The Prediction Markets Crackdown Continues

Key Takeaways

• Prediction-market enforcement appears to be entering a new phase. What began as an emerging regulatory theory is increasingly becoming an active enforcement priority, with authorities reportedly examining additional instances of alleged trading on nonpublic information.
• The potential reach of these cases extends well beyond traditional corporate insiders. Recent investigations reportedly involve both government and corporate information, highlighting how the legal and reputational ramifications from insider trading on and manipulation of prediction markets may reach a much broader universe of individuals than when that conduct occurs on traditional securities markets.
• Prediction markets create a direct mechanism for monetizing information that historically may have had no obvious trading outlet. Government decisions, regulatory approvals, military operations, procurement awards, enforcement actions, product launches, and other event-driven developments can now become the subject of actively traded contracts.
• The focus of enforcement is shifting from classification to conduct. Although questions remain regarding whether particular event contracts are commodities, securities, swaps, or something else entirely, regulators appear increasingly focused on the misuse of confidential information regardless of the instrument involved.
• The next generation of insider trading cases may not look like traditional insider trading cases. The emerging fact patterns suggest that future enforcement actions may involve employees, consultants, auditors, contractors, government personnel, scientists, and other professional-services providers and individuals whose access to confidential or other nonpublic information could, if misused, give them a predictive advantage in event-based markets.

Earlier this year, we examined how federal authorities might apply existing insider trading and anti-fraud principles to prediction markets, an emerging asset class that does not fit neatly within traditional regulatory regimes, but whose features arguably implicate several of them. In Regulating Insider Trading on Prediction Markets, we explored an enforcement landscape beginning to take shape as regulators, prosecutors and market participants grappled with the rapid expansion of event-based trading markets. Days later, legal theory became an enforcement action. DOJ and the CFTC brought parallel charges against a U.S. soldier who allegedly used classified information concerning a military operation to trade prediction-market contracts. As discussed in SDNY and CFTC Charge U.S. Soldier with Using Classified Information to Profit on Prediction Market, the case demonstrated both the breadth of the available charging theories and the willingness of authorities to deploy them in a market many observers still viewed as novel.

Recent developments suggest that case was not an outlier. Publicly available information regarding these reported matters remains limited, and no charges have been announced. The significance of the reports lies less in the specific allegations than in the apparent direction of enforcement attention. Federal authorities are reportedly investigating separate instances of alleged trading on prediction markets using nonpublic information, with potential charges reportedly under consideration. The reported matters involve two distinct categories of information: sensitive government information pertaining to military strikes in Iran and Venezuela allegedly obtained through military service and confidential corporate information allegedly obtained through professional employment. Neither involves the archetypal executive trading the securities of his or her own company. Both illustrate a defining feature of prediction markets: information acquired through a wide range of professional roles and relationships could, if misused, be converted directly into trading profits.

If charges follow, the cases may be remembered less for the identities of the individuals involved than for what they signify. Together, they would suggest that prediction-market insider trading is evolving from an emerging regulatory concern into a sustained enforcement priority.

From a test case to an emerging pattern

Prediction markets create something genuinely new from an enforcement perspective. Historically, many forms of highly sensitive information had no obvious, direct outlet for monetization. An individual might possess advance knowledge of a military operation, regulatory approval, government contract award, enforcement action, cybersecurity incident, or product launch. Although that information could be extraordinarily valuable, it might not provide a readily identifiable opportunity to trade in traditional securities markets.

Prediction markets change that calculus. By creating liquid markets around the occurrence of real-world events, event contracts expand the range of information that can be converted into profit. Information that once sat at the periphery of traditional insider trading frameworks can now provide what we previously described as a “direct, monetizable outlet” for individuals possessing nonpublic information.

The first parallel DOJ and CFTC prosecution illustrated how authorities may respond. Under the government’s theory as charged in those actions, it did not need to establish that the defendant had traded the securities of an affected public company. Instead, the charges rested on commodities fraud and other statutory theories directed at the alleged misuse of classified information allegedly misappropriated for personal gain in violation of the subject’s duties to the government. As we observed at the time, the action demonstrated “the wide variety of statutes and charging theories” available to authorities seeking to address fraud on prediction markets. 

