Speculative ticketing may already be illegal [Chris Castle]

Speculative ticketing – the practice of offering a ticket for sale that might be available in the future – is currently the subject of state and federal scrutiny and legislation. But attorney Chris Castle says that it may already be illegal under existing federal law,

by CHRIS CASTLE of Music Tech Policy

There is a lot of discussion at the moment about a business scheme called “speculative ticketing,” sometimes called “take order” tickets (compared to “in hand” tickets). 

The Government Accountability Office produced a report in part on speculative ticketing schemes and defined the practice as:

A speculative ticket refers to a ticket put up for sale by a broker when the broker does not yet have the ticket in hand, perhaps because the event has not yet gone on sale. Brokers may sell speculative tickets because they anticipate they will be able to secure the tickets (whether on the primary or secondary market) and sell them for a profit. The terms of use of most secondary sites we reviewed did not allow speculative ticket listings. However, while we were unable to identify comprehensive data on the extent of speculative tickets, numerous industry representatives told us that these sites commonly do not enforce this prohibition and listing of speculative tickets was widespread. One common form of speculative ticketing occurs when brokers offer tickets after a popular artist has announced a concert schedule but not yet begun ticket sales, according to industry representatives.

In order to be effective, the scheme must involve a ticket that is likely to go on sale in the future for a concert or event that has created enough interest that there is demand for the ticket. That demand must be great enough that the seller can charge a premium over the likely face price of the ticket (face price being the ticket price printed on the front of the ticket, hence “face”). Indeed, speculative tickets may attract multiple orders for what is ostensibly the same ticket unlike in hand tickets that are typically removed from the reseller’s system after purchase. It is hard to believe that sellers do not use illegal bots to “cover their shorts” to obtain tickets they promised at a price that profits them. 

There’s no upfront cost to the seller and if they can make a sale it’s pure profit after they take care of the reseller. So selling speculative tickets is certainly better than selling dime bags on a street corner in Sofia waiting for someone to stick a Glock in your mouth.

In a nutshell, the speculative ticket scheme involves selling a “ticket” to an event that does not existat the time of sale, and is run by two essential players and a mark. There are three essential players in the scheme: On the sell side that’s the seller of the faux ticket, or in the case of speculative ticketing the promise of a ticket since the ticket doesn’t actually exist yet, and the ticket reseller market maker. 

Of course the truly essential player is on the buy side–the mark. The mark is the fan who is suckered into buying a ticket that doesn’t exist based on a lack of knowledge about the transaction that is not disclosed to the mark by the seller or reseller. The mark’s lack of knowledge is often based on the seller and market maker failing to disclose facts to the mark that are known to them as is the mark’s lack of knowledge. But this misallocation of knowledge is what makes a mark a mark and it is what drives the speculative ticketing artifice. 

Once the seller gets a mark to buy into the scheme, when the real ticket becomes available the seller scrambles to buy a ticket to cover their promise, much like a trader will scramble to acquire a stock the trader has shorted in a “naked short” transaction. Some will tell you that short covering on naked shorts is one way, not the only way but one way, that Lehman became Lehman in 2008. Which is why naked shorts are now illegal. However, the seller may not be able to obtain a ticket at all or obtain a ticket at a price that isn’t low enough to yield sufficient profit, in which case the seller defaults on their promise.

This whole thing just seems illegal, doesn’t it? And as a great man once said, if something feels illegal it probably is. And you need to get your butt home, young man.

A number of legislative bodies have tried to pass bills outlawing the speculative ticket practice. There’s a desire to get it right–to get specific language dealing with speculative ticketing because it’s a scheme that should be illegal. 

I’m all about getting it right. However I would like to point out that we may already have laws to deal with the problem of naked short-type speculative ticketing. That would be 18 USC §1341.

That statute requires that the seller (or maybe the market maker or both) knowingly devised a scheme for obtaining money or property by means of false or fraudulent pretenses, representations, promises, or omitted facts. Note that’s a disjunctive sentence which means one or more of those conditions must be present, not all of them. For color commentary, realize that false or fraudulent representations can include deceitful statements of half-truths (also known as “quibbling” for you honor code fans).

The statements made or facts omitted as part of the scheme need to be material; that is, they had a natural tendency to influence, or were capable of influencing, a person to part with money.

The seller (or maybe the market maker or both) needs to have acted with the intent to deceive and cheat the mark; and

The defendant used, or caused to be used, the Internet to carry out or attempt to carry out an essential part of the scheme (or, as here, all of it).

The hurdle the government would have to get over is whether defendant[s] had a duty to disclose the omitted fact[s] arising out of a relationship of trust. That duty can arise either out of a formal fiduciary relationship, or an informal, trusting relationship in which one party acts for the benefit of another and induces the trusting party to relax the care and vigilance that it would ordinarily exercise. Like maybe if the reseller’s terms of service prohibited speculative tickets but they were doing it anyway as is so common. So that duty issue will likely change based on the facts.

If the trier of fact decides that the defendant was a member of a scheme to defraud and that the defendant had the intent to defraud, the defendant may be responsible for other co-schemers’ actions during the course of and in furtherance of the scheme, even if the defendant did not know what they said or did.

For the defendant to be guilty of an offense committed by a co-schemer in furtherance of the scheme, the offense must be one that the defendant could reasonably foresee as a necessary and natural consequence of the scheme to defraud. (18 U.S.C. §§ 1341, 1343, 1344, 1346.)

So fraud and wire fraud is a pretty big stick, assuming you actually use it. On the other hand, there’s good reason to use it liberally in the case of speculative ticketing. Because everyone has a scheme until they get punched in the mouth you greasy mofos.