Introduction

The U.S. Commodity Futures Trading Commission (“CFTC”) and the U.S. Department of Justice (“DOJ”) have initiated an aggressive enforcement campaign targeting insider trading and the misuse of material nonpublic information (“MNPI”) on prediction market platforms. While federal regulators are pivoting toward a more permissive framework for listing political, economic, and corporate event contracts, they are simultaneously deploying civil and criminal tools to police market integrity.  Recent parallel actions in the Southern District of New York (“SDNY”) demonstrate that federal authorities will aggressively prosecute individuals who trade on event contracts using confidential information—even if their employers operate entirely outside the traditional financial sector. Corporate counsel must immediately evaluate whether internal compliance programs, insider trading policies, and employee handbooks adequately address these emerging compliance risks.

Recent Enforcement Actions

In the first of two recent enforcement actions, DOJ and the CFTC invoked Section 6(c)(1) of the Commodity Exchange Act (the so-called “Eddie Murphy Rule” which prohibits trading on misappropriated government information) in a first-of-its-kind action.[1]  A U.S. Army soldier was charged with civil and criminal violations for allegedly using classified, nonpublic intelligence surrounding a U.S. military operation to place highly profitable bets on the ouster of Venezuelan President Nicolás Maduro via prediction market platform Polymarket.  In the second case, the DOJ and CFTC filed parallel criminal and civil insider trading actions against a technology company software engineer, alleging the  misappropriation of confidential proprietary data to reap approximately $1.2 million trading search-related event contracts on Polymarket. The charges in each of these cases include commodities fraud, wire fraud, and money laundering.  These are likely just first couple of cases in what will likely be a steady trend that increases as the popularity of prediction markets increases.

Legislative and Agency Mandates

Beyond these two recent enforcement actions, the CFTC has taken administration action in this area with its Division of Enforcement formally designating insider trading in prediction markets and the illegal use of government information as top enforcement priorities.  And in the U.S. Congress, the House Armed Services Committee inserted a provision into the 2027 National Defense Authorization Act (“NDAA”) which would prohibit U.S. military personnel and U.S. Department of Defense (“DOD”) employees from participating in prediction markets using material nonpublic information whether classified or unclassified.

Related Litigation Over Federal versus State Jurisdiction

This enforcement surge arrives amidst a complex jurisdictional battle over who regulates this multibillion-dollar prediction markets industry. Moving rapidly toward explicit federal preemption, the CFTC is currently reviewing a formalized prediction market rulebook with the White House Office of Management and Budget (OMB) to provide clear national standards for event contracts.  Meanwhile, more than 20 state civil and criminal actions are pending against platforms with state regulators arguing that these platforms constitute illegal gambling under state laws.  This litigation seems destined for a show-down in the U.S. Supreme Court, which would need to decide whether federal law preempts state regulation in this space as the prediction markets argue.

Critical Takeaways

Prediction markets now allow users to trade on a massive array of corporate and macroeconomic outcomes, including product launch timelines, corporate earnings, regulatory approvals, and executive departures.  This new threat suggests the following compliance enhancements for relevant companies:

1. Updated insider trading policies. Because most legacy corporate insider trading policies restrict employees from trading in the employer’s securities or related financial derivatives while in possession of MNPI, these policies should be reviewed and updated, as appropriate, to reflect this new reality. Specifically, such policies should explicitly prohibit employees from using proprietary, confidential, or nonpublic corporate data to trade “event contracts,” “binary options,” or “yes/no contracts” on any prediction market platform.
2. Definition of material information. The definition of material Information contained in corporate policies should be updated to include information that may not be material to a stock price but could be highly material to a niche prediction market contract (e.g., an internal software patch date, a localized marketing trend, or specific search metric volume).  Indeed, the definition should be broad enough to apply whether such a contract is structured as a security, derivative, or event-based wager.
3. Enhanced training. Compliance teams must review ethics or code-of-conduct training to ensure that all proprietary business data remain confidential and cannot be monetized for personal trading.  Specifically, businesses must update such training to clearly state that misuse of MNPI is prohibited regardless of whether used to apply beyond the trading of securities and specifically includes prediction-markets activity.
4. Monitoring and Reporting. As regulated platforms are increasingly expected to act as the “first line of defense” by flagging anomalous trading volumes and cooperating directly with federal investigators, corporate compliance officers should implement clear protocols to handle internal whistleblowers or external inquiries from the CFTC or DOJ regarding employee trading accounts.  Such efforts are critical to mitigating potential legal exposure and reputational risk.

Conclusion

As prediction markets continue to draw regulatory scrutiny, companies must ensue that policies and training appropriately reflect this new reality.  Organizations that take a proactive, forward-looking approach to governance in this space will be best positioned to navigate an increasingly complex compliance reality driven by a rapidly evolving enforcement landscape.

[1] The “Eddie Murphy Rule” is an informal term for a provision in the 2010 Dodd-Frank Act that makes it illegal to trade commodities using nonpublic information stolen from a government source.  The term comes from the 1983 comedy film “Trading Places” starring Eddie Murphy and Dan Aykroyd wherein the corrupt “Duke brothers” bribe a government official to get an advance, unpublished copy of the Department of Agriculture orange crop report.