By Dave Michaels, Joel Schectman and Brian Schwartz

For decades, the information that fueled insider trading was found on Wall Street or inside the glass offices of public companies across the country.

The rise of prediction markets has created a new temptation in Washington, where the Trump administration's fast-moving agenda is giving those privy to government information a chance to cash in on the volatility.

Regulators and prosecutors are now playing catch-up to combat a batch of suspicious betting that touches various corners of the federal bureaucracy. It is a new challenge for authorities because insider-trading laws weren't designed for people who bet on the outcome of legislation, political races and even U.S. military operations.

Authorities in recent months have issued a number of information requests to Kalshi and Polymarket, the two biggest prediction markets, with many