News

WMHW Alert: Prediction Markets in the Crosshairs: DOJ and CFTC Bring First Parallel Insider Trading Cases, Signaling New Enforcement Era

By Barry W. Rashkover, Jeffrey A. Udell, Ronald G. White, and Deanna M. Paul

Whether prediction market event contracts are ultimately treated as swaps, options, commodity derivatives, gambling products, or some other instrument, one point is now unmistakable: the federal government is not waiting to bring enforcement actions, especially in the insider trading context. Last week, the U.S. Attorney’s Office for the Southern District of New York (“SDNY”) and the Commodity Futures Trading Commission (“CFTC”) filed parallel criminal and civil charges arising from alleged insider trading on a prediction market. The charges, brought against a U.S. Army soldier accused of trading on classified information concerning the military operation to capture former Venezuelan President Nicolas Maduro, appear to mark the first Justice Department insider-trading prosecution tied to prediction-market activity and the first parallel CFTC case in that context. The five-count criminal indictment charges Army Special Forces Master Sergeant Gannon Ken Van Dyke with unlawful use of confidential government information for personal gain; theft of nonpublic government information; commodities fraud; wire fraud; and engaging in an unlawful monetary transaction. The CFTC complaint alleges violations of Sections 4c(a)(3), 4c(a)(4)(C), and 6(c)(1) of the Commodity Exchange Act (“CEA”) and Regulation 180.1, based on the alleged misuse of nonpublic government information to trade Polymarket event contracts.

Below are our observations on what these charges may signal for prediction markets, for the government’s evolving enforcement toolkit, and for companies and market participants navigating this fast-developing area.

Key Takeaways

• Prediction markets are now a mainstream enforcement target. The parallel criminal and civil actions brought by the SDNY and the CFTC signal that federal prosecutors and regulators now view trading on nonpublic information in prediction markets as the functional equivalent of traditional insider-trading and market abuse.
• Regulatory uncertainty does not reduce exposure. Courts and regulators continue to debate whether event contracts are best characterized as securities-like instruments (such as options), commodity derivatives (such as swaps) under the CEA, or gambling products. Yet that unresolved classification question has not stopped the government from bringing enforcement actions in this area.
• The risk extends beyond government information. The same commodities fraud and wire fraud theories employed in the Van Dyke case could apply to trading on material nonpublic corporate information, including mergers, clinical trial results, government contracts, sanctions, product launches, and other event-sensitive developments.
• Compliance programs should be updated. Companies should ensure that their MNPI, personal trading, conflicts, outside-accounts, training, and surveillance frameworks expressly cover prediction-market and event-contract trading, particularly for employees with access to market-moving or sensitive corporate, regulatory, or government-facing information.
• Platform rules and government referrals are increasing enforcement risk. Prediction-market platforms are increasingly banning insider trading in their terms of service and referring suspicious activity to regulators, meaning conduct once treated only as a merely a platform-compliance issue may now serve as the basis for fraud allegations and federal regulatory enforcement.

Discussion

The parallel SDNY and CFTC actions signal that prediction markets are no longer operating at the edges of enforcement. Federal authorities have made clear that they are prepared to treat trading on nonpublic information in prediction markets with the same intensity that they have long brought to securities and traditional commodities markets.

Van Dyke is alleged to have used his access to classified, nonpublic information about “Operation Absolute Resolve”—the U.S. military mission to capture Maduro and his wife—to trade Polymarket contracts tied to Maduro’s removal and related Venezuela outcomes, netting over $400,000 in profits when the operation was publicly announced. The factual allegations are remarkable, but the importance of the case lies in how the government chose to charge it: using overlapping commodities, fraud, and financial-crime theories. The indictment builds a charging framework designed to survive even if one of the central legal theories (particularly, the classification of prediction-market contracts as swaps) is rejected by the court.

Commodities fraud, wire fraud and money laundering are familiar features of federal white-collar prosecutions. The creative move here is the government’s application of CEA provisions to binary event contracts on a prediction platform. In that respect, Van Dyke is not simply another fraud case involving new technology. It is the first major federal effort to treat prediction-market trading on nonpublic information as a coordinated insider-trading-style enforcement problem.

That effort depends on an unsettled legal proposition: whether Polymarket’s event contracts are classified as derivatives, and more specifically swaps, within the meaning of the CEA. If a court ultimately rejects the CFTC’s swap theory, the government’s wire fraud theory offers an independent path to conviction.

Wire fraud permits prosecutors to proceed on the misappropriation of government property through interstate wires. Although it’s the most versatile count, recent Second Circuit jurisprudence has imposed meaningful constraints on that theory, making this path less automatic than it once was. The government appears to have drafted around those limitations. For example, the indictment does not rely on implied informational interests, but points to classified operational intelligence that is expressly designated as “property of the United States” in signed nondisclosure agreements.

Van Dyke has real defenses. He can attack the swap classification and argue that the link between knowledge of a military operation and the CEA’s requirement of financial, economic, or commercial consequence is too attenuated. With respect to the wire fraud count, he can argue that the government is stretching Title 18 too far by invoking Second Circuit jurisprudence, such as United States v. Blaszczak, 56 F.4th 238 (2d Cir. 2022), and the decisions handed down after Ciminelli v. United States, 598 U.S. 306 (2023), which rejected the government’s expansive theories of prosecution.

Those are not trivial arguments, but they will face a factual record saturated with compelling evidence indicating consciousness of guilt. For example, the indictment alleges that Van Dyke used a VPN routed through a foreign exit node, traded under a pseudonymous handle, asked Polymarket to delete his account after the public reporting began, changed his exchange email to one not subscribed in his name, and routed proceeds through a foreign crypto “vault” before moving funds into a new brokerage account. It also alleges that before trading, he had uploaded materials reflecting his knowledge that special-operations details were not public. Whatever room the law leaves him, those facts make a clean “innocence” narrative hard to sell.

Conclusion

The implications for practitioners and market participants are immediate. Prediction markets must be treated as part of the mainstream market-abuse landscape. The unresolved fight over whether a given contract is a swap, a security-based option, or a sophisticated wager no longer functions as a practical safe harbor because federal prosecutors are prepared to charge around that uncertainty. For companies and institutions, any organization whose personnel may possess event-sensitive confidential information should review whether its existing MNPI, trading, conflicts, and outside-accounts policies expressly cover event contracts and prediction platforms. Monitoring frameworks should also be reassessed, and platform terms of service should not be treated as mere boilerplate. For lawyers, it means the next wave of cases will likely test not only CFTC jurisdiction, but also the boundaries of post-Ciminelli wire fraud doctrine and the durability of Blaszczak in the government-information context. And for the market itself, the clearest takeaway is that the government no longer views prediction markets as an exotic regulatory case, but rather another venue in which fraud is simply fraud.

* This Client Alert is provided for informational purposes only and does not constitute legal advice. It should not be construed or relied on as legal advice, or to create a lawyer-client relationship. Readers should not act upon this information without seeking advice from professional advisers.