US launches insider trading cases against prediction market operators

Federal insider trading cases mark a new front in the prediction market fight

The Wall Street Journal reported federal prosecutors in Manhattan and Washington have opened investigations into prediction market trading — not the platform contracts themselves, but the people placing bets on them. Military-event contracts. Corporate-earnings wagers. The implication is straightforward: someone knew something they shouldn't have, and they used a prediction market to monetize it.

This is a different problem from the circuit split, from Nevada's daily fines, from Connecticut's lawsuit. Those disputes are about whether Kalshi's contracts are sports bets or financial instruments — a jurisdictional question that the Supreme Court will eventually have to answer. The insider trading investigations are about individual conduct inside a legal framework that nobody has finished building yet.

That gap is where the real exposure sits.

Prediction markets were designed, in theory, around Hayek's core insight: prices aggregate dispersed information better than any central planner can. The problem is that some information isn't dispersed. It belongs to one person, or three, and it isn't supposed to move prices at all — it's supposed to move through disclosure rules and trading windows and compliance desks that don't yet exist on most prediction platforms. When Gabriel Perez settled with the CFTC for $107,500 last week, that was one case. Federal prosecutors in Manhattan working corporate-earnings angles is a caseload.

Kalshi's public posture — that it operates a federally regulated exchange with proper risk management tools, self-exclusion, deposit limits, a relationship with the National Council on Problem Gambling — is coherent as far as it goes. The company is right that federally regulated entities pay state taxes, right that a national framework beats a patchwork of fifty different rules, right that "indistinguishable from sports betting" is a contested characterization and not an established legal fact. The Ninth Circuit's unanimous ruling against them doesn't settle whether sports event contracts are legally swaps or wagers. It only settles that Nevada can enforce its own rules while the larger question works its way up.

The consensus read on all of this is that Kalshi is losing the legal war and winning the time war — that CFTC rulemaking will eventually provide the federal cover the courts haven't. I don't think that timeline holds anymore, and the insider trading investigations are the reason. Regulatory agencies move faster when prosecutors are already in the building. The CFTC's current posture, working toward clarification, becomes harder to maintain if federal charges land against people trading on non-public corporate information through prediction markets. At that point the Commission isn't clarifying rules — it's explaining why it didn't have them sooner.

Forty-four state attorneys general signed a letter to the CFTC arguing that prediction markets have evaded state regulation and state taxes. That's not a lobbying effort. That's a political signal to a federal agency about which direction the wind is blowing when the cases reach Washington. Mike Dreitzer, chairman of the Nevada Gaming Control Board, called the Ninth Circuit ruling a complete vindication. Bill Miller at the American Gaming Association called it a significant win for consumer protections and taxpayers. That framing — consumer protection — is the one that survives political cycles.