The newly reported investigations may test how readily that model extends beyond the initial national-security fact pattern. The investigations could both further develop the government-information theory and bring the issue closer to a conventional corporate insider trading scenario, but without requiring trading in a public company’s securities. That would represent an important next phase. One case can be exceptional. Multiple investigations involving different types of information, actors and employment relationships may suggest that authorities are continuing to explore how existing anti-fraud theories apply in this area.

If matters involving more conventional insider trading scenarios proceed or multiply, they would also introduce a structural feature not present in the servicemember case: the nonpublic information at issue reportedly belonged not to the individual’s own employer, but to the employer’s clients. Gatekeepers, unlike a traditional corporate insider, may be subject to contractual, professional, confidentiality, or other duties relating to client information, depending on the engagement and applicable law. Depending on the facts and applicable regulatory framework, situations involving alleged misuse of client information may raise questions regarding existing information-governance, compliance, and supervisory controls.  Organizations that maintain confidential information on behalf of clients, customers, counterparties, patients, or governmental bodies may wish to consider whether existing controls adequately address the risks presented by event-based markets. Any such exposure would necessarily depend on the governing regulatory framework and the particular facts. Misuse of client information could also create litigation, regulatory, reputational, and commercial issues for the provider and potentially affected clients. Nor would those questions necessarily be limited to any particular industry or profession. Similar issues could arise for life-sciences and medical advisers, bankers, lawyers, consultants, and other service providers with access to confidential client information relevant to an event contract. 

Prediction markets are creating new insiders

Perhaps the most significant feature of prediction markets is not the underlying contracts, but the breadth of the population that may possess confidential or other nonpublic information relevant to them.

Traditional insider trading cases tend to involve a familiar group of participants: corporate executives, directors, bankers, lawyers, and investors. Prediction markets expand that universe considerably. Government employees may have advance knowledge of policy decisions or military activity. Individuals across a range of professions may have access to confidential information relevant to the outcome of event contracts. Such individuals may include government employees, consultants, advisers, advisers, researchers, contractors, lawyers, accountants, medical professionals, and others whose work provides access to nonpublic information. For example, scientists and regulatory personnel may understand the likely outcome of an approval process; consultants, engineers, and contractors may know about product launches, cybersecurity incidents, strategic transactions, or operational disruptions; and procurement officials may know the likely recipient of a significant government contract. The common thread is not the individual’s title or proximity to the executive suite. It is access to nonpublic information capable of affecting the outcome of a  tradable event.

The reported focus illustrates this dynamic. The alleged informational advantages supposedly arose not from membership in the senior leadership of a public company, but from access to information obtained through government service and other employment. Prediction markets may therefore bring individuals who have rarely viewed themselves as potential market insiders within the practical reach of insider trading and anti-fraud enforcement. This may create both challenges and opportunities for  organizations as they update their insider-trading policies and trainings to address these risks. This risk is particularly acute because event contracts can collapse the distance between informational advantage and monetization. As Prediction Markets and Investment Advisers: From Regulatory Curiosity to Business Critical Risk explained, prediction markets sit “at a crossroads between information and trading.” Contracts are frequently binary and time-bound, meaning that information that might move a stock price only incrementally could resolve a prediction contract with near certainty. 

Prediction markets therefore do more than create new financial products. They create new categories of insiders and new pathways through which nonpublic information can be monetized.

The regulatory debate is shifting

For much of the industry’s development, prediction markets have been viewed primarily through the lens of classification and jurisdiction. Existing regulatory frameworks were not designed with modern event contracts in mind, resulting in overlapping oversight, novel legal questions, and competing views regarding the appropriate treatment of these products. That debate remains important, and many of its central issues remain unresolved. Some event contracts may fall within the CFTC’s commodities jurisdiction. Others, particularly those tied closely to individual companies or securities, may implicate the SEC’s authority over securities or security-based swaps. State authorities have separately sought to apply gaming and consumer-protection laws.

As discussed in CFDs, Prediction Markets, and the SEC’s Expanding Regulatory Perimeter, the SEC’s analysis of emerging products may turn less on labels, technological form, or jurisdictional structuring than on economic reality. Recent enforcement developments suggest a related shift in emphasis. Authorities appear increasingly focused not simply on what prediction-market contracts are, but on how they are being used. When allegations involve deception or the misuse of confidential information, the precise classification of the instrument may become less significant than the conduct itself.

This reflects a familiar pattern in financial regulation. New products often generate extended debates about jurisdiction, structure, and statutory boundaries. Enforcement authorities, by contrast, tend to focus on more enduring principles of fraud and market integrity. The market changes. The underlying concern does not.

