backThis article was originally posted on Law360.
Insider trading enforcement in prediction markets is here to stay. Regulators have made clear that betting on future events using material nonpublic information is not exempt from enforcement merely because the vehicle is a prediction market rather than a traditional security.
In spring 2026 alone, the U.S. Department of Justice and U.S. Commodity Futures Trading Commission brought back-to-back enforcement actions against two individuals, each of whom allegedly leveraged inside information to amass six- and seven-figure profits trading event contracts on prediction market platforms.1Indictment, United States v. Van Dyke, No. 26 Cr. 156 (S.D.N.Y. filed Apr. 23, 2026); Complaint, United States v. Spagnuolo, No. 26 MAG 2020 (S.D.N.Y. filed May 26, 2026). But while enforcement attention is now catching up to prediction market trading, there are at least three looming risks to companies and their stakeholders that are getting less attention.
In this article, we outline practical steps like updating insider trading policies to cover event contract platforms, evaluating disclosure controls for prediction market manipulation and identifying personnel with access to nonpublic government information to respond to these risks.
First, we expect that shareholder derivative litigation will emerge as allegations of insiders' misuse of company information in prediction markets lead to claims of reputational harm and related stock price declines.
Second, companies may soon face novel disclosure questions where management is alleged to have known of — or been on notice of — third parties actively betting on false or misleading information about the company, raising unresolved issues about duties to correct the market outside traditional trading venues.
Third, prediction market betting is likely to continue to draw congressional scrutiny next year, with an even broader remit if the U.S. House of Representatives changes hands and Congress searches for suspicious bets made by administration officials.
Why This Matters Now: Prediction Markets Going Corporate
To understand the scale of potential exposure, it helps to understand what is actually being traded.
Prediction markets are no longer limited to elections and weather. Today's leading platforms offer a sprawling menu of contracts tied directly to public company activity. Traders can place bets on whether a public company will beat its quarterly earnings estimate, whether a proposed merger or acquisition will close and by when, whether a pre-initial public offering company will go public within a given window, and even whether a specific word or phrase will be used during a CEO's earnings call.
Contracts tied to production volumes, subscriber counts and sales figures that depend on a company's own financial disclosures are actively being traded. Some contracts allow investors to gain exposure to large private companies that have not yet gone public.
There are obvious implications for those with insider knowledge. An investor relations employee who knows the CEO's talking points on the earnings call, a legal assistant who knows a deal is about to close, a finance analyst working on draft financials — each of them can likely now find a prediction market contract that would reward the confidential information they possess.
No shares of stock change hands. But the opportunity to profit from inside information is just as real, and the contracts are just as traceable — albeit outside the scope of most companies' current trade monitoring systems.
Shareholder Derivative Suits On the Horizon
Regulators are not the only parties that could bring suits based on misconduct associated with prediction markets.
There is nothing in the recent DOJ and CFTC actions against military service member Gannon Ken Van Dyke, charged in the U.S. District Court for the Southern District of New York on April 23 for using sensitive classified information concerning the capture of deposed Venezuelan President Nicolás Maduro, that precludes a legal theory predicated on a breach of duty due to misuse of confidential information from being applied in the corporate context.2Indictment, United States v. Van Dyke, No. 26 Cr. 156 (S.D.N.Y. filed Apr. 23, 2026); Complaint, CFTC v. Van Dyke, No. 26-cv-03369 (S.D.N.Y. filed Apr. 23, 2026). In fact, the complaint against Google engineer Michele Spagnuolo, unsealed on May 27 in the Southern District of New York, shows how these suits may play out in the corporate context.3Complaint, United States v. Spagnuolo, No. 26 MAG 2020 (S.D.N.Y. filed May 26, 2026).
When that charge inevitably lands on an employee of a high-profile company — or one of its bankers, lawyers, auditors or other outside contractors — the fallout will not stay in the prediction market. It will spill into headlines, analyst calls and the stock price. That combination of reputational damage and share price decline is exactly the raw material used to build derivative claims.
To be clear: This theory of harm is not speculative. Courts have long recognized that directors owe a duty to maintain reasonable internal controls, and that a sustained failure to monitor insider behavior can give rise to liability.
What is new is the vehicle. An insider who bets against the company's earnings on a prediction market exchange — or tips someone else who makes the bet — may be alleged to have diverted a corporate opportunity and exposed the company to harm, just as surely as one who sells short in the equity markets.
Prominent corporate liability doctrines, such as those derived from the Delaware Court of Chancery's 1996 ruling in In re: Caremark International Inc. Derivative Litigation and its 1949 decision in Brophy v. Cities Service Co., could readily be applied to a new set of facts involving prediction markets. And a plaintiff's story about an employee betting against one's own company may have jury appeal.
A Disclosure Puzzle: When Others Bet on Lies About Your Company
What about threats from outside the company? Consider a scenario in which management becomes aware that third parties — not even shareholders — are placing large prediction market bets premised on false or misleading information about the company.
For example, suppose an organized group floods social media with fabricated claims about a pending regulatory action against the issuer, then cashes in by purchasing "yes" contracts on a prediction market platform. The company's stock drops on the noise.
Does the issuer have a duty to correct the record? And if it stays silent, has it made a material omission?
Under U.S. Securities and Exchange Commission Rule 10b-5, a company generally has no affirmative obligation to speak unless it has previously made a statement that has become materially misleading, or unless silence itself would be misleading in light of a duty to disclose. But prediction markets scramble that comfortable framework.
If management knows that a manipulative scheme is underway, and that investors in the traditional equity markets are being harmed as a consequence, sitting on your hands may itself become a source of liability. Plaintiffs may argue that silence, once the company possesses knowledge of the manipulation, amounts to a material omission.
Companies may wish to be proactive in such instances and call out the suspected manipulation in public statements and disclosures, as some have in the past when targeted by short activists.
Congressional Investigations on the Horizon
Backroom Washington negotiations have long been a coveted source of nonpublic information for the private sector. Traditionally, someone looking to make money trading on that nonpublic government information needed to identify a connection to a public company's stock or some other financial instrument.
With prediction markets, someone with knowledge about a confidential new policy or government initiative might be able to find event contracts affected directly by, or even predicting, a pending development.
Case in point, in February, six newly created Polymarket accounts collectively made $1.2 million in profits from successfully betting — just hours ahead of time — on the timing of U.S. military strikes on Iran.4 Amy Fan, How Anonymous Bettors Cashed in on the Iran Strike, Just Hours Before it Happened, New York Times, Mar. 3, 2026, available at: https://www.nytimes.com/2026/03/03/upshot/prediction markets-iran-strikes.html. Another trader made more than $553,000 betting that Iran's supreme leader would be removed, just before his assassination.5Bobby Allyn, Prediction market trader 'Magamyman' made $553,000 on death of Iran's supreme leader, NPR, Mar. 1, 2026, available at: https://www.npr.org/2026/03/01/nx-s1-5731568/polymarket trade-iran-supreme-leader-killing. And most notably, given the subsequent prosecutorial attention, Van Dyke, the aforementioned U.S. service member with advance knowledge of the operation to capture Maduro, allegedly set up a new account and turned an almost $34,000 bet into more than $400,000.6Indictment, United States v. Van Dyke, No. 26 Cr. 156 (S.D.N.Y. filed Apr. 23, 2026) ¶ 11.
Congress has noticed. Bills targeting prediction markets have been introduced this year by members of both parties, in both the House and the U.S. Senate.
Some have widely bipartisan groups and sponsors. The bipartisan Preventing Real-time Exploitation and Deceptive Insider Congressional Trading, or Predict, Act, introduced in the House on March 25 — and now with 25 bipartisan co-sponsors — and the Public Integrity in Financial Prediction Markets Act, for example, would aim to prohibit federal officials from trading prediction market contracts while in possession of material nonpublic information obtained through their duties.
Even the Senate's version of this year's annual Intelligence Authorization Act includes a prohibition on intelligence community employees and contractors using nonpublic information to place bets on prediction markets.
Whether or not legislation on prediction markets passes in the final few months of this Congress, you can bet that Capitol Hill investigators will be looking to develop facts that will drive the legislative debate next year.
Congressional investigations move faster than cases conducted by criminal prosecutors or financial regulators. They operate with fewer rules and often more in the public view, with investigators quicker to publish documents and responses they receive.
And there is an ever-present risk of witnesses being called to Capitol Hill for public hearings. Congressional investigators will be looking for compelling examples to, among other things, amplify the urgency of legislating in this space.
This is one issue area where the question of which party controls Congress next year may matter less. While a Democrat-led House could focus investigations around prediction market trades by current administration officials, the current Republican-led House Oversight Committee has itself already launched an investigation into insider trading on these platforms.
Companies and individuals who have any exposure to this area, whether as market participants, platform operators or employers of individuals with government access, should be conducting internal assessments now rather than waiting for a request letter, subpoena or hearing invitation to arrive.
What to Do Now
The convergence of these three risks — shareholder derivative suits, evolving disclosure requirements and congressional investigations — means that prediction market exposure has graduated from an interesting hypothetical to an audit committee agenda item. Companies would be well served by taking concrete steps now.
First, companies should review and potentially update insider trading policies and codes of conduct to address prediction market activity. Most existing policies were drafted with traditional securities in mind, and define prohibited trading by reference to stocks, bonds, options and other conventional instruments. Policies should be amended to cover event-based contracts, and preclearance procedures should be extended to encompass prediction market trades.
Second, companies should assess whether existing disclosure controls and procedures account for the possibility of external manipulation through prediction markets as opposed to the traditional securities space. Companies should consider establishing monitoring protocols to identify unusual prediction market activity tied to their securities or business events, and should coordinate on when and how to address prediction market-driven misinformation.
Third, companies should identify any employees or officers with access to nonpublic government information and ensure they understand the boundaries of permissible activity. This is particularly relevant for companies with significant government-facing operations, including defense contractors, regulated financial institutions, healthcare companies, and any business with employees who hold security clearances or regularly interact with government officials.
Raising awareness among these insiders through targeted education efforts can not only prevent improper prediction market activity from occurring, but also be a powerful tool to demonstrate that the company took affirmative steps to protect its information.
The opinions expressed are those of the author(s) and do not necessarily reflect the views of their employer, its clients, or Portfolio Media Inc., or any of its or their respective affiliates. This article is for general information purposes and is not intended to be and should not be taken as legal advice.
