Federal prosecutors are investigating whether several large contract purchases at popular prediction platforms represent illegal insider trading, CNN reports.
Key Takeaways
- One Polymarket customer won more than $400,000 trading on the capture of then Venezuelan president Nicolas Maduro.
- Federal criminal charges have not been filed against any companies or individuals.
- Polymarket and Kalshi recently updated their anti-insider trading standards and policies.
The U.S. Attorney's Office for the Southern District of New York is handling the investigation.
The body’s chiefs of the securities and commodities fraud unit recently met with Polymarket, one of the most popular prediction outlets, to discuss how current legislation could be used to address possible illegal activity from traders. One recent trade netted more than $400,000 by forecasting the capture of then Venezuelan president Nicolas Maduro, which prompted an immediate outcry from lawmakers and industry watchdogs.
CNN only explicitly referenced the Maduro capture, but its sources claimed prosecutors were looking into “lucrative trades,” implying multiple cases.
“As a general matter, our Office meets with market participants to discuss market activity and application of the law,” Nicholas Biase, a spokesman for the U.S. attorney’s office, said in a statement to CNN. “With regard to so-called ‘prediction markets,’ our Office has made clear that various laws, including insider trading laws, anti-money laundering laws, laws prohibiting manipulation, and various anti-fraud laws are applicable to a wide range of observed activity.”
While the Commodity Futures Trading Commission (CFTC) is in charge of regulating prediction platforms, non-affilited federal officials have not shown much interest in interfering with the markets amid their recent explosion in popularity.
However, suspicious trades and continued pushback from state gaming regulators have brought them further into the spotlight for officials and lawmakers, including two Senators who recently proposed a bill to ban sports event contracts at prediction market sites.
Enjoying Covers content? Add us as a preferred source on your Google account
Fears of insider trading
The Maduro incident was one of the earliest high-profile cases to raise concerns about suspicious, potentially insider-driven trading activity. Several others have since occurred, including at the end of last month when six Polymarket accounts won close to $1 million by predicting the U.S. would attack Iran before Feb. 28.
Polymarket and its top competitor, Kalshi, have both cracked down on insider trading with new protocols and standards implemented within the last couple of months. However, the prosecutors’ interest in the matter signals that fear of illegal activity still exists.
“Polymarket sets, maintains, and enforces the highest standards of market integrity. We also proactively work with regulators and law enforcement to reinforce those standards,” Carissa Felger, a spokesperson for the trading platform, told CNN.
News of the investigation comes just weeks after U.S. Attorney for the Southern District of New York Jay Clayton said he believed there would be criminal cases involving trading at prediction platforms.
State-level disputes between prediction platforms and gaming officials have often resulted in temporary injunctions or restraining orders. That escalated earlier this month, when the Arizona attorney general filed criminal charges against Kalshi, which the company’s CEO called “baseless.”
There have been no federal criminal charges or CFTC civil enforcement actions related to prediction trading, although scrutiny is increasing.
Burden of proof
Prediction markets allow customers to purchase “Yes” or “No” contracts associated with different events. Top platforms have markets available in industries including finance, weather, politics, sports, and entertainment, among others.
While certain big-money trades have created feelings of skepticism, the onus is still on prosecutors to prove their illegal nature, which may prove to be difficult.
“Prosecutors would have to show not only that someone was trading in possession of material nonpublic information, but they were doing it in violation of some kind of fiduciary duty or duty of trust,” said Aitan Goelman, a criminal defense lawyer who previously served as the director of enforcement at the CFTC. “But all this is untested.”