Informational advantage is becoming more consequential

Prediction markets also form part of a broader evolution in how regulators understand informational advantage. 

In life sciences, for example, value is often driven by binary events such as clinical-trial results and regulatory decisions. Information about those outcomes develops gradually and may remain uncertain until an official decision is announced. Yet an individual may acquire a meaningful predictive advantage well before possessing a definitive, nonpublic fact. As discussed in From Science to Signals: SEC Enforcement, Predictive Markets, and Informational Advantage in Life Sciences, the distinction between possessing inside information and being able to predict an outcome with high confidence may be narrowing. The aggregation of partial signals can produce an insight that, from an enforcement perspective, closely resembles insider knowledge, even when no single piece of information is independently decisive.

That development is especially important for event-based markets. A prediction contract assigns an express financial value to the probability of an outcome. Partial information, operational signals, or preliminary developments may therefore provide a substantial advantage before an event becomes certain or a formal announcement is made. This dynamic could push enforcement attention earlier in the information lifecycle. It likely will also broaden the population of employees and third parties whose access to developing information creates risk.

From isolated cases to an enforcement frontier

In hindsight, the emergence of insider trading concerns in prediction markets may have been inevitable. Markets depend on confidence that participants are not systematically trading against individuals who possess undisclosed informational advantages. Whenever a new market develops, authorities must determine how existing anti-fraud principles apply when a participant uses information unavailable to the broader market to obtain a trading advantage.

Prediction markets present that problem in an unusually broad form. Almost any sufficiently discrete future event can become the subject of a contract. As the range and specificity of those contracts grow, so too will the population of individuals who possess information relevant to their outcome. The enforcement trend is therefore unlikely to be limited to conventional corporate information. It could encompass government decisions, geopolitical events, regulatory actions, scientific developments, litigation outcomes, procurement processes, and operational events. Nor is the risk necessarily confined to the individuals who originate the information. Tipping, indirect trading and the use of intermediaries may complicate investigations while extending potential exposure to a wider group.

The two newly reported investigations are significant for precisely this reason. They are said to involve different sources of information, different professional settings, and different relationships of trust. Yet the underlying concern is the same: the alleged use of nonpublic information obtained through employment to gain an advantage in a market built around the outcome of future events. 

What comes next

When we first examined prediction markets, the principal questions concerned jurisdiction, regulation, and market structure. Those questions remain important. Increasingly, however, the more consequential story is enforcement.

The first major prosecution showed that authorities were prepared to use existing commodities and fraud statutes to address prediction-market trading based on confidential information. The additional investigations may reveal whether that approach can be extended to corporate information, professional advisers and other participants who do not resemble the traditional insider. Any resulting cases could test both the reach of existing statutes and the limits of familiar insider trading concepts in a market defined by event-based, rather than securities-based, exposure. They may also reveal whether courts will accept the government’s application of longstanding anti-fraud principles to products whose regulatory classification remains contested.

For companies, financial institutions, professional-services firms, and government contractors, the issue is no longer merely whether prediction markets can create insider-trading risk. The more immediate considerations are whether existing compliance, confidentiality, conflicts, and information-governance frameworks adequately address the unique risks presented by event-based markets.  Relevant considerations may include who within an organization, and among its key outside advisers, consultants, or suppliers, has access to information relevant to event contracts; whether existing controls address the ways that information can be monetized; and how the organization would respond if suspicious trading were identified. Organizations may wish to discuss with internal and external counsel practical steps they can take to address these risks, reinforce a proactive and cooperative posture with regulatory authorities, and develop an appropriate record of their compliance efforts.

Organizations may also wish to consider whether publicly available trading information can provide useful risk indicators, including unusual activity or significant publicly visible payouts on contracts tied to the organization, its clients, or events about which its personnel possess confidential information. Any such review should be appropriately scoped and interpreted cautiously. Visible trading activity may warrant inquiry, but ordinarily would not, standing alone, establish the source of the trader’s information or whether misconduct occurred. Counsel can assist in evaluating potentially significant activity, preserving appropriate privilege, and developing proportionate escalation and response protocols. Prediction markets are no longer simply a story about innovative financial products. They are becoming a story about the evolution of insider trading enforcement. And enforcement attention in this space shows little sign of slowing. 

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