Exclusive: Federal prosecutors are exploring whether prediction market bets trip insider trading laws

By Kara Scannell, CNN

(CNN) — Federal prosecutors in Manhattan are exploring whether certain lucrative bets placed on prediction markets have violated insider trading and other laws, multiple sources told CNN.

The chiefs of the securities and commodities fraud unit of the US attorney’s office for the Southern District of New York recently met with representatives of Polymarket, one of the leading prediction market platforms, to discuss how existing laws could be applied to potential misconduct in the fast-growing industry, according to people familiar with the matter.

The Justice Department’s focus on headline-grabbing profitable bets is an escalation against an industry that recently saw an explosion of growth in the past year, largely uninhibited by federal regulators. Prosecutors are investigating lucrative trades, including the timing of the capture of Venezuelan leader Nicolás Maduro, one source said.

“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 US 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,” Biase said.

No companies have been accused of wrongdoing.

Polymarket declined to comment about specific trades or its meeting with law enforcement.

“Polymarket sets, maintains, and enforces the highest standards of market integrity. We also proactively work with regulators and law enforcement to reinforce those standards,” said Carissa Felger, a spokesperson for Polymarket, told CNN.

The meeting comes several weeks after Jay Clayton, the US attorney for the Southern District of New York, sent a warning shot through the industry when he said at a securities law conference that he believed there would be criminal cases involving prediction market activity.

“Because it’s a prediction market doesn’t insulate you from fraud,” Clayton said.

The increased attention by federal prosecutors comes as some players in the fast-growing industry are rushing to write and update their own rules and open investigations into suspicious activity. The expansion of bets into elections and sports is also creating a clash between state and federal authorities.

Recent lucrative bets on the timing of the war with Iran, the capture of Maduro and the outcomes of popular television series have raised fresh questions over whether bettors were lucky or if they had inside information.

Prediction markets, like Polymarket and Kalshi, have been heralded in some corners as accurate forecasters of election outcomes and are increasingly incorporated by researchers and investors as valuable data points.

Critics caution they are mostly self-policed platforms that are ripe for market manipulation. And for Polymarket in particular, its US-approved site is not fully operational yet, which means its most controversial markets about Venezuela and Iran are being offered on its offshore site, unencumbered by US federal regulations.

Prediction markets allow for yes or no bets on outcomes. To offer products in the US, the operators need to register with the Commodity Futures Trading Commission as designated contract markets, which are obligated to enforce rules, and abide by CFTC oversight.

To date there haven’t been any federal criminal prosecutions or CFTC civil cases brought against trade in prediction markets.

“I think it will be difficult. You can’t criminally prosecute someone if the law is vague,” said Aitan Goelman, a criminal defense lawyer who previously served as the director of enforcement at the CFTC.

“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. But all this is untested,” Goelman added.

Trades that took place on marketplaces outside of US also make it more challenging for federal prosecutions.

The series of well-timed bets has led some lawmakers from both parties to introduce bills to clarify the rules, including banning lawmakers and federal officials from trading on political events or policy decisions, and outlawing sports betting on the platforms. Last week, California Democratic Gov. Gavin Newsom issued an executive order to ban state government officials from using insider knowledge on prediction markets in the state.

State regulators are also becoming more aggressive to crack down on bets in election and sports.

Arizona recently filed the first criminal charges against Kalshi, allegedly it is operating an illegal gambling business and engaging in election wagering. Kalshi denies wrongdoing and called the misdemeanor charges “paper thin.” There are also dozens of civil lawsuits against prediction sites, with support from a bipartisan array of state attorneys general.

The CFTC under the Trump administration has signaled a more hands-off approach emphasizing the self-policing nature of the market.

Industry focus on insider trading

As prosecutors’ focus turns to the market, the big players are rushing to take steps to tamp down concerns that they are out of control.

Last week, Polymarket issued rules placing bans on trades based on confidential information or in violation of a duty of trust or confidence. The same day, Kalshi announced new rules to block politicians from trading on their own campaigns and athletes from trading in their own leagues.

However, there are also key differences between the two rival platforms. Kalshi’s rules have long banned insider trading, and it has recently endorsed some of the congressional proposals to ban the practice among federal officials.

(CNN has a partnership with Kalshi and uses its data to cover major events, but editorial employees are prohibited from participating in prediction markets.)

Robert DeNault, the head of enforcement for Kalshi, said on X that it is investigating suspicious trades based on popular television series.

“Aliens, Survivor, and Bachelorette markets – we’re investigating all of them, and so far, we have not found compelling evidence of insider trading or market manipulation. However, these markets are not closed and our monitoring and analysis continues,” Denault wrote on X.

Kalshi said in the past year it has referred over a dozen cases to law enforcement.

Last May, Kalshi fined and issued a five-year ban from its market when it discovered a political candidate was trading on his own candidacy. A few months later Kalshi fined and banned a trader based on “reasonable belief” that the person “likely had access to material nonpublic information related to his trades.”

The CFTC highlighted Kalshi’s actions, but did not bring civil charges in either case.

“CFTC-registered exchanges are required to monitor for manipulation, fraud, and insider trading. We’re consistently working with our exchanges to make surveillance capabilities even stronger,” a spokesperson for the CFTC told CNN.

Polymarket paid $1.4 million to settle with the CFTC in 2022 for operating as an unregistered exchange in the US. A criminal investigation was later opened by the Biden-era Justice Department, but it was closed last year without any charges. Polymarket gained federal regulatory approval in July 2025 when it registered with the CFTC. Its US-facing site, which isn’t available yet to most customers, will be required to comply with the CFTC’s rules.

Under the Biden administration, the CFTC said election-related bets on Kalshi were unlawful. Kalshi challenged the case in court and won, paving the way for an explosion of legal 2024 election-related betting on the site. Last May, under the Trump administration, the CFTC dropped its appeal of the case.

In August, Donald Trump Jr. joined the advisory board of Polymarket after venture capital firm 1789 invested an undisclosed amount of money into the company. He is also an adviser to Kalshi. Trump Jr.’s spokesman previously told CNN he doesn’t trade on any prediction platforms and doesn’t interact with federal government officials about these companies.

The CFTC under the Trump administration has championed oversight that bolsters an expansion of prediction markets.

CFTC Chairman Michael Selig last week announced a task force to advance rules that “fosters innovation at home and ensure American participants are not left on the sidelines.”

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