CLIENT ALERT: Emerging Federal Enforcement Priorities Signal Risk to Prediction Market Users

May 18, 2026

KEY TAKEAWAYS

Prediction markets (platforms through which users can bet on the likelihood of a future event occurring) have skyrocketed in popularity in recent years and, more recently, have become an enforcement focus for federal prosecutors and regulators.
Recently, the U.S. Attorney’s Office for the Southern District of New York (SDNY) and the Commodity Futures Trading Commission (CFTC) both initiated actions against an active member of the U.S. military, alleging that he had, among other violations, engaged in insider trading by using classified government information to place bets on whether and when the United States would take certain military actions in Venezuela.
These actions—viewed together with prior statements by SDNY U.S. Attorney Jay Clayton and the CFTC’s Director of the Division of Enforcement David I. Miller—illustrate that the federal government believes prediction market contracts (the bets) are commodities under its jurisdiction and thereby subject to existing antifraud, insider trading, and market manipulation laws.
Notwithstanding the federal government’s view, the law is not settled that prediction market contracts are subject to the Commodity Exchange Act (CEA).
Individuals who bet on such markets and entities that possess material nonpublic information (MNPI) should nonetheless take steps to mitigate risk of federal action. In particular, entities that could be the subject of an event contract should consider modifying or implementing policies prohibiting the misuse of such MNPI on prediction markets.

RECENT SDNY AND CFTC ACTIONS

On April 23, 2026, SDNY unsealed an indictment charging a U.S. Army Master Sergeant with commodities and wire fraud, money laundering, and other charges arising from his alleged misuse of classified government information to bet on Polymarket, one of the most popular prediction market trading platforms.^[1]

According to the indictment, the defendant was under a duty of confidentiality because he had signed at least two nondisclosure agreements acknowledging that his position in the military provided him access to classified and sensitive government information and promising never to divulge such information. He was also, the government alleges, in possession of MNPI through his involvement in the planning and execution of the U.S. military operation to capture former Venezuelan President Nicolás Maduro and his wife.

Per the indictment, in December 2025, the defendant created a Polymarket account using a virtual private network geolocated to a foreign country and purchased 13 event contracts betting that U.S. forces would invade Venezuela or remove Maduro from power. Because he was in possession of MNPI when he purchased the event contracts, the government alleges that he breached his duty of confidentiality to the source of the information: the federal government. After Maduro and his wife were captured by U.S. forces on January 3, 2026, the defendant purportedly netted $409,881 from the contracts.

The government further accused the defendant of taking steps to hide his illicit behavior, including moving the money through a cryptocurrency “vault,” deleting his Polymarket account, and changing the email address for his cryptocurrency exchange account. The government noted in a related press release that Polymarket had cooperated in the investigation.

In a parallel action filed on the same day, the CFTC initiated a civil action against the defendant alleging that his conduct constituted insider trading.^[2] In a press release announcing the enforcement action, Director Miller said that it “marks the first time the CFTC has charged insider trading involving event contracts, and the first time the CFTC has used the so-called ‘Eddie Murphy Rule’ to bring charges based on the misuse of government information.” The “Eddie Murphy Rule” is named for Murphy’s character in the movie Trading Places who profited by using information from a stolen government crop report. The rule prohibits trading based on confidential government information.

Both the DOJ and CFTC actions allege that the defendant’s prediction market contract purchases are commodities subject to the CEA.

REMARKS AND GUIDANCE FORESHADOW INCREASED FOCUS ON PREDICTION MARKETS

The SDNY indictment and CFTC enforcement action should come as no surprise. U.S. Attorney Clayton and Director Miller had hinted in the weeks preceding the April 23 coordinated action that prediction markets would be an enforcement priority.

On February 2, 2026, while appearing on CNBC’s Squawk Box, U.S. Attorney Clayton compared prediction markets to traditional futures/swap markets, describing prediction markets as featuring “much more narrow issues on a retail basis,” adding, “[t]he thinner the market, the more opportunity for manipulation.” U.S. Attorney Clayton confirmed that SDNY prosecutors were “absolutely” already considering ways to prosecute prediction market users. Days later, during a Q&A session at the 2026 Securities Enforcement Forum, when asked whether he foresaw any prosecutions in the prediction markets, U.S. Attorney Clayton responded quickly and decisively “yes” before elaborating that “because it’s a prediction market doesn’t insulate you from fraud.”

