Federal prosecutors are preparing insider trading charges against two individuals who allegedly used confidential information to bet on prediction platforms, a crackdown that could reshape how Polymarket and Kalshi operate.
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US prediction market crackdown targets 2 insiders as charges loom
US authorities are preparing insider trading charges against a servicemember and a KPMG employee who allegedly used confidential information to place bets on prediction platforms, with charges expected this fall as part of a new enforcement batch.
"You would always be wondering, is DOJ waiting in the wings?" said Elizabeth Davis, former chief trial attorney at the CFTC who now leads the commodities and derivatives practice at Davis Wright Tremaine LLP. "Jamie's in that role with the Southern District of New York and working very closely, given that he has roots with the CFTC and knows how they work."
The crackdown follows a series of high-profile prediction market bets that have drawn regulatory scrutiny. A $32,000 wager on the US ousting of Nicolás Maduro was placed hours before President Trump announced the operation, collecting $400,000. Another bettor won nearly $1 million for correctly identifying 22 of 23 of Google's top search terms for 2025. The CFTC has brought two civil cases paralleling criminal prosecutions by the Southern District of New York, including one against Army soldier Gannon Ken Van Dyke, accused of using classified government information to bet on Maduro's capture.
The enforcement push comes as prediction markets have exploded in popularity, with $14 million riding on whether Iran would strike Israel on March 10 alone. Jamie McDonald, the new SDNY chief and former CFTC enforcement director, has said prediction markets will be "an active space for investigations and enforcement going forward." His prior representation of Polymarket at Sullivan & Cromwell could require recusal from cases targeting the platform directly, though legal ethics experts say he can work on cases where Polymarket is merely part of the evidence.
The new cases would mark the second wave of prediction market prosecutions under McDonald's leadership. His predecessor, Jay Clayton, publicly forecasted that his prosecutors would bring prediction market cases and warned that betting outside typical venues "doesn't insulate you from fraud." The CFTC is now investigating Polymarket, and lawyers expect the agency to refer more cases to the Manhattan US attorney's office given McDonald's close relationship with his former employer.
The manipulation concerns extend beyond insider trading. One bettor won more than $500,000 with a successful bet on the timing of Ayatollah Khamenei's death shortly before he was killed by an Israeli air strike on February 28. Another won more than $16,000 by making 17 successful guesses about who would and would not perform in the Super Bowl LX halftime show, hours before it began. One bettor even allegedly used a hair dryer to change the temperature being recorded at Charles de Gaulle airport to win a bet about the weather.
Anonymity Complicates Enforcement
Polymarket accounts, like those on Kalshi, are not tied to one's identity. Users can place bets using anonymous crypto wallets and create multiple wallets to hide the signature of insider knowledge. Seven or eight anonymous speculators each getting one improbable guess correct is less suspicious than one person nailing them all. Many bettors use nonsensical pseudonyms or random strings of letters and numbers for their aliases.
Recusal Questions Loom for SDNY Chief
McDonald's prior representation of Polymarket and Coinbase at Sullivan & Cromwell raises recusal questions. If the CFTC's investigation of Polymarket were to escalate to a criminal case directed at the company, McDonald would likely be expected to step aside. "That's where I would see the wrinkle, with his prior representations," Davis said. "But you know, the Southern District bench is deep. I have no doubt his deputies would step up for those cases."
It's hardly unprecedented for a US attorney to be sidelined from some of the office's biggest cases. Clayton recused himself from the federal prosecution of Luigi Mangione, who recently pleaded guilty to federal stalking charges in the death of UnitedHealthcare CEO Brian Thompson. Geoffrey Berman, another former Manhattan US attorney, recused himself from the office's investigations related to President Trump.
The two existing SDNY cases — Van Dyke and the Google engineer — do not name Polymarket as a defendant, and NYU law professor Stephen Gillers said McDonald can work on both cases "unless he happened to have worked for Polymarket on the underlying facts in either case."
This article is for informational purposes only and does not constitute investment advice.
