Via Mike Linksvayer in a comment…

Good plug of HubDub inside an economic analysis segment.

Video

Much of my comment tracked the answer I posted here earlier. Long story short: such claims would not materially promote wrongful acts, so the CFTC has no legal basis to ban them. To that argument, however, I added a First Amendment analysis; to wit:

Could you fault claims about assassinations or other terrorist events for giving incentives for wrongful acts? Not very plausibly; as I explain above, it is very unlikely that anyone would find it profitable or prudent to try to use an event market to cash in on wrongdoing. Furthermore, all sorts of investment instruments offer the same incentives. Thus, for instance, a would-be terrorist might go long on oil futures prior to pulling off an attack on a refinery. Indeed, that sort of scenario seems much, much more likely than one involving event markets.

At root, concern about unseemly event market claims boils down to concern about violating a taboo about what sorts of things people discuss openly in a polite society. Those norms merit our concern, granted. They do not, however, justify imposing a speech restriction on event markets. And make no mistake about it; to bar such claims would constitute a restriction on speech.

Specifically, if the CFTC banned certain sorts of event market claims relating to assassinations, terrorist activities, or criminal acts, it would thereby impose a content-based restriction on speech. That would, under present First Amendment jurisprudence, trigger the highest level of judicial review: strict scrutiny. The ban would almost certainly fail to survive that scrutiny, as it would be too broad (stopping not just the bad guys but also the good ones), too narrow (since it would fail to forbid the use of other financial instruments, such as generic futures, from like uses), and not narrowly tailored (since there are other, better ways to discourage bad acts). Those sorts of claims would, moreover, fall within the core of the sort of speech protected by the First Amendment, as they would concern political events.

Our freedoms of speech and expression include the right to ask troubling questions. The CFTC has no good reason to ban event market claims about assassinations or other illegal acts. Nor can it do so constitutionally.

Suppose that my argument leads the CFTC to doubt that it can ban event markets from hosting claims about assassinations or terrorist activities. Suppose further, as seems likely, that the CFTC has some discretion in deciding whether its jurisdiction encompasses event markets; suppose, that is, that extant law does not command one answer to that question. What result?

I predict that the CFTC would tend to deny that it has jurisdiction over event markets because it would not want to take the blame for encouraging distasteful claims. Indeed, I not only predict that result, I intend it. I don’t trust the CFTC to do a very good job regulating event markets, so I want it to know why it does not even want to try.

[Crossposted at Agoraphilia and Midas Oracle.]

Anyway;

From the Tradesports forums:

Focus: United States

The Times – January 17, 2007

Neteller founders charged after sting operation by FBI
James Doran in New York

Stephen Lawrence and John Lefebvre, founders of Neteller, the UK-listed online payments company, were last night charged with conspiracy in connection with a multibillion-dollar money laundering scheme linked to internet gambling. ["a multibillion-dollar money laundering scheme"... no f***ing shame]

The pair were arrested on Monday after an FBI sting operation discovered that Neteller was being used to allow Americans to place illegal bets on sporting events via internet gambling companies based in foreign countries.

Mr Lawrence, 46, who lives in a luxury home on Paradise Island in The Bahamas, was arrested in the United States Virgin Islands and has been ordered to appear later today in the federal court of St Thomas.

Mr Lefebvre, 55, was arrested at the same time in Malibu, California, and was expected to appear in Los Angeles federal Court last night. [You were about to feel sorry for them, too, weren't you? Then you learned they were rich. I doubt they will be by the time the FBI has gotten its tribute, but you still can't feel sorry for them, right?]

Neither Mr Lawrence nor Mr Lefebvre were available to comment in response to the allegations made in the indictment. If found guilty, the pair face 20 years in jail.

The seven-page indictment, filed in New York last night, claims that the pair set up Neteller in 1999 with the express purpose of providing online payment services to gambling companies. The indictment also claims that between 2000 and 2003 Neteller Inc, a Canadian corporation, offered payment services to various internet gambling companies so that they could illegally access customers in the United States.

From 2004 to the present day, the same operation was conducted by Neteller plc, an Isle of Man-based company which in April 2004 raised some $70 million via a listing on London’s AIM. An agent with the FBI named in the indictment claims she used Neteller as a middle man between her US-based bank account and an offshore internet gambling company.

Shares of Neteller were suspended on AIM yesterday before the indictment was released as the company was seeking clarification of its status with US authorities.

A spokesman for Neteller stressed that the founders were no longer employees or directors of the company. “Because of that, this arrest has nothing to do with the company,” he added.

Mr Lawrence resigned as a non-executive director of the company on October 13, having stepped down as non-executive chairman last May. Mr Lefebvre resigned as a non-executive director on December 15, 2005. However, the pair still own large stakes of Neteller. Mr Lawrence holds 5.91 per cent of the company, while Mr Lefebvre owns 5.54 per cent.

Neteller claims to operate the largest independent online money transfer business in the world with 3 million customers in 160 countries and over $7 billion in annual transactions.

It specialises in providing instant payment services where money transfer is difficult or risky because of issues of identity, trust, currency exchange, or distance. In the past, it handled funds for online gamblers in the US but it is said to have stopped the practice when tough new laws banned internet gambling in America last October.

Last year authorities arrested a number of prominent executives for breaching US gambling laws, including two from Britain. David Carruthers, the former chief executive of BetOnSports, was arrested in July while Peter Dicks, former non-executive chairman of Sportingbet, was arrested in September.

Tradesports’ just-completed reorganization will probably buy a little time, but serious damage has already been done on all fronts. Some liquidity will be permanently lost just because of the NETeller incident, and it won’t be back anytime soon. Mssrs. Lawrence and Lefebvre will have to fork over some millions of dollars, joining the ranks of David Carruthers, Peter Dicks, Manfred Bottner, Norbert Teufelberger and others who inadvertently threatened America’s most powerful lobby, the casino industry. Sure, millions of dollars’ legal fees and settlement fees later, a court will do justice and toss out the indictment. But the damage will have been done, and the message will have been sent: The United States of America does not respect your person, your innovation or your property. Do not cross the casino industry. They are too powerful. And if you cross them, they will destroy you.

(Non-American readers, please do not fall back onto the puritanical-American stereotype as explanation for this. There was simply no demand for this legislation from any corner of American society, other than the casino lobby. Which was why Senator Jon Kyl, Senator John Ensign, and Rep. Jim Leach among others had to insert it as a rider into a port-security bill in the dead of night for it to pass. This episode is a grotesque embarrassment to the country.)
I think this was why Tradesports split into two sections, the one section dealing with all securities that compete with what American casinos offer, and the other offering more obviously “socially beneficial” contracts. However, while this does superficially help reassure Americans who might have money in Intrade, I don’t see how it really helps. If the feds pressure Delaney enough, Delaney has to choose between his professional reputation, and being able to ever set foot in the United States again for fear of getting cuffed and hauled off to a cell next to Carruthers et al. (I hope Delaney has wired every dime he can out of the United States before the government tries to freeze his US assets to use as leverage against him.)

Addendum: I hope Paul Tetlock, Justin Wolfers, and others who have made a mini-career mining the insights of prediction markets are as fine with the decimation of said markets as their complacency would otherwise suggest. The only way this will stop is if 1) the government issues a statement that prediction markets will be exempt from the intended swathe of destruction; and/or 2) respected intellectuals publish op-eds, lean on influential people, and otherwise pour negative publicity on the regulators and officials who have been doing this. Regulators’ career advancements are significantly governed by the political price of elevating them, i.e. if they cause more negative publicity, that will hurt their career prospects. Potential further victims of that bullying, including most of us, need to be just as ruthless about destroying reputations as they have. Just my personal — not general to MidasOracle — reckless 2c, because that really needed to be said.)

I am sure Tradesports/Intrade is bitterly learning that you can never pay somebody off once (their first time was the $150,000 CFTC fine, for violating the oligopoly of American commodities exchanges and running an oil futures market). You either refuse to pay at the outset, or pay over… and over… and over again.

(Originally posted at the Tradesports Political Maven)

PS — as a frequent contributor here, I know that there are some very disparate opinions of John Delaney and his enterprise. I have not held back from broadsiding Tradesports in the past, but I also feel compelled to say that, in light of the pall cast over Tradesports/Intrade’s future, I think Mr. Delaney’s decision to hold up the integrity of his enterprise, even at the cost of not being able to come to the United States again, is worthy of enormous respect. I have a lot of issues with the way Tradesports does certain things, but that is for another time. The current chaos does not have me wondering “What the hell is wrong with Tradesports?” just yet.

–Alex Forshaw