The CFTC soon followed suit. On February 25, 2026, the CFTC’s Division of Enforcement issued a formal Prediction Markets Advisory, reiterating that the agency “has full authority to police illegal trading practices” on prediction markets because the event contracts available for purchase therein are typically structured as swaps, and therefore subject to the CEA’s antifraud provisions. Then, on March 31, 2026, Director Miller gave a speech emphasizing that protecting the integrity of prediction markets was a main enforcement priority. Director Miller sought to dispel a “myth in the mainstream media and social media that insider trading law doesn’t apply in the prediction market,” confirming his view that such behavior does in fact violate the CEA and CFTC regulations and would be investigated and prosecuted accordingly.

STATES SEEK TO ASSERT REGULATORY CONTROL OVER PREDICTION MARKETS

While the federal government has asserted that prediction market contracts are subject to the CEA, a growing number of states have taken the opposite position, contending, in a wave of litigation across the country, that these contracts are wagers subject to state gambling laws. Several states have brought enforcement actions against prediction market platforms like Kalshi and Polymarket. In April 2026, in a case brought by New Jersey against Kalshi, the Third Circuit became the first federal appellate court to hold that the CEA preempts state gambling laws as applied to sports-related event contracts traded on CFTC-registered prediction markets.^[3] More than 34 states filed amicus briefs in support of New Jersey’s position. A circuit split, however, could soon develop: in a similar action, the Sixth Circuit cast doubt on federal preemption arguments in a recent order denying Kalshi’s motion for injunctive relief,^[4] and the Fourth^[5] and Ninth^[6] Circuits are expected to render decisions on the subject following recent oral arguments. In response to this trend of state action, the CFTC and DOJ have launched an unprecedented federal offensive, jointly suing five states to defend the CFTC’s exclusive jurisdiction over prediction markets.

PRACTICAL IMPLICATIONS

While it is undeniable that the federal government is treating users on prediction markets as enforcement targets, there are steps that users and employers can take to minimize risk.

Users should assume that their contract purchase activity, account information, and communications on prediction market platforms may be disclosed by the platforms to regulators and prosecutors. If contacted by the compliance staff at a prediction market platform to provide additional information, assume that information will also be shared with regulators and prosecutors.
Prediction market users should carefully review the user rules and guidelines for any prediction market platform they use to ensure they are following the rules. For instance, Kalshi has banned political candidates from betting on their own elections.
If prediction market users are betting on an event for which they have information through their employment, they should consult their employer’s confidentiality and compliance policies to ensure that their use of such information would not violate those policies.
Entities that could be the subject of an event contract should consider implementing or updating their policies to address prediction market use.

CONCLUSION

The demonstrated trend toward increased monitoring of, and enforcement surrounding, prediction markets serves as a reminder—much like cryptocurrency and artificial intelligence before it—that when new technologies become popular, government regulation is often not far behind. Sher Tremonte LLP will continue to monitor developments. For questions, please contact us. Written by Brian Kidd, Alison Moe, Tami Stark, and Rebecca Prager.

^[1] Indictment, United States v. Van Dyke, No. 26-cr-156 (S.D.N.Y. Apr. 23, 2026).

^[2] Complaint, CFTC v. Van Dyke, No. 26-cv-3369 (S.D.N.Y. Apr. 23, 2026).

^[3] KalshiEX, LLC v. Flaherty, 172 F.4th 220 (3d Cir. 2026).

^[4] Per Curiam Order, KalshiEX, LLC v. Schuler, No. 26-3196 (6th Cir. Apr. 24, 2026).

^[5] KalshiEX, LLC v. Martin, No. 25-1892 (4th Cir.).

^[6] North American Derivatives Exchange Inc. v. Nevada, Nos. 25-7187, 25-7516, and 25-7831 (Consolidated) (9th Cir.).