The rapid proliferation of prediction markets has collided with a newly aggressive posture from federal regulators and prosecutors, producing two landmark insider trading prosecutions in a matter of weeks and signaling that this emerging asset class is now firmly within the crosshairs of the Department of Justice, the Commodity Futures Trading Commission, and the Securities and Exchange Commission. On May 28, 2026, the U.S. Attorney’s Office for the Southern District of New York unsealed criminal charges against Google software engineer Michele Spagnuolo for allegedly earning more than $1.2 million trading on Polymarket using confidential company data — the second prediction-market insider trading prosecution in just over a month, following the April 2026 indictment of U.S. Army Master Sergeant Gannon Ken Van Dyke for trading on classified military intelligence. These cases, combined with the CFTC’s assertion of exclusive regulatory jurisdiction over prediction markets, its issuance of proposed rulemaking, and an historic Memorandum of Understanding between the SEC and CFTC, confirm that companies and individuals with access to material nonpublic information may face meaningful criminal and civil exposure if they — or their employees — trade event contracts on the basis of that information. This alert provides an overview of how prediction markets function, the legal framework governing insider trading in this space, the so-called “Eddie Murphy Rule,” recent enforcement milestones, and practical steps that companies and individuals should consider to mitigate risk.
What Are Prediction Markets and How Do They Work
Prediction markets are online platforms that specialize in offering “event contracts” — instruments that allow traders to bet on the occurrence or nonoccurrence of a specific event. These contracts typically feature a binary payoff structure and are presented as “Yes/No” questions. A trader who purchases a “Yes” contract receives a payout of $1.00 if the underlying event occurs before the contract’s expiration date but receives nothing if it does not; conversely, a “No” contract pays $1.00 if the event fails to occur. In liquid markets, the price of an event contract generally reflects the market’s assessment of the event’s probability at a given point in time. For example, a “Yes” contract trading at $0.60 reflects the market’s collective belief at that time that there is a 60 percent chance an event will occur.
Several prediction markets have registered with the CFTC as Designated Contract Markets (“DCMs”), operating as regulated exchanges under the Commodity Exchange Act (“CEA”), 7 U.S.C. § 1 et seq. According to litigation filed by the CFTC in April 2026 at least eight CFTC-regulated DCMs, including Kalshi, Polymarket (which operates both a CFTC-registered U.S. exchange and an offshore international platform), and several newer entrants, have collectively self-certified more than 3,000 event contracts, covering topics ranging from sporting-event outcomes to political elections and macroeconomic or geopolitical developments. The industry has experienced unprecedented growth since 2024 after contracts based on political events became popular on prediction markets; in the past year contract volumes on Kalshi and Polymarket alone have grown more than ten-fold.
The defining structural characteristic of prediction markets — and the feature that makes them susceptible to abuse — is that for many contract types, someone may know the outcome in advance. Even more so than traditional securities markets where material nonpublic information relates to a company’s intrinsic financial condition, event contracts can be tied to outcomes within the direct knowledge of government officials, corporate employees, sports teams, media organizations, and countless other actors. This creates inherent information asymmetry between insiders with access to outcome-determinative data and retail traders operating without it.
The Traditional Securities Law Paradigm
The law of insider trading developed primarily in the context of securities markets. Courts have long held that trading securities based on material nonpublic information (“MNPI”) in breach of a duty constitutes a violation of SEC Rule 10b-5, which prohibits fraudulent and deceptive conduct in connection with the purchase or sale of any security. Liability under Rule 10b-5 rests on two judicially created theories. Under the “classical theory,” a company’s insiders (e.g., officers, directors, or temporary insiders such as outside counsel) who trade the company’s securities based on MNPI violate Rule 10b-5 by breaching duties owed to their trading counterparties, namely the company’s shareholders. Under the “misappropriation theory,” liability attaches when any person trades securities based on MNPI obtained by breaching a duty of trust and confidence owed to the source of that information, regardless of whether the trader is a traditional corporate insider.
Expansion Under Dodd-Frank: The CEA and CFTC Rule 180.1
Historically, the CEA’s insider trading prohibitions were far narrower than those in securities law, applying only to employees of the CFTC and CFTC-registered entities. This changed dramatically in 2010 when Section 753 of the Dodd-Frank Wall Street Reform and Consumer Protection Act amended the CEA to prohibit fraud and manipulation “in connection with any swap, or a contract of sale of any commodity in interstate commerce, or for future delivery on or subject to the rules of any registered entity.” Pursuant to this authority, in 2011 the CFTC promulgated Rule 180.1, 17 C.F.R. § 180.1, which is explicitly modeled after SEC Rule 10b-5, 17 C.F.R. § 240.10b-5, and extends insider trading prohibitions to commodity, futures, and swap markets.
When adopting Rule 180.1, the CFTC clarified that a person who trades on the basis of MNPI “in breach of a pre-existing duty (established by another law or rule, or agreement, understanding, or some other source), or by trading on the basis of material nonpublic information that was obtained through fraud or deception, may be in violation of final Rule 180.1.” Critically, the CFTC also stressed that Rule 180.1 does not create a parity-of-information regime: it is not a violation merely to withhold information that a market participant lawfully possesses about market conditions, nor to trade on the basis of superior research, judgment, or analysis. It is the breach of a duty of trust and confidence — through misappropriation — that transforms otherwise legal trading into a violation.
Because event contracts are classified as “swaps” under the CEA’s broad statutory definition — which covers any agreement dependent on the “occurrence, nonoccurrence, or the extent of the occurrence of an event or contingency associated with a potential financial, economic or commercial consequence” — the anti-fraud provisions of CEA Section 6(c)(1), 7 U.S.C. § 9(1), and Rule 180.1 apply with full force to prediction markets.
The “Eddie Murphy Rule” and Its First Application
Origin and Statutory Basis
The so-called “Eddie Murphy Rule” derives its name from the 1983 film Trading Places, in which Eddie Murphy’s character, Billy Ray Valentine, conspires to profit from trades in frozen orange juice concentrate futures using a stolen and not-yet-public Department of Agriculture crop report. Then-CFTC Chairman Gary Gensler, testifying before Congress in connection with the Dodd-Frank Act, told lawmakers that the misconduct depicted in Trading Places was not actually illegal under the CEA and urged them to institute a ban on trading using nonpublic information misappropriated from a government source. Congress responded by enacting Section 4c(a)(4) of the CEA, 7 U.S.C. § 6c(a)(4), which contains three distinct prohibitions.
First, Section 4c(a)(4)(A) makes it unlawful for government personnel to impart confidential government information “in [their] personal capacity and for personal gain with intent to assist another person, directly or indirectly, to use the information to enter into” commodity trades. Second, Section 4c(a)(4)(B) targets persons who receive such confidential information from a government employee and trade on it. Third, Section 4c(a)(4)(C) makes it unlawful to “steal, convert, or misappropriate” confidential federal government information to use it (or assist others) in entering trades.
First Invocation: United States v. Van Dyke
On April 23, 2026, the CFTC and DOJ invoked the Eddie Murphy Rule for the first time in connection with an enforcement action against a prediction market participant. Master Sergeant Gannon Ken Van Dyke, an active-duty U.S. Army Special Forces soldier involved in “Operation Absolute Resolve” — the U.S. military operation to capture former Venezuelan President Nicolás Maduro — was charged in the Southern District of New York with using classified, nonpublic information about the operation to purchase event contracts on Polymarket tied to Maduro’s removal from power and U.S. military action in Venezuela. Van Dyke allegedly invested approximately $33,000 and earned approximately $409,881 in profits after the operation succeeded. He allegedly attempted to conceal his proceeds by transferring them through cryptocurrency accounts and into a foreign vault while also obscuring his connection to the Polymarket account used to place the trades. Van Dyke has pleaded not guilty to five counts, including unlawful use of confidential government information, theft of nonpublic government information, commodities fraud, wire fraud, and money laundering. The CFTC filed a parallel civil complaint in Manhattan federal court the same day.
The Spagnuolo Case: Corporate Insiders and the Misappropriation Theory
The Alleged Scheme
On May 28, 2026, the U.S. Attorney’s Office for the Southern District of New York unsealed a criminal complaint charging Michele Spagnuolo, a 36-year-old Google software engineer living in Switzerland and operating under the Polymarket alias “AlphaRaccoon,” with commodities fraud, wire fraud, and money laundering. The CFTC simultaneously filed a parallel civil complaint in the same court.
According to the complaints, Spagnuolo had access to Google’s internal data systems, including a confidential software tool marked “Google Confidential” in red text, which provided advance visibility into Google’s annual “Year in Search” results before their public release. Between mid-October and December 4, 2025, Spagnuolo allegedly purchased “yes” or “no” shares on at least twenty-three Year in Search contracts “with near-perfect accuracy,” risking approximately $2,754,092 in total. His trades included correctly predicting that singer d4vd would become the most searched person of the year and wagering more than $600,000 that Pope Leo XIV would not hold that position.
After Google publicly announced its Year in Search 2025 results on December 4, 2025, Spagnuolo’s AlphaRaccoon account allegedly profited approximately $1.2 million. When Discord and X communities began speculating that AlphaRaccoon was a Google insider, the username was removed from the Polymarket account, reverting to an alphanumeric wallet address.
Legal Theories and Significance
In connection with the criminal complaint against Spagnuolo, U.S. Attorney Jay Clayton stated that the charges “reinforce a decades-old message: corporate insiders cannot use confidential business information to turn a profit in our markets.” The case applies the misappropriation theory to a corporate — rather than governmental — context. In its complaint, the CFTC alleged that Spagnuolo had a “duty and obligation to maintain the confidentiality of the information he acquired” and breached that duty by misappropriating the information for personal gain.
CFTC Chairman Michael S. Selig reinforced the message, stating in connection with the civil case: “As I have said repeatedly, the commission will not tolerate fraud, manipulation, or insider trading, regardless of the technology or platform that is used.” CFTC Director of Enforcement David I. Miller added: “Employees who are entrusted with confidential business information cannot misappropriate that information for personal financial gain. As this and other enforcement actions show, the Division is a cop on the beat in policing the illegal use of inside information in the prediction markets.”
The Spagnuolo case is particularly significant because it extends prediction-market insider trading enforcement beyond the government-information context of the Eddie Murphy Rule into the broader realm of corporate confidential information — demonstrating that any person who breaches a duty of trust and confidence to trade event contracts faces potential criminal and civil liability.
Enforcement Priorities and the Path Forward
The CFTC Enforcement Division’s March 2026 Speech
On March 31, 2026, CFTC Director of Enforcement David I. Miller delivered his first public remarks identifying five enforcement priorities: insider trading (including in prediction markets); market manipulation (particularly in energy markets); market abuse and disruptive trading; retail fraud; and willful AML/KYC violations. Miller addressed head-on what he characterized as a widespread but mistaken belief that insider trading law does not apply to prediction markets, calling it a “myth” propagated by prominent individuals in finance and on social media.
Miller’s speech was notable for its breadth. He made clear that the misappropriation theory applies to a wide range of information sources, including information learned on the job and used in violation of a duty owed to an employer under a confidentiality agreement, NDA, or employment contract. He provided illustrative examples: an NBA team employee with advance knowledge of a player’s injury who trades injury-related event contracts could face liability, as could someone trading on the expected date of a highly anticipated product release. He also emphasized the CFTC’s intent to police the illegal use of government information in prediction markets using both the anti-fraud provisions of Section 6(c)(1) and Rule 180.1, as well as the Eddie Murphy Rule provisions of Section 4c(a)(4).
A Pattern of Escalating Enforcement
The enforcement trajectory in this area has been swift and deliberate. In February 2026, the CFTC’s Division of Enforcement issued an advisory highlighting two enforcement cases by Kalshi involving misuse of nonpublic information on the platform— one involving a political candidate trading on his own candidacy, and another involving an individual who traded YouTube-channel-related contracts based on information obtained through employment. While Kalshi’s own internal enforcement program handled those matters, the CFTC used them as a predicate to assert its full authority over illegal trading practices on any DCM.
In March 2026, the CFTC released an advanced notice of proposed rulemaking seeking comment on whether certain individuals should be banned from trading on events due to their insider knowledge, what contracts should be prohibited on a public interest basis, and whether platforms should determine whether certain types of betting run the risk of being manipulated. Comments on that notice closed on April 30. Then came the Van Dyke prosecution in April and the Spagnuolo prosecution in May, each building upon the previous one and expanding the scope of potential liability.
DOJ and Parallel Criminal Theories
The DOJ has demonstrated a willingness to pursue prediction-market misconduct using multiple legal theories simultaneously. In both the Van Dyke and Spagnuolo cases, prosecutors charged commodities fraud, wire fraud, and money laundering in addition to the specific CEA violations. The wire fraud theory (18 U.S.C. § 1343) is particularly significant because, as the Second Circuit recognized in United States v. Blaszczak and United States v. Chastain, it provides an alternative criminal basis for prosecuting insider trading that does not depend on classification of the underlying instrument as a commodity or security.
Amanda Houle, Chief of the Criminal Division at the United States Attorney’s Office for the Southern District of New York, emphasized in recent comments at the Practicing Law Institute that insider trading was an area of intense focus for the office. The DOJ has also emphasized individual accountability throughout 2026, with both the newly formed National Fraud Enforcement Division and the U.S. Attorney’s Office for the Southern District of New York signaling that corporate structures will not shield individuals from criminal exposure. U.S. Attorney Jay Clayton’s statement in connection with the Van Dyke indictment that “prediction markets are not a haven” for trading on misappropriated information underscores the Office’s intent to treat this as an ongoing enforcement priority.
Practical Implications and Risk Mitigation
Who Is at Risk
The scope of potential liability extends far beyond military personnel and government employees. Any individual who possesses MNPI by virtue of a relationship of trust and confidence — whether arising from employment, a confidentiality agreement, an NDA, a consulting arrangement, or any other fiduciary or contractual obligation — faces potential criminal and civil exposure if they trade event contracts on the basis of that information. This encompasses corporate officers and employees with access to nonpublic business information, professionals at law firms, accounting firms, and consulting firms who work on confidential client matters, government employees and contractors with access to classified or sensitive information, and individuals in the sports, entertainment, and media industries who possess advance knowledge of outcomes.
The Spagnuolo case demonstrates that the federal government will not limit its enforcement to duties that arise in a government context. In the complaint, DOJ alleges that Google’s internal confidentiality policies, combined with Spagnuolo’s acknowledged understanding of those policies, were sufficient to establish the duty element for charging purposes.
Steps Companies and Individuals Should Take Now
Companies should immediately review and update their insider trading and personal trading compliance policies to expressly address prediction markets and event contracts. Many existing policies were drafted with securities and traditional derivatives in mind and may not clearly encompass the novel structures traded on prediction market platforms.
Companies should assess which categories of employees have access to MNPI that could be material to event contracts — a broader inquiry than traditional insider-trading compliance, because prediction markets cover an expansive range of topics beyond corporate financial results.
Internal training programs should be updated to educate employees on the fact that insider trading law applies to prediction markets with the same force as it does to securities and traditional commodities. Given that Director Miller has explicitly stated the CFTC is “a cop on the beat” in this space and that the myth of a permissive legal environment is precisely that — a myth — companies cannot afford to assume that employees are aware of the legal risks.
The platforms themselves are implementing enhanced surveillance measures. Kalshi and Polymarket announced new rules against insider trading and market manipulation in March 2026, reflecting increasing alignment with traditional financial market regulation. Kalshi’s rules now prohibit trading by (1) “[a]ny person who has access or is in a position to access material non-public information before such information is made publicly available”; (2) “[a]ny person who is an employee or affiliate of a source agency for any contract”; and (3) “[a]ny person who is a decision maker, direct or indirect, or has any influence, direct or indirect, on the outcome of the underlying event for any contract.” These platform-level prohibitions are often broader than what federal law requires, meaning platform-level discipline can attach even where a federal enforcement action might not.
Companies should also review internal gambling and personal-investment policies to determine whether they account for prediction market activity and should consider whether preclearance or reporting requirements analogous to those used for securities trading should be extended to cover event-contract trading. Given the DOJ’s consistent emphasis on voluntary self-disclosure and cooperation credit — including DOJ’s first-ever nationwide corporate enforcement policy issued in March 2026 and the CFTC analogue, which offers declinations for companies that voluntarily disclose misconduct — early identification and escalation of potential violations are critical.
Conclusion
The two prediction-market insider trading prosecutions in April and May 2026 represent not isolated incidents but rather the leading edge of what federal authorities have signaled will be a sustained enforcement campaign. The CFTC has established insider trading in prediction markets as one of its top enforcement priorities and the DOJ has demonstrated its willingness to bring parallel criminal charges under multiple theories. The federal government is increasingly asserting that event contracts are federally regulated swaps subject to the full panoply of anti-fraud provisions, and the legal theories employed in the Van Dyke and Spagnuolo cases — the Eddie Murphy Rule for government information, the misappropriation theory for corporate information, plus wire fraud and money laundering charges for additional exposure — provide prosecutors with multiple pathways to conviction.
For companies and individuals, the takeaway is clear: prediction markets are regulated markets, and many of the same rules that have governed insider trading for decades can apply in this new context. Organizations with employees who have access to any category of MNPI, whether relating to corporate strategy, government policy, litigation outcomes, product launches, personnel decisions, or any other topic on which event contracts trade, should ensure that compliance programs address this emerging risk. The consequences of inaction include possible criminal charges carrying substantial prison sentences, civil enforcement seeking restitution and disgorgement, trading bans, and severe reputational harm.
Blank Rome’s White Collar Defense & Investigations team continues to monitor these developments and stands ready to assist clients in evaluating their compliance frameworks and defending against prediction-market investigations and actions in this rapidly evolving enforcement landscape.
For more information or assistance, please contact Bradley L. Henry, or another member of Blank Rome’s White Collar Defense and Investigations group.