Insider Trading in Prediction Markets: MNPI, Kalshi & Polymarket

Prediction markets traded more than $64 billion in event contracts in 2025. That scale attracted a lot of sharp traders—and at least some who had a sharper edge than mere analysis. A U.S. Army service member used classified intelligence about a Venezuelan military operation. A Google software engineer used confidential employer data about internet search trends. Both traded on platforms that millions of retail participants treat as liquid information markets.

The CFTC’s response to insider trading in prediction marketshas been direct: the same legal architecture that governs MNPI in equities (including the misappropriation doctrine and the duty-of-trust analysis) applies in full to event contracts listed on designated contract markets. If you already follow Form 4 filings or congressional disclosures, the conceptual framework here will feel familiar. The instrument changed; the legal theory didn’t.

What prediction markets are and why MNPI matters there

A prediction market is a platform where participants buy and sell contracts whose payoff depends on whether a real-world event occurs. Kalshi’s “Will the Fed cut rates in September?” or Polymarket’s “Will Maduro leave office by January 31, 2026?” are examples. A “Yes” share resolves at $1 if the event happens; a “No” share resolves at $1 if it doesn’t. Prices reflect collective probability estimates, which is why these markets attract attention as forecasting tools.

The same property that makes prediction markets useful as forecasters, namely that prices move on new information, also creates a clear MNPI problem. If you know the outcome of the underlying event before the market does, you can place a near-certain bet. The CFTC classifies event contracts on designated contract markets as swaps, which brings them under the anti-fraud and anti-manipulation provisions of the Commodity Exchange Act. The question isn’t whether the law reaches these markets; the question is what conduct it prohibits.

The legal framework: how CFTC Rule 180.1 mirrors SEC Rule 10b-5

If you’re familiar with securities law, the statutory architecture here has a direct parallel. SEC Rule 10b-5, promulgated under Section 10(b) of the Securities Exchange Act of 1934, is the foundational anti-fraud rule in equities. When Congress passed Dodd-Frank in 2010, it extended comparable authority to commodity and swap markets through CEA Section 6(c)(1) and CFTC Regulation 180.1, which was explicitly modeled on Rule 10b-5.

On March 31, 2026, CFTC Enforcement Director David I. Miller addressed what he called a pervasive misconception: “There is a myth in the mainstream media and social media that insider trading law doesn’t apply in the prediction markets. That is wrong.” He made prediction market insider trading the first of five CFTC enforcement priorities for 2026, ahead of market manipulation in energy markets, retail fraud, and AML violations.

The practical effect: any conduct that would constitute insider trading in a stock trade is equally prohibited when the instrument is an event contract. Trading while in possession of material nonpublic information obtained through a breach of duty violates the CEA just as it violates the Exchange Act.

The misappropriation theory applied to event contracts

In equities, insider trading liability flows through two main theories. The “classical theory” covers corporate insiders trading their own company’s stock. The misappropriation theory—established in United States v. O’Hagan, 521 U.S. 642 (1997)—covers anyone who misappropriates confidential information by breaching a duty of trust and confidence to the source, regardless of whether they have any relationship with the issuer of the securities they trade.

That second theory is the one that matters most for prediction markets, because the relevant “issuer” concept doesn’t map cleanly onto event contracts. What the CFTC asserts, and what the two 2026 criminal cases confirm, is that the misappropriation analysis travels intact. A trader who obtains information through a relationship of trust or confidence and then uses it to trade prediction market contracts has breached a duty to the source. That breach is the violation, not the nature of the instrument.

For readers who already follow the tipper-tippee liability chain in securities law, the extension to prediction markets is straightforward: the personal-benefit test and the duty-of-trust analysis apply the same way. The information source, the breach, and the resulting trade are the elements prosecutors look for, whether the contract is a share of stock or a binary outcome contract on Polymarket.

Case 1: The Army soldier and the “Eddie Murphy Rule” (April 2026)

On April 23, 2026, the CFTC filed its first-ever prediction market insider trading enforcement action against Gannon Ken Van Dyke, an active-duty U.S. Army service member. The facts are stark. Between December 30, 2025, and January 2, 2026, Van Dyke purchased more than 436,000 “Yes” shares in a Polymarket contract asking whether Venezuelan President Maduro would leave office by January 31, 2026. He was trading under the handle “Burdensome-Mix.” The source of his edge was classified intelligence about “Operation Absolute Resolve,” a U.S. military operation targeting Maduro’s government. He invested approximately $33,000 and generated approximately $404,000 in profits.

The CFTC charged Van Dyke under CEA Section 4c(a)(4), a provision sometimes called the “Eddie Murphy Rule” after the 1983 film Trading Places. Congress included this provision in the 2010 Dodd-Frank Act specifically to prohibit trading on material nonpublic information misappropriated from the federal government. It was the first time the provision had ever been invoked in an enforcement action.

Case 2: The Google engineer and the Year in Search trades (2025–2026)

The second major 2026 case illustrates that the same liability framework reaches corporate employees who misappropriate their employer’s data. Michele Spagnuolo, a Google software engineer, accessed confidential “Year in Search” data through an internal company tool—information about which topics and people became the most-searched queries of 2025. Operating as “AlphaRaccoon” on Polymarket, Spagnuolo placed bets on at least 23 Year in Search event contracts between October 15 and December 4, 2025, with near-perfect accuracy. His most notable single trade: on November 27, 2025, hours after learning through internal data that a particular artist had become the most-searched person of the year, he wagered on that outcome at near-zero implied odds.

Spagnuolo risked approximately $2.75 million and generated approximately $1.2 million in profits. He then attempted to conceal his gains by routing funds through cryptocurrency tumblers and deleting his Polymarket account after online communities began identifying “AlphaRaccoon” as a suspected insider. The DOJ charged him with commodities fraud (10-year maximum), wire fraud (20-year maximum), and money laundering (20-year maximum). The CFTC filed parallel civil charges seeking disgorgement, restitution, and a permanent trading ban.

Platform self-regulation: what Kalshi and Polymarket changed in March 2026

The enforcement actions were preceded by platform-level disciplinary actions, and followed by formal rule updates. Kalshi had already imposed a 5-year suspension and $6,229.30 fine on a Virginia Democratic Senate primary candidate named Mark Moran for trading on his own candidacy. Two additional candidates (Matt Klein in Minnesota and Ezekiel Enriquez in Texas) each received 5-year suspensions and fines under $800 for similar violations. These actions signaled that exchanges, not just regulators, were expected to serve as a first line of defense.

In March 2026, following CFTC guidance emphasizing that exchanges must prevent contracts from being “readily susceptible to manipulation,” both platforms formalized their policies:

The CFTC’s position is that these platform-level measures are necessary but not sufficient. Federal enforcement is prepared to escalate beyond exchange-level penalties when the conduct warrants it, as the Van Dyke and Spagnuolo cases demonstrate.

Where the enforcement line actually sits: what’s legal vs. illegal

The most useful clarification came directly from CFTC Enforcement Director Miller: “you are absolutely entitled to trade on MNPI that you rightfully own.” The prohibition is not on information asymmetry itself—prediction markets exist precisely because some participants have better analytical frameworks, more data sources, or stronger research. The prohibition is on trading with information you obtained by breaching a duty to its source.

That distinction produces three practical risk categories:

The enforcement reach is also broader than the CFTC alone. The CFTC, DOJ, and SEC have all asserted independent authority over prediction market insider trading. U.S. Attorney Jay Clayton stated that prediction markets do not exempt fraudsters from prosecution, noting that conspiracy to influence outcomes constitutes “plainly criminal” conduct. SEC Chair Paul Atkins testified that the space involves “overlapping jurisdiction” between the agencies, and that “a security is a security regardless of how it is structured.”

This matters for how you think about information generated at your workplace. The same analysis that applies to shadow trading in equities(using an employer’s confidential data to trade securities in a related company) applies when the instrument is a prediction market contract. The duty attaches to the information, not to the instrument you trade it on.

What comes next: congressional scrutiny and the ANPRM

The 2026 enforcement actions didn’t emerge in a vacuum. The regulatory framework around prediction markets has been developing rapidly, and the trajectory is toward more formal rulemaking, not less.

On March 12, 2026, the CFTC issued both an enforcement advisory on prediction markets and an Advance Notice of Proposed Rulemaking (ANPRM) on event contracts, with a public comment period that closed April 30, 2026. The ANPRM solicits feedback on margin trading, gaming definitions, insider information rules, and procedural mechanics—suggesting comprehensive rulemaking may follow by late 2026. The CFTC also reversed its prior administration’s June 2024 proposed ban on political and sports event contracts, clearing the regulatory path for those markets to continue.

The Third Circuit Court of Appeals ruled in April 2026 that state gambling laws are preempted by federal CEA jurisdiction over event contracts—a case of first impression that establishes federal authority as the primary regulatory framework. A parallel Ninth Circuit case may escalate to the Supreme Court, potentially establishing binding national precedent.

The House Oversight Committee has also launched a formal inquiry into Kalshi and Polymarket, with a response deadline of June 5, 2026. More than 10 bills have been introduced in the 119th Congress touching prediction market regulation, and the CFTC signed a memorandum of understanding with Major League Baseball in March 2026 establishing information-sharing frameworks for prediction market oversight.