Keeping Tabs: CFTC and DOJ Charge Software Engineer with Insider Trading for Prediction Market Trades

Following on the heels of the highly publicized first criminal and civil case charging insider trading in prediction markets, the US Department of Justice (DOJ) and the Commodity Futures Trading Commission (CFTC) filed the first cases alleging insider trading in prediction markets based on the improper use of confidential commercial information. The May 27 complaints allege that a software engineer for a major internet search provider (the Company) misappropriated confidential information from his employer to place numerous profitable trades in event contracts.

The Alleged Scheme

The complaints allege that the employee made multiple trades in event contracts related to whether certain individuals would appear on the Company’s Year in Search list for 2025. Shortly after those contracts were launched, the employee accessed an internal software tool to obtain information about the non-public Year in Search results. The complaints allege the information was valuable to the Company because it releases its Year in Search results as part of a coordinated marketing campaign to drive engagement and increase demand for advertisements on the Company’s platform. The complaints alleged that the information was confidential because the Company took steps to limit access to the information and carefully control its dissemination. 

According to the complaints, the employee used the non-public Year in Search results to place trades in related event contract markets with near-perfect accuracy. The software engineer risked about $2.7 million on approximately 25 Year in Search 2025 outcomes that the market treated as unlikely and profited approximately $1.2 million when the Company released its Year in Search 2025 results. These highly profitable trades quickly garnered the attention of other market participants, and online news reports raised suspicion about the employee’s trades.

Key Takeaways and Looking Forward

Because these cases allege the misuse of confidential commercial information, they should be more relevant to a wider range of market participants than the first prosecutions for insider trading in prediction markets, which alleged misuse of classified national-security information. Given the wide range of event contracts related to all aspects of public life, countless individuals will have access to commercial data — customer trends, platform metrics, product plans, sales data, or other internal analytics — that could be material to an event contract. In these cases, the DOJ and CFTC alleged that Company policies required the employee to keep Company information confidential. 

The complaints also detailed how the Year in Search results themselves and the timing of their release created value for the Company. This may leave open questions about whether a confidentiality policy or agreement alone is sufficient to expose someone to liability for insider trading in prediction markets The facts also leave little doubt that the employee knew he was profiting from information that he was required to keep confidential, which may leave open questions about whether the government has to prove actual knowledge or intent to misuse information that the trader knows is confidential. 

The US connection in the recent actions is also far more remote than the first insider trading prosecutions in prediction markets, which alleged that a US citizen made trades from the United States based on information obtained from the US military that was classified under US law. In contrast, the employee was allegedly a resident of Switzerland who presumably accessed Company information and traded event contracts while in Switzerland. The employee also traded on a non-US market that operates on the blockchain, rather than a CFTC-registered Designated Contract Market.

The CFTC’s allegations of a US connection also raise questions about the CFTC’s view of its ability to police trading in non-US markets. This is particularly noteworthy given the CFTC’s recent efforts to clarify and harmonize the scope of its cross-border jurisdiction. The CFTC alleges that the unregistered overseas market is “operated” by a Panamanian corporation and a Delaware corporation, both with their principal place of business in New York. The complaint alleges that employees in New York made decisions about which event contracts to list on the overseas prediction market. Time will tell whether the CFTC will continue to assert an active role in policing misconduct that takes place largely overseas. 

Katten on Prediction Markets and CFTC Enforcement

Katten is continually monitoring the latest developments regarding prediction markets and CFTC enforcement activity. For more information about trends in CFTC enforcement and how this may impact regulatory compliance and enforcement going forward, visit our Prediction Markets topic, or please contact one of the authors of this article or your primary Katten attorney.