Facing accusations that it allowed American investors to bet on the outcome of wars and other world events without the blessing of regulators, Intrade announced on Monday that it was closing its Web site to United States residents.
The disclosure, which referenced “legal and regulatory pressures,†came just hours after American authorities sued the Irish company over its popular trading network. Investors log on to Intrade by the thousands to bet on the outcome of elections, the weather and even whether the United States will bomb Iran.
But in a civil complaint filed in federal court in Washington, the Commodity Futures Trading Commission took aim at the company and an affiliate for offering the contracts outside traditional exchanges and without regulatory approval. The agency also accused the companies of “making false statements†to regulators and violating a past order banning it from offering so-called “prediction†contracts outside traditional exchanges.
“Unfortunately this means that all U.S. residents must begin the process of closing down their Intrade accounts,†the company said on its Web site. “We understand this announcement may come as a surprise and a disappointment, and we apologize for the short notice and haste required to deal with this.â€
An Intrade representative did not immediately respond to a request for comment.
The company, created in 1999 by an Irish businessman who died last year after coming within 50 yards of the summit of Mount Everest, recently gained prominence as a gambling hub for both professional and amateur investors. Following the model of Wall Street derivatives, Intrade customers buy and sell contracts tied to the outcome of a future event.
The site positioned itself as a sort of crystal ball for major world events, aggregating individual opinions and signaling the popular wisdom on, for instance, presidential elections. Intrade bettors correctly predicted President Obama's 2008 victory and his re-election earlier this month. The site, which accurately anticipated the capture of Saddam Hussein in 2003, is now putting the odds of a United States or Israeli air strike against Iran at 31 percent.
But the company's business model in the United States is on murky legal ground. Some states explicitly outlaw gambling on elections. The trading commission this year also rejected the North American Derivatives Exchange's plans to offer an election contract.
In the complaint on Monday, the agency skirted the larger question of whether investors can legitimately bet on elections. Instead, it cited Intrade for allowing American customers to trade off-exchange contracts. From late 2007 through mid-2012, according to the agency, Intrade “unlawfully solicited and permitted U.S. customers to buy and sell†futures contracts.
“The requirement for on-exchange trading is important for a number of reasons, inclu ding that it enables the C.F.T.C. to police market activity and protect market integrity,†David Meister, the agency's director of enforcement, said in a statement. “Today's action should make it clear that we will intervene in the ‘prediction' markets, wherever they may be based, when their U.S. activities violate the Commodity Exchange Act or the C.F.T.C.'s regulations.â€
The trading commission's complaint further accuses Intrade - and an affiliated company, Trade Exchange Network Ltd. - with filing bogus annual forms with the agency. The companies, the complaint said, misled the agency into thinking that they limited their contracts to “eligible†investors.
Trade Exchange Network Ltd., the complaint said, also failed to honor a 2005 agreement that it halt improper trading. At the time, the company paid a $150,000 fine.
