Acting CFTC Chairman Caroline Pham named a lawyer with a background in complex fraud and market manipulation as the Acting Director of the Division of Enforcement on Monday. Paul Hayeck has represented the CFTC in market violation cases in the past.
Before his most recent appointment, Hayeck was the acting chief of the complex fraud task force. So, his appointment is consistent with the new administration’s focus on fraud rather than placing new restrictions on derivatives companies.
“I’ve been impressed with Paul’s deep expertise and skill since I was a CFTC enforcement intern over 15 years ago,” said Acting Chairman Pham. “Paul’s unwavering commitment to integrity and fairness is the kind of strong leadership we need at the CFTC. His accomplishments as Acting Chief of the Complex Fraud Task Force and his extensive experience at the CFTC make him well suited to lead the Division of Enforcement. I’ve never been more confident in the CFTC’s mission to protect our markets, hold fraudsters accountable, and help victims with Paul in charge.”
Kalshi benefits from regulators’ focus on fraud
As the CFTC has turned its focus to fraud and its victims, companies like Kalshi have been able to expand prediction markets into new terrain.
After pushback during the previous administration, Kalshi has been able to offer election contracts without penalty from the new CFTC administration. Just last month, the CFTC reached an agreement with Kalshi to dismiss the lawsuit over election contracts, putting the challenge to rest. Now the CFTC seems poised to allow Kalshi and other prediction market platforms like Crypto.com to continue offering event contracts on sports.
However, state gaming regulators may turn their attention to the CFTC just as the agency gets the people in place to focus on its anti-fraud agenda. Kalshi has sued several state gaming regulators over cease-and-desist letters ordering Kalshi to remove its sports contracts from different states.
If Kalshi’s argument that state gaming regulators cannot limit its federally regulated event contracts leads to court victories, then stakeholders who oppose sports contracts may look for ways to sue the CFTC instead. One such avenue comes from Rule 40.11.
Is the CFTC enforcing its own rule?
Rule 40.11 is a regulation the CFTC voted to pass in 2011 that prohibited event contracts in certain specific categories, including terrorism, assassination, and gaming. While gaming is not defined, it could be understood to mean a contract on a game, like football or basketball.
Kalshi’s D.C. Circuit brief from its election contract lawsuit stated that:
“[C]ontracts relating to games—again, activities conducted for diversion or amusement—are unlikely to serve any ‘commercial or hedging interest.’”
Hedging interests are often invoked to defend new event contracts. However, those arguments may not be needed with a supportive CFTC chairman. Trump’s nominee for chairman, Brian Quintenz, has argued that contracts on any event could be traded on a derivatives exchange. Consequently, he could refrain from conducting the public interest review that leads to certain event contracts being banned.
If states begin accusing the CFTC of failing to enforce its own rules, then the agency’s focus may be pulled away from fraud after all.
