Intrade Tells U.S. Users to Shut Accounts After CFTC Sues

Intrade, the online service that lets people bet on events such as elections and weather, asked U.S. customers to close their accounts after regulators sued the website for allegedly offering improper options trading.

From September 2007 to June 25, 2012, Intrade continued to offer options betting on future prices of gold, crude oil and changes in U.S. economic data after it had pledged to stop doing so under a 2005 order, the Commodity Futures Trading Commission said in a complaint filed yesterday in Washington federal court.

The CFTC said it’s seeking a permanent injunction to prevent Dublin-based Trade Exchange Network Ltd., which runs Intrade, from operating in violation of securities laws including a part of the Dodd-Frank Act intended to crack down on abuses in the sales of derivatives. The CFTC also said it’s seeking fines and disgorgement of all monetary benefits received as a result of the violations.

“We are sorry to announce that due to legal and regulatory pressures, Intrade can no longer allow U.S. residents to participate in our real-money prediction markets,” according to a notice posted on the company’s website. Customers have until Dec. 23 to close out “open predictions” and must withdraw all money from their accounts by Dec. 31.

It’s against the law to solicit people in the U.S. to buy and sell commodity options -- even if they’re called “prediction” contracts -- unless the securities are listed for trading and traded on a CFTC-registered exchange or are legally exempt, David Meister, director of the CFTC’s enforcement division, said.

‘Market Integrity’

The requirement for on-exchange trading “enables the CFTC to police market activity and protect market integrity,” Meister said in a statement on the agency’s website.

Intrade failed to comply with the 2005 order, “including its obligation to inform U.S. customers which contracts offered on the www.intrade.com website they were prohibited from trading,” according to the suit.

In 2005, Trade Exchange Network agreed to pay $150,000 to settle allegations it illegally offered contracts in the U.S. based on the price of gold, crude oil, the euro and the yen, among other commodities.

The exchange, which extended a “high level of cooperation” in the investigation, didn’t admit or deny the findings, the CFTC said at the time.

U.S. Clientele

The CFTC investigation preceding the 2005 order found that the exchange actively marketed its products to U.S. residents, eventually building a U.S. clientele that made up as much as 40 percent of its total customers. Trade Exchange Network currently has about 50,000 members, according to its website.

The CFTC’s 2005 order specifically listed as examples of banned options such contracts as the daily crude oil contract, gold futures, light sweet crude oil futures and the intraday euro versus U.S. dollar rate contract, according to the complaint.

Trade Exchange Network “has failed to cure or attempt to cure, its violations of the 2005 order,” the CFTC said in yesterday’s lawsuit.

The case is U.S. Commodity Futures Trading Commission v. Trade Exchange Ltd., 12-cv-01902, U.S. District Court, District of Columbia (Washington).

To contact the reporter on this story: Sara Forden in Washington at sforden@bloomberg.net

To contact the editor responsible for this story: Michael Hytha at mhytha@bloomberg.net