Insider Trading on Prediction Markets: The Cases and the Legal Gaps

Insider trading on prediction markets is no longer a theoretical worry. Since April 2026, federal prosecutors have charged a US Army soldier and a Google engineer, the CFTC has settled with a White House teleprompter operator, and Kalshi has disciplined a trader who bet on his own candidacy and another who bet on videos he edited before publication.

But the documented cases are still few, the legal theories are still being tested, and most viral accusations have not been proven. The useful question is not "is insider trading happening?" It plainly is, in some cases. The useful question is which conduct the law can actually reach, and which conduct only looks bad.

What counts as insider trading here

Prediction markets are derivatives markets. The CFTC polices them under the Commodity Exchange Act, including Section 6(c)(1) and Regulation 180.1, which prohibit fraud, manipulation and deceptive schemes. The agency does not use the SEC's Rule 10b-5, and there is no standalone federal statute called "prediction-market insider trading."

Instead, the CFTC and DOJ rely on a misappropriation theory. A trader violates the law when they use material nonpublic information in breach of a duty of trust or confidence to the source of that information. The duty can come from an employment contract, a security clearance, a confidentiality agreement, or a government ethics rule.

That is why the cases tend to involve people with a clear obligation: a soldier with classified access, a Google engineer with internal search data, a White House aide with advance copies of a speech. The duty is the hook. Without it, a well-timed trade is just a well-timed trade.

The documented cases

The soldier. Gannon Ken Van Dyke was indicted in April 2026 on charges of using classified information about the operation that captured Nicolás Maduro to trade Polymarket contracts. The government says he made about $409,881. He is charged, not convicted. The case is one of the first serious tests of whether commodities fraud law can reach a geopolitical prediction-market trade.

The engineer. Michele Spagnuolo, a Google software engineer based in Switzerland, was charged by the CFTC and DOJ in May 2026. The CFTC alleges he used confidential data about Google's 2025 "Year in Search" list to trade at least 23 related Polymarket contracts under the handle "AlphaRaccoon," generating about $1.2 million. The allegations are unproven.

The White House aide. Gabriel Perez, a longtime teleprompter operator for President Trump, settled with the CFTC in August 2026. The order found that between December 2025 and February 2026 he traded presidential "mention market" contracts on Kalshi using advance access to speech drafts, generating more than $107,500 in profits. He disgorged $107,539.02, paid a $65,000 penalty and accepted a three-year trading ban. Because this was a settlement, the findings are established for the order, but there was no trial.

The candidates and the editor. Kalshi's disciplinary notices, described in a CFTC advisory, include a political candidate who traded a contract on his own candidacy in May 2025 and a YouTube channel editor who traded on videos before publication in August and September 2025. Kalshi fined them $2,246.36 and $20,397.58 respectively and suspended them for five years and two years. These are exchange sanctions, not criminal convictions.

The Israeli case. Israeli authorities charged a military reservist and a civilian in February 2026 over the alleged use of classified information to bet on Polymarket contracts related to military operations. The defendants have not been convicted, and no court finding has been announced.

The surveillance problem

Prediction markets have an unusual surveillance advantage: on the international crypto venues, every trade is on a public ledger. Analysts can see wallet creation dates, funding sources, position sizes and payouts. That is how the Maduro and Iran stories were reported in the first place.

The advantage has limits. A wallet is not an identity. A trader can use a new address, fund it through an exchange, and cash out through another. Blockchain analytics can cluster wallets and trace flows, but attribution is probabilistic. The Van Dyke case allegedly involved a request to delete the Polymarket account and a change of email at a crypto exchange; the government says it traced the person anyway. Not every case will be that traceable.

The Israel election episode in October 2026 shows the pattern. Bloomberg found more than 600 wallets created on the same day, with no prior trading history, betting on Benjamin Netanyahu or Likud. One account stood to make about $180,000. Polymarket said it was investigating the trades, according to The Straits Times. No finding has been announced.

That is the standard sequence now: on-chain analysts flag the cluster, journalists report it, the platform opens a review, and the matter goes to law enforcement. Sometimes it ends in charges. Often it ends in silence.

The legal grey zones

Three gaps matter.

First, the duty question. A government employee clearly owes a duty. A contractor may. A random trader who overhears something in a bar may not. The law does not treat all "inside information" the same.

Second, the enforcement capacity. The CFTC is a small agency relative to the markets it oversees. In April 2026, The Guardian reported that the commission had only one commissioner, Michael Selig, and that its capacity to police the markets was a live concern. Selig has said the agency will pursue insider trading, but resources and political priorities shape what actually gets investigated.

Third, the statutory gap. There is no prediction-market-specific insider trading statute. The current cases are built on general commodities fraud and misappropriation theories. A bipartisan bill introduced in March 2026 would ban members of Congress and senior federal staff from trading prediction-market contracts tied to political events or policy decisions, according to The Guardian. That bill is a proposal, not an enacted rule.

The senators who wrote to Polymarket and Kalshi in October 2026 put the problem bluntly: "The identification of isolated instances of improper trading does not demonstrate that these markets are adequately protected," they wrote. "Instead, it raises serious questions about how much similar activity may be going undetected." The letter was reported by The Straits Times.

What it means for traders

The first lesson is that platform rules are broader than the law. Kalshi's rules prohibit trading a contract if the trader has direct or indirect influence over the outcome. That is stricter than the Commodity Exchange Act. A trader can violate exchange rules without committing a crime.

The second is that anonymity is not a defense. The public ledger is permanent, and the government has shown it will subpoena exchanges and trace funding. A new wallet is a privacy measure, not a legal shield.

The third is that "insider trading" is not a single thing. It can be a criminal charge, a civil enforcement action, an exchange suspension, or a reputational accusation. Those outcomes carry different burdens of proof. A viral post that identifies a lucky trader is not a finding.

The market-integrity problem is real. The remedy is likely to be a mix of exchange surveillance, CFTC enforcement, clearer rules and, eventually, legislation. Until then, traders should assume that anyone with a duty and a wallet is a potential defendant, and that anyone without a duty may be doing something legal that still looks terrible.