of [Bloomberg Law](https://invisiblenetwork.ai/podcast/277975394), 27 Apr 2026, 34 min.

Audio: https://podtrac.com/pts/redirect.mp3/traffic.omny.fm/d/clips/e73c998e-6e60-432f-8610-ae210140c5b1/7c892d84-801f-4c0b-b0e9-ae2b0012ff5f/a36d6076-69e1-4a08-807b-b439017f6475/audio.mp3?utm_source=Podcast&in_playlist=91224201-26a6-429d-ac3c-ae2b0012ff6d

Bloomberg legal reporter Madlin Mekelburg discusses the start of the face-off in court of Elon Musk and Sam Altman over the future of OpenAI. Joshua Mitts, a professor at Columbia Law School, and an authority on insider trading, securities law and corporate law, discusses the soldier charged with using classified information to make $400,000 on Polymarket. June Grasso hosts. See omnystudio.com/listener for privacy information.

## Transcript

[0:02] Speaker 1: This is Bloomberg Law with June Grossel from Bloomberg Radio.
[0:08] Speaker 2: Elon Musk and Sam Altman are facing off in a
[0:12] Speaker 2: courtroom in California as their decades long fight over open
[0:16] Speaker 2: Ai plays out before a jury. The high profile showdown
[0:21] Speaker 2: between the billionaires is the culmination of years of animosity
[0:26] Speaker 2: and public feuding over the startup that the pair founded
[0:29] Speaker 2: together more than a decade ago, before their relationship soured
[0:34] Speaker 2: and they became rivals. Musk alleges that Altman and others
[0:39] Speaker 2: at open Ai enriched themselves by abandoning its altruistic principles
[0:44] Speaker 2: and converting it to a for profit company with billions
[0:48] Speaker 2: of dollars in support from Microsoft. Altman and open Ai
[0:52] Speaker 2: accused Musk of harassment and say the real goal of
[0:56] Speaker 2: the lawsuit is to undercut competition with his own startup
[1:00] Speaker 2: that he co founded in twenty twenty three XAI. Joining
[1:05] Speaker 2: me is Bloomberg Legal reporter Madlin Meckelberg, who's covering the trial.
[1:10] Speaker 2: They started open Ai a decade ago, when their relationship
[1:14] Speaker 2: was quite different.
[1:15] Speaker 1: I mean, what happened that is the question. I think
[1:20] Speaker 1: that's what we're going to find out over the course
[1:22] Speaker 1: of the next three weeks at this trial. Certainly they
[1:26] Speaker 1: were partners at the beginning of this enterprise, and obviously
[1:30] Speaker 1: their relationship has soured since then. They've become very public
[1:34] Speaker 1: bitter rivals, fighting with each other about Ai and specifically
[1:39] Speaker 1: about open Ai, this company that they founded, and what
[1:42] Speaker 1: should happen there. I think we heard from Elon Musk
[1:45] Speaker 1: when he initially left open Ai that he disagreed about
[1:49] Speaker 1: the direction that they wanted to take things in. But
[1:52] Speaker 1: I don't think that we've gotten much more specifics from
[1:55] Speaker 1: them about what exactly happened there to prompt this falling out,
[2:00] Speaker 1: and so I think that's something that eager watchers in
[2:02] Speaker 1: this space are going to be helping to hear more
[2:04] Speaker 1: about over the course of this trial.
[2:06] Speaker 2: So Elon Musk brought the lawsuit, and he's looking for
[2:10] Speaker 2: one hundred and thirty four million dollars, an eye popping
[2:13] Speaker 2: amount is the basic claim that open ai was converted
[2:18] Speaker 2: into a for profit company.
[2:21] Speaker 1: So, if you'll recall when this case was first filed,
[2:24] Speaker 1: it was massive. There were a lot of allegations, and
[2:27] Speaker 1: it's been seriously trimmed down since then by the judge
[2:30] Speaker 1: and also by Musk himself. Withdrawing some of the allegations.
[2:34] Speaker 1: But the crux of the argument here is that open ai,
[2:38] Speaker 1: Microsoft and its founders violated the founding mission of open
[2:43] Speaker 1: ai to pursue this AI for all mentality by converting
[2:47] Speaker 1: from a nonprofit to a for profit entity well through
[2:51] Speaker 1: the process they finished in October after quite an undertaking
[2:54] Speaker 1: that involved a lot of different parties. So that's the
[2:57] Speaker 1: central allegation here. But technically, the two claims that are
[3:01] Speaker 1: going to be up before this jury are breach of
[3:04] Speaker 1: charitable trust and unjust enrichment.
[3:07] Speaker 2: And how do Altman and open ai respond to those allegations.
[3:12] Speaker 1: So open ai and Sam Altman stay first of all,
[3:16] Speaker 1: deny these allegations, and they say that Elon Musk is
[3:19] Speaker 1: harassing them through litigate in this is not the only
[3:22] Speaker 1: lawsuit he has involving one of these entities. And they
[3:26] Speaker 1: say that it's a clear attempt by him to undercut
[3:29] Speaker 1: a competitor in the AI space, because, as you and
[3:32] Speaker 1: your listeners know, Elon Musk started his own AI company
[3:35] Speaker 1: in twenty twenty three Xai, And so they say that
[3:39] Speaker 1: this is clearly a competitive beef between the two. The
[3:42] Speaker 1: charges are unfounded and there are plenty to fight them
[3:45] Speaker 1: to the noil.
[3:46] Speaker 2: And Microsoft is also a defendant.
[3:49] Speaker 1: Here, right. Microsoft is a defendant here, and that's because
[3:52] Speaker 1: of their significant investments that they made in open Ai,
[3:56] Speaker 1: and that funding was part of what made it possible
[3:58] Speaker 1: for open Ai to pursue this for profit conversion, because
[4:02] Speaker 1: that's what we heard from Sam Altman when all this
[4:04] Speaker 1: was happening that in order for them to sustain and
[4:07] Speaker 1: continue to meet this mission of providing this tool and
[4:11] Speaker 1: service in the way that it's accessible now is because
[4:14] Speaker 1: they need private funding. They need to convert to this
[4:17] Speaker 1: kind of entity. So, yes, Microsoft is a party as well.
[4:20] Speaker 1: We're expecting to hear In addition to hearing from witnesses
[4:23] Speaker 1: from open Ai and from Musk Camp, we're also going
[4:26] Speaker 1: to hear from executives from Microsoft.
[4:29] Speaker 2: Musk and Altman will both be testifying. Musk is very
[4:34] Speaker 2: practiced at testifying and he's been called teflon Elon for
[4:39] Speaker 2: his success at trial. What about Altman?
[4:42] Speaker 1: I think this is going to be the first time
[4:44] Speaker 1: that Altman will be testifying in any kind of trial
[4:47] Speaker 1: like this. We've heard him speak in committee hearings on
[4:50] Speaker 1: Capitol Hill, which you know can have some of the
[4:53] Speaker 1: same characteristics of sitting in a jury box, but obviously
[4:57] Speaker 1: the stakes here are really different because he defending his
[5:00] Speaker 1: business practices as a CEO and decisions that he made
[5:04] Speaker 1: in leading this company. So definitely, I think a lot
[5:07] Speaker 1: of attention, rightfully so, is being paid to the just
[5:11] Speaker 1: huge characters and personalities that these guys are. I mean,
[5:15] Speaker 1: when they're coming into the courtroom, they're bringing with them
[5:17] Speaker 1: billions of dollars and huge public personas and reputations.
[5:22] Speaker 2: Besides testimony, what other evidence do you expect.
[5:25] Speaker 1: My understanding is that the evidence that we're going to
[5:28] Speaker 1: be able to see at trial is going to include
[5:30] Speaker 1: a lot of internal documents about the mission of Open AI.
[5:34] Speaker 1: We're going to see emails and messages from executives at
[5:38] Speaker 1: these companies talking about what they want the mission to be.
[5:42] Speaker 1: We're going to see text messages between Elon Musk and
[5:45] Speaker 1: some of his close allies talking about frustrations about the
[5:49] Speaker 1: direction that things are heading in. I think we're going
[5:52] Speaker 1: to see a lot of internal We've seen quite a
[5:54] Speaker 1: few come out already through the course of discovery, but
[5:56] Speaker 1: I think we're expecting quite a bit more. Hard to
[5:58] Speaker 1: say at this point what that will entail.
[6:01] Speaker 2: So we've seen Mosk called Altman quote scam, Altman accusing
[6:07] Speaker 2: him of betrayal of Shakespearean proportions, and Altman claiming Musk
[6:12] Speaker 2: is insecure and not a happy person. Are we likely
[6:16] Speaker 2: to see some of these personal attacks at trial.
[6:19] Speaker 1: I think that's kind of what people are expecting, just
[6:22] Speaker 1: based on what we've seen from these two guys in
[6:25] Speaker 1: the public sphere. You know, they've been even leading up
[6:28] Speaker 1: to this trial, they've been posting on social media about
[6:30] Speaker 1: it about each other. They're not strangers to talking about
[6:34] Speaker 1: their very strong feelings about the other in a public way.
[6:37] Speaker 1: But I think one thing that's going to be different
[6:40] Speaker 1: here is that we have a judge who has said
[6:42] Speaker 1: previously that she doesn't want this case to be about
[6:45] Speaker 1: billionaire versus billionaire. She really wants it to be about
[6:48] Speaker 1: the issues, and so I think we're going to see
[6:50] Speaker 1: her trying to limit some of that. I know that
[6:54] Speaker 1: she's restricted what some of the questions that can be
[6:57] Speaker 1: asked are specifically open. Aye was hoping to ask must
[7:00] Speaker 1: about his Ketemie news. She said that's going to be
[7:03] Speaker 1: a no go. But they are going to be allowed
[7:05] Speaker 1: to ask him about his attendance at Burning Man, which
[7:07] Speaker 1: was apparently during some of the years of some negotiations
[7:11] Speaker 1: with open AI. So I think we're going to get
[7:13] Speaker 1: a little bit a little taste of that. It's hard
[7:15] Speaker 1: to say exactly right now how into the weeds this
[7:18] Speaker 1: is going to get on the personal level.
[7:20] Speaker 2: So I know, let's talk about the stakes of this
[7:24] Speaker 2: trial for open AI. It goes beyond the one hundred
[7:28] Speaker 2: and thirty four billion dollars in damages that Musk is
[7:32] Speaker 2: asking for.
[7:33] Speaker 1: The steaks are huge for open AI. The judges divided
[7:36] Speaker 1: this case into two separate sections. One is going to
[7:40] Speaker 1: be the liability section, where they're going to decide whether
[7:42] Speaker 1: or not the claims are legitimate. But the judge is
[7:45] Speaker 1: going to have a whole separate set of arguments about
[7:48] Speaker 1: what the remedies should be should she and the jury
[7:52] Speaker 1: find in musks favor. And as you said, he's seeking
[7:55] Speaker 1: as much as one hundred and thirty four billion dollars
[7:57] Speaker 1: that he has said that he would like to give
[7:59] Speaker 1: to Verity. He's not intending to keep that money for himself.
[8:03] Speaker 1: He wants to give it back to the open AI's
[8:05] Speaker 1: charitable arm. At the conclusion of this, should he be
[8:08] Speaker 1: awarded that, but you're right, there are other stakes here
[8:11] Speaker 1: besides the dollar amount, and that includes a request from
[8:15] Speaker 1: Musk that Altman and the president of open AI, Greg Brockman,
[8:18] Speaker 1: be removed from their leadership positions. And he's also seeking
[8:22] Speaker 1: to restore the startup status as a full nonprofit research organization,
[8:26] Speaker 1: so unwinding this for profit conversion that we saw them
[8:29] Speaker 1: spend the past year trying to achieve, and so there's
[8:33] Speaker 1: definite concern that that could destabilize the company, especially during
[8:37] Speaker 1: kind of this critical moment when there's this kind of
[8:40] Speaker 1: public offering maybe in the future, So the stakes are huge.
[8:44] Speaker 1: It's hard to say right now whether any of those remedies,
[8:46] Speaker 1: of course, are actually going to be awarded. They are
[8:49] Speaker 1: huge asks that can't be overstated. But yeah, if they
[8:53] Speaker 1: were to come to pass, I think open AI would
[8:55] Speaker 1: definitely be facing a big question mark about what the
[8:57] Speaker 1: future holds.
[8:59] Speaker 2: The jury verdict is only going to be advisory. Do
[9:02] Speaker 2: you know why the judge chose an advisory opinion.
[9:06] Speaker 1: It's quite unusual to have an advisory opinion for the
[9:09] Speaker 1: liabilities phase of a trial. Sometimes you'll see that where
[9:12] Speaker 1: a jury can offer suggestions to the judge when it
[9:15] Speaker 1: comes to damages how much money they think should be awarded,
[9:18] Speaker 1: and the judge will come in and say, actually, no,
[9:21] Speaker 1: we're going to cut this down or it should be higher.
[9:23] Speaker 1: I'm not exactly sure why the judge decided to do
[9:25] Speaker 1: that in this case, but what we do know is
[9:28] Speaker 1: that once the jury hands in its verdict, once they've
[9:31] Speaker 1: made these arguments about remedies, the judge is going to
[9:33] Speaker 1: take all of that back. She's going to be sitting
[9:35] Speaker 1: there through all the arguments and she's going to be
[9:37] Speaker 1: weighing her own view of the arguments and the legal
[9:41] Speaker 1: arguments being presented, but also taking into consideration this suggestion
[9:46] Speaker 1: from the jury about what should be done and how
[9:49] Speaker 1: to resolve this very complicated case that involves so many
[9:53] Speaker 1: huge public figures and huge companies and this hot button
[9:57] Speaker 1: issue of artificial intelligence.
[10:00] Speaker 2: There'll be nine people on the jury. What are some
[10:03] Speaker 2: of the concerns about jury selection when you have two
[10:05] Speaker 2: such well known billionaires opposing each other.
[10:10] Speaker 1: That's a great question. I mean, when you're talking about
[10:12] Speaker 1: these huge companies and these huge names, a lot of
[10:15] Speaker 1: people are going to come in with reconceived notions about them.
[10:18] Speaker 1: They're going to have strong opinions about them. Least if
[10:21] Speaker 1: they don't have strong opinions about them, they're going to
[10:23] Speaker 1: know who they are. And I think it's always a
[10:25] Speaker 1: complicating factor when one of your parties is incredibly wealthy
[10:30] Speaker 1: and known for being incredibly wealthy, and in this case,
[10:33] Speaker 1: there is more than one person in that room that's
[10:35] Speaker 1: got applied a lot of money to their name, and
[10:37] Speaker 1: so I think that's definitely a factor for jurors. There's
[10:40] Speaker 1: also going to be like a technological element of this
[10:43] Speaker 1: and their familiarity with artificial intelligence and whether that's you know,
[10:48] Speaker 1: do they use CHATGPT, do they use XAI, do they
[10:51] Speaker 1: use rock any of these tools, because that could certainly
[10:54] Speaker 1: factor into how they view this case. So those are
[10:56] Speaker 1: all kind of thorny issues that lawyers are going to
[10:59] Speaker 1: be navigating. They're trying to nail down who's going to
[11:01] Speaker 1: sit in the jury box during jury selection. Sam Altman
[11:04] Speaker 1: and Greg Brockman actually were there in the room as
[11:07] Speaker 1: jurors were being questioned, which is I think quite unusual
[11:11] Speaker 1: for someone of that high profile to attend jury selection.
[11:15] Speaker 2: That looks like a good strategic move to me, letting
[11:18] Speaker 2: the jurorsye your concerned and involved in the case. Thanks
[11:22] Speaker 2: so much, Madlin. We'll check back with you as the
[11:24] Speaker 2: trial goes on. That's Bloomberg. Legal reporter Madelein Mecklberg. Coming
[11:29] Speaker 2: up next. A soldier will be arraigned on charges of
[11:33] Speaker 2: using classified information to make four hundred thousand dollars trading
[11:37] Speaker 2: on the timing of the capture of Nicolas Maduro. This
[11:41] Speaker 2: is Bloomberg. A US Army soldier has been charged with
[11:48] Speaker 2: using classified information about the timing of the capture of
[11:53] Speaker 2: then Venezuelan President Nicolas Maduro to make more than four
[11:58] Speaker 2: hundred thousand dollars on polymarkets prediction market.
[12:02] Speaker 3: It's a little like Peter Rose. Peter Rose, he kept
[12:04] Speaker 3: him out of the Hall of Fame because he bet
[12:06] Speaker 3: on his own team.
[12:07] Speaker 2: Federal prosecutors say Master Sergeant Gannon Ken van Dyke, a
[12:12] Speaker 2: Special Forces soldier who was involved in the planning and
[12:15] Speaker 2: execution of Operation Absolute Resolve, the military effort to capture Maduro,
[12:22] Speaker 2: placed a total of about thirteen bets from December twenty
[12:26] Speaker 2: seventh through the evening of January second, all taking yes
[12:31] Speaker 2: positions on various Maduro related questions posed by the trading platform.
[12:36] Speaker 2: President Trump said last week that he has issues with
[12:40] Speaker 2: the concept of event betting platforms.
[12:43] Speaker 3: The whole world unfortunately, has become somewhat of a casino,
[12:48] Speaker 3: and you look at what's going on all over the world,
[12:51] Speaker 3: in Europe and every place, they're doing these betting things.
[12:54] Speaker 3: I was never much in favor of that. I don't
[12:56] Speaker 3: like it conceptually, but it is what it is. No
[12:59] Speaker 3: I think that I'm not happy with any of those.
[13:03] Speaker 2: However, His son, Donald Trump Junior, is an advisor to
[13:06] Speaker 2: both Calshi and Polymarket, and an investor in Polymarket through
[13:11] Speaker 2: the venture fund where he's a partner. My guest is
[13:14] Speaker 2: Joshua Mitt's, a professor at Columbia Law School and an
[13:17] Speaker 2: authority on insider trading, securities law, and corporate law. Explain
[13:22] Speaker 2: what the sergeant's accused of?
[13:24] Speaker 4: Sure, So, these websites known as betting markets sometimes prediction markets.
[13:32] Speaker 4: They are platforms which allow individuals to essentially purchase a
[13:39] Speaker 4: contract that pays off if in a future event happens,
[13:44] Speaker 4: and if the event does not happen, then you lose
[13:46] Speaker 4: all the money you paid. So is there like any
[13:49] Speaker 4: other markets where you might pay you twenty cents then
[13:51] Speaker 4: you can make a dollar or lose all of your
[13:53] Speaker 4: twenty cents, and these markets on a website known as
[13:58] Speaker 4: polymarket have I've sort of sprung into existence for all
[14:02] Speaker 4: sorts of future events. And in this case, the sergeant
[14:06] Speaker 4: purchased contracts which paid off one dollar if Maduro was
[14:13] Speaker 4: I think it was deposed as leader of Venezuelers, might
[14:15] Speaker 4: have been madurou out by a certain date, something of
[14:18] Speaker 4: that effect. And the sergeant purchased these contracts when they
[14:23] Speaker 4: were relatively inexpensive, so I think in the order of
[14:27] Speaker 4: single digit sense, maybe around seven cents or so of contract.
[14:30] Speaker 4: And of course he knew, very few people knew at
[14:34] Speaker 4: the time he purchased the contract that the operation was underway.
[14:38] Speaker 4: And so when the operation occurred and the contracts value
[14:45] Speaker 4: went from whatever it was seven cents eight cents to
[14:48] Speaker 4: one dollar per contract, and he had purchased a large
[14:52] Speaker 4: number of contracts, he made just short of half a
[14:56] Speaker 4: million dollars or so in profit.
[14:58] Speaker 2: And is he being charged because he used classified information
[15:02] Speaker 2: to make the bets?
[15:04] Speaker 4: That's exactly right. I mean, the operation itself was classified information,
[15:11] Speaker 4: so the capture of rendition of Maduro was non public
[15:18] Speaker 4: information that it was going to happen. When it happened,
[15:20] Speaker 4: and so the way that prosecutors have set forth the
[15:24] Speaker 4: theory of criminal liability here is that he was essentially
[15:28] Speaker 4: misappropriating information that belonged to the federal government and information
[15:33] Speaker 4: that was non public information that was classified for personal gain.
[15:38] Speaker 2: He placed a total of thirteen bets from December twenty
[15:41] Speaker 2: seventh through January tewod All yes on various Maduro related questions.
[15:48] Speaker 2: Is that an any defense for him that he was
[15:51] Speaker 2: placing thirteen and making different predictions.
[15:54] Speaker 4: So there's two questions here. I mean, they're on polymarket,
[15:58] Speaker 4: you'll often see minor vary and variations of the same
[16:02] Speaker 4: underlying contract or. It could be that an event happens
[16:06] Speaker 4: by a particular date, but there might be slight variations
[16:09] Speaker 4: in the date. It could be a day before, a
[16:11] Speaker 4: day after. So an individual who is in possession of
[16:14] Speaker 4: material non public information about one of these future events
[16:18] Speaker 4: may decide to trade in connection with that information without
[16:24] Speaker 4: necessarily pinning themselves down to one specific date. It could
[16:27] Speaker 4: be that you are highly highly confident that an event
[16:30] Speaker 4: is going to happen by a particular point in time,
[16:34] Speaker 4: but you're not sure exactly when, so you hedge your
[16:36] Speaker 4: bets a little bit on the specific contract. I think
[16:39] Speaker 4: your question, though, is getting at a broader question, which
[16:41] Speaker 4: is that there isn't a lot of case law, or
[16:44] Speaker 4: it's not very clear, and this is such a new
[16:47] Speaker 4: and emerging area what it means for information to be
[16:51] Speaker 4: material in this context and for the misappropriation of information
[16:55] Speaker 4: to be more than the sort of garden variety, you know,
[16:59] Speaker 4: general in tuitions that people have from their exposure to
[17:04] Speaker 4: ordinary speculation about the future. And I would imagine that
[17:08] Speaker 4: the sergeant will try to make the argument that he
[17:13] Speaker 4: did not necessarily have this level of specificity which would
[17:17] Speaker 4: be required to render this an actual misappropriation of information,
[17:22] Speaker 4: but simply that he had a general sense that something
[17:25] Speaker 4: was going to happen, and that general sense was not
[17:28] Speaker 4: any sort of information that had been misappropriated, but rather
[17:33] Speaker 4: his own impression or analysis of what he had been
[17:37] Speaker 4: exposed to.
[17:38] Speaker 2: And it was poly Market that turned him in, that
[17:40] Speaker 2: alerted the authorities.
[17:42] Speaker 4: Poly Market did, and one of the facts from the
[17:45] Speaker 4: indictment we see is that he used a virtual private network.
[17:49] Speaker 4: Because poly market is actually not accessible under essentially an
[17:54] Speaker 4: agreement with the CFTC. They do have a small US
[17:58] Speaker 4: market that they've been working with, but the poly markets
[18:01] Speaker 4: primary markets are not accessible to US residents, so he
[18:07] Speaker 4: had to use a VPN to use poly Market. That
[18:09] Speaker 4: wasn't the problem, but it did explain why it was
[18:12] Speaker 4: a little difficult for poly Market. Polymarket, you know, they
[18:15] Speaker 4: didn't have an obvious indication based on his IP address
[18:19] Speaker 4: that he was coming from the United States. He did. However,
[18:23] Speaker 4: my understanding from the indictment is that he had shared
[18:26] Speaker 4: his actual email address with poly market and that is
[18:29] Speaker 4: what gave them a trail, if you will, back to
[18:32] Speaker 4: this individual.
[18:34] Speaker 2: So last week Calsha, another predictions platform, said it had
[18:38] Speaker 2: fined and banned three political candidates who had bet on
[18:41] Speaker 2: their own elections. So is it up to the prediction
[18:45] Speaker 2: platforms themselves to police themselves.
[18:48] Speaker 4: Well, we are seeing increased regulatory and enforcement attention on this.
[18:53] Speaker 4: Jake Clayton gave a speech a couple months ago, this
[18:57] Speaker 4: was back in February, that this was going to be
[18:58] Speaker 4: an area of priority the most recent indictment, so all
[19:02] Speaker 4: this suggests that this is growing in importance and focus
[19:06] Speaker 4: for federal prosecutors. The reality is that most cases are
[19:11] Speaker 4: unlikely to be as simple as this one. And you
[19:15] Speaker 4: mentioned these three congressional candidates who had placed bets essentially
[19:19] Speaker 4: on their own markets and markets concerning their own campaigns.
[19:25] Speaker 4: That's a form of manipulation or a form of influencing
[19:29] Speaker 4: the outcome of a contract, which is also prohibited. But
[19:33] Speaker 4: these are again the exception. I have a new paper
[19:35] Speaker 4: which looked systematically at polymarket, and we think that there's
[19:41] Speaker 4: quite a bit of informed trading. Not all of this
[19:44] Speaker 4: will be illegal misappropriation of information, but anomalous or suspicious trading,
[19:50] Speaker 4: which suggests that perhaps there could be much more widespread
[19:54] Speaker 4: exploitation of this sort of information than these individual idiosyncratic
[19:59] Speaker 4: cases might suggest.
[20:01] Speaker 2: Yeah, what about there was apparently there was also trading
[20:06] Speaker 2: on the Iran war, and then the White House put
[20:10] Speaker 2: out a statement warning against insider trading. Yeah.
[20:16] Speaker 4: Well, as we explain in the paper, I mean this
[20:18] Speaker 4: happened in a number of cases, both before the February
[20:23] Speaker 4: Iran War, the Second Ran War, as well as the
[20:27] Speaker 4: June twenty twenty five Iran War. There were other events,
[20:32] Speaker 4: So we do see anomalist trading, large purchases. Again, unless
[20:37] Speaker 4: someone is going to put their email address in, it's
[20:39] Speaker 4: going to be quite hard for poly Market in particular
[20:42] Speaker 4: poly market runs on the blockchain. The blockchain is much
[20:46] Speaker 4: more anonymous in its structure than a traditional market, so
[20:51] Speaker 4: there's very little know your customer or similar regulatory disclosures
[20:56] Speaker 4: which are required. So it's going to be more difficult
[20:59] Speaker 4: formarket and regulators to chase down whoever might have been
[21:04] Speaker 4: trading in advance of these events. And the other thing
[21:07] Speaker 4: is it's important to recognize that not all lucky trading
[21:11] Speaker 4: is on the basis of inside information. Some of it
[21:14] Speaker 4: may be on the basis of putting lots of pieces
[21:16] Speaker 4: of information together, but it's not necessarily using some misappropriated
[21:21] Speaker 4: facts that only you possess. And so we don't know
[21:24] Speaker 4: in any of these cases whether the traders might have
[21:27] Speaker 4: just connected some dots that the rest of us had
[21:29] Speaker 4: not yet connected, in which case, under the law, they're
[21:33] Speaker 4: entirely entitled to benefit from the profits of that work.
[21:37] Speaker 2: What concerns do you have about the prediction markets.
[21:42] Speaker 4: Well, if in fact there are episodes even episodically even
[21:47] Speaker 4: here there where government officials or those like the sergeant
[21:52] Speaker 4: and possession of this sort of information are rushing out
[21:54] Speaker 4: to these markets to profit off of that information, there
[21:58] Speaker 4: can be a number of concerning collateral consequences. So one
[22:02] Speaker 4: could be that our adversaries learn from this sort of trading.
[22:06] Speaker 4: So if there's any exploitation of information that takes the
[22:09] Speaker 4: form of large transactions prior to national security or military actions,
[22:15] Speaker 4: that information is broadcast immediately globally, and so it could
[22:19] Speaker 4: in fact put our soldiers in harms way. And I
[22:22] Speaker 4: believe the prosecution referred to this as betrayal of his
[22:26] Speaker 4: fellows servicemen, and I think there's definitely truth to that.
[22:30] Speaker 4: There's also a question around whether the profits that could
[22:34] Speaker 4: be made from these sorts of contracts may have a
[22:37] Speaker 4: first order of factor, may skew the way that individuals
[22:41] Speaker 4: behave So if I know that if I take a
[22:43] Speaker 4: certain action, I'm going to profit personally or my friends
[22:47] Speaker 4: are going to profit personally, that might introduce a form
[22:50] Speaker 4: of corruption to my decisions. We see certain forms of
[22:54] Speaker 4: this in the extreme, so called mention markets, where contracts
[22:58] Speaker 4: that pay out if a public says something. And you
[23:01] Speaker 4: can start to imagine how this can create incentives to
[23:04] Speaker 4: say certain things and essentially, you know, redirect and redistribute
[23:09] Speaker 4: who's winning from these mentioned market bets. So this sort
[23:13] Speaker 4: of activity, if it continues to grow and aggregate, and
[23:16] Speaker 4: it's not just widespread gambling or widespread betting. It can
[23:20] Speaker 4: actually change potentially the way people behave.
[23:24] Speaker 2: Coming up next on the Bloomberg Law Show, I'll continue
[23:27] Speaker 2: this conversation with Professor Mitz. The Commodity Futures Trading Commission
[23:32] Speaker 2: lodged a parallel civil complaint against the soldier, the first
[23:36] Speaker 2: time the regulator filed a prediction markets insider trading case.
[23:40] Speaker 2: Also the first time the agency used what's known as
[23:43] Speaker 2: the Eddie Murphy rule in an insider trading case. I'm
[23:47] Speaker 2: June Grosso and you're listening to Bloomberg. A US Army
[23:51] Speaker 2: soldier will be arranged tomorrow in New York for using
[23:55] Speaker 2: classified information about the timing of the capture of then
[23:58] Speaker 2: Venezuela and pressident Nicolas Maduro to make more than four
[24:03] Speaker 2: hundred thousand dollars trading on polymarkets prediction market. I've been
[24:08] Speaker 2: talking to Columbia Law School professor Joshua Mittz. I mean
[24:12] Speaker 2: it sounds like gambling, you place a bet on something.
[24:15] Speaker 2: Yet there is this battle between some states and the
[24:19] Speaker 2: commadi's Future Trading Commission about who will regulate the markets
[24:25] Speaker 2: and the States say it's gambling and they should regulate it.
[24:30] Speaker 2: The CFTC says, no, it's not, and they've sued three states.
[24:34] Speaker 2: I mean, what do you think.
[24:37] Speaker 4: Well, these contracts in many ways very similar to the
[24:42] Speaker 4: sort of if you look at the definition of a
[24:45] Speaker 4: swap or of a future that you know, they seem
[24:47] Speaker 4: to satisfy these definitions that the CFTC has statutorily. In part,
[24:53] Speaker 4: they lend themselves very naturally to the CFTC framework because
[24:56] Speaker 4: they are traded on markets with trading price. Whereas traditionally
[25:02] Speaker 4: betting was against some house accounts, so you would you
[25:05] Speaker 4: would open a bet against let's say the dealer, and
[25:09] Speaker 4: the dealer would take a particular position, whereas these platforms
[25:13] Speaker 4: look more like financial markets and that they match buyers
[25:15] Speaker 4: and sellers. The reality is that this is this is
[25:19] Speaker 4: an area of ongoing litigation, and I would expect to
[25:22] Speaker 4: see potentially this reached the Supreme Court. I believe CALCI
[25:25] Speaker 4: just won in the Third Circuit against an attempt by
[25:28] Speaker 4: States New Jersey to regulate its activities. So I think
[25:32] Speaker 4: we will see increasing litigation around the scope of the
[25:37] Speaker 4: CFTC statutory authority. If I had to place a bet
[25:40] Speaker 4: on it no pun intended. I would say that perhaps
[25:43] Speaker 4: the CFTC is likely to win this in the end.
[25:46] Speaker 2: I mean, the chairman of the CFTC, Mike Zellig, seems
[25:51] Speaker 2: very supportive of the prediction markets. He called them exciting products,
[25:57] Speaker 2: and he scrapped a Biden rule that would have restricted
[26:01] Speaker 2: them like everything else. I guess, and life does it
[26:04] Speaker 2: depend on who's in charge of the CFTC.
[26:07] Speaker 4: I think that's right. I also think that there's regulators
[26:11] Speaker 4: prefer to establish a sort of area of the market
[26:15] Speaker 4: that they consider legitimate and then an area of the
[26:17] Speaker 4: market that they consider illegitimate. This is also true for
[26:20] Speaker 4: industry participants. Industry participants and regulators in any industry would
[26:25] Speaker 4: like to have sort of the accepted safe activity and
[26:28] Speaker 4: then the unacceptable dangerous activity, and the latter is what
[26:32] Speaker 4: the regulators cracked down on. It creates a need both
[26:35] Speaker 4: for the regulation and it legitimizes the industry. If you
[26:39] Speaker 4: had no industry, you would have no regulators. So they
[26:41] Speaker 4: both have an interest in this outcome, whether it's good
[26:45] Speaker 4: or not for society. There is an economic argument that
[26:48] Speaker 4: it is beneficial for society to have this information, particularly
[26:52] Speaker 4: in the context of macroeconomic or geopolitical events because there's
[26:56] Speaker 4: an aggregation of information that happens, So every participant has
[26:59] Speaker 4: a particular view, and in the end, the one who's
[27:02] Speaker 4: willing to put the most money behind their view determines
[27:04] Speaker 4: the price, and we all can look and learn. It's
[27:06] Speaker 4: kind of like a live poll, and this gives some
[27:10] Speaker 4: information about the likelihood of future events and we can
[27:12] Speaker 4: organize our activity accordingly. That's a little bit of an
[27:16] Speaker 4: idealistic notion, but it may bear out in some cases
[27:20] Speaker 4: that there's value in having this sort of this sort
[27:23] Speaker 4: of market. At the end of the day, the question
[27:25] Speaker 4: is are there steps that can be taken that make
[27:27] Speaker 4: these markets safer, that make them less dangerous for ordinary
[27:32] Speaker 4: participants who may not have this sort of non public
[27:35] Speaker 4: information that we're talking about, And are there potentially, you know,
[27:39] Speaker 4: external effects like leaking information out or changing the way
[27:44] Speaker 4: people make decisions which weren't particular regulatory scrutiny.
[27:48] Speaker 2: The CFTC has filed a civil complaint against the soldier.
[27:53] Speaker 2: It's the first time it filed a complaint in connection
[27:56] Speaker 2: with the prediction markets. It's also the first time the
[27:59] Speaker 2: agency has used what's known as the Eddie Murphy rule
[28:03] Speaker 2: in an insider trading case tell us about that.
[28:06] Speaker 4: This is a rule which basically prohibits for Synthon Dot
[28:09] Speaker 4: Frankact prohibits the misappropriation of information that is held by
[28:14] Speaker 4: the government. And there's some technical history here in the
[28:18] Speaker 4: context of insider trading law that I won't get into
[28:21] Speaker 4: all the details right now, but basically, traditionally there was
[28:25] Speaker 4: some question around whether information held by the government could
[28:29] Speaker 4: satisfy these fraud statutes which are used for insider trading law.
[28:34] Speaker 4: The classical sort of view of insider trading was that
[28:38] Speaker 4: it involved information that belonged to a company, and trading
[28:42] Speaker 4: on the basis of that information was a kind of
[28:45] Speaker 4: deception of the shareholders of the company or a deception
[28:49] Speaker 4: of the source of the information, and it had a
[28:53] Speaker 4: very commercial context in which it arose. Now, these cases,
[28:58] Speaker 4: like the case of the Urgent, are cases involving the
[29:02] Speaker 4: misappropriation of information received from the government or received pursu
[29:06] Speaker 4: into a governmental role, and the Eddie Murphy rule clarifies
[29:11] Speaker 4: that that information can also be misappropriated. So what we're
[29:17] Speaker 4: seeing now are new ways to exploit information. I mean,
[29:20] Speaker 4: you might say from the standpoint of what's good for society.
[29:23] Speaker 4: It's better to have these misappropriation rules because the risk
[29:28] Speaker 4: to society of stealing information that belongs to the public
[29:31] Speaker 4: is greater. But it is a different context than we
[29:35] Speaker 4: initially thought traditionally of insider trading as applying to individual companies.
[29:39] Speaker 2: And the rule is nicknamed the Eddie Murphy rule after
[29:43] Speaker 2: the nineteen eighty three movie Trading Places, where the characters
[29:47] Speaker 2: use a stolen Department of Agriculture report to manipulate the
[29:52] Speaker 2: orange juice market that was part of the Dodd Frank law.
[29:56] Speaker 2: Do you think we need a federal law to handle
[29:58] Speaker 2: the prediction markets.
[30:00] Speaker 4: Well, we definitely need to see more work on the
[30:04] Speaker 4: prediction markets more generally, and there are some proposals. The CFTC,
[30:08] Speaker 4: for example, has a Notice of Proposed Rulemaking comment period
[30:11] Speaker 4: that's ending in a few days on April thirtieth, and
[30:15] Speaker 4: the CFTC has invited commentary on the question of whether
[30:18] Speaker 4: the prediction markets should be regulated more that could take
[30:22] Speaker 4: the form of rulemaking. There are some legislative proposals to
[30:25] Speaker 4: clarify other settings, such as congressional settings. For example, congressional
[30:30] Speaker 4: staffers and others who may want to rush out and
[30:32] Speaker 4: trade on prediction markets on the basis of information, and
[30:36] Speaker 4: this legislation would clarify that that that's not permitted. Beyond that,
[30:41] Speaker 4: I think there's a broader challenge here that's really more
[30:44] Speaker 4: of an enforcement challenge than a legislative challenge. If you
[30:48] Speaker 4: look globally at the activity here and you think, well,
[30:52] Speaker 4: it could be originating anywhere around the world. The challenge
[30:56] Speaker 4: I see it is more of a cooperation and coordination challenge.
[31:01] Speaker 4: How do you get different components of the regulatory and
[31:05] Speaker 4: enforcement apparatus around the world to work together, whether that's
[31:08] Speaker 4: financial institutions, whether that's prosecutors, whether that's market regulators. And
[31:13] Speaker 4: that's more of an institutional challenge than it is a
[31:16] Speaker 4: legislative challenge. How you need to get national governments to
[31:19] Speaker 4: cooperate and root out essentially this sort of transnational exploitation
[31:24] Speaker 4: of information, because in many cases it's not going to
[31:27] Speaker 4: be only in the United States. It's going to be
[31:29] Speaker 4: especially on poly market on the blockchain, could be anywhere
[31:32] Speaker 4: around the world.
[31:33] Speaker 2: Why do you think these prediction markets have become so
[31:36] Speaker 2: popular so fast?
[31:38] Speaker 4: Well, just say, I think what's important for you know,
[31:41] Speaker 4: someone who's never thought about this, I think to understand
[31:44] Speaker 4: is the context that you know, this is not the
[31:47] Speaker 4: first iteration of sort of gambling that we've seen in
[31:51] Speaker 4: the financial world in recent years. I would say traditionally
[31:56] Speaker 4: speculation was viewed as almost a necessary by product of investing.
[32:01] Speaker 4: So you might buy or sell stocks, but you kind
[32:03] Speaker 4: of knew that what you at the end of the
[32:05] Speaker 4: day needed to do was to buy and invest in companies.
[32:08] Speaker 4: Then we started to see more gambling and gamification of
[32:13] Speaker 4: the financial markets in the last five or six years.
[32:16] Speaker 4: It started with Game Stop, we saw with meme stocks,
[32:19] Speaker 4: We saw with crypto, a sort of increasing acceptance of
[32:22] Speaker 4: this sort of gambling and risk taking that had very
[32:26] Speaker 4: little connection with any kind of underlying investment thesis. And
[32:30] Speaker 4: so it probably should not surprise us that the prediction
[32:34] Speaker 4: markets emerged on the backdrop of this societal trend. And
[32:37] Speaker 4: so I think the broader question here really to think
[32:39] Speaker 4: about is why is it that these prediction markets have
[32:42] Speaker 4: in fact become as popular as they have the insider
[32:46] Speaker 4: trading opportunities that we document in our research, and that
[32:49] Speaker 4: the basis of this indictment, they wouldn't exist if you
[32:52] Speaker 4: did not have an active, frothy market for people to
[32:56] Speaker 4: trade in and out of four hundred and fifty five
[32:58] Speaker 4: hundred thousand dollars that a particular trader made, where four
[33:02] Speaker 4: and fifty five hundred thousand dollars of losses suffered by
[33:05] Speaker 4: others in the market. So that means that there's a
[33:07] Speaker 4: lot of activity out there that can be exploited. And
[33:11] Speaker 4: there's a broader question as to why these markets have
[33:14] Speaker 4: exploded in popularity and the increasing acceptance perhaps societally, of
[33:19] Speaker 4: this sort of activity may have something to do with it.
[33:21] Speaker 2: This is a topic I'm sure we'll hear more and
[33:24] Speaker 2: more about in the coming days. Thanks so much for
[33:27] Speaker 2: joining me. That's Columbia Law School professor Joshua Mitts, and
[33:31] Speaker 2: that's it for this edition of The Bloomberg Law Show.
[33:34] Speaker 2: Remember you can always get the latest legal news on
[33:36] Speaker 2: our Bloomberg Law Podcast. You can find them on Apple Podcasts, Spotify,
[33:41] Speaker 2: and at www dot Bloomberg dot com, slash podcast Slash Law,
[33:46] Speaker 2: and remember to tune into The Bloomberg Law Show every
[33:49] Speaker 2: weeknight at ten pm Wall Street Time. I'm Junie Grosso,
[33:53] Speaker 2: and you're listening to Bloomberg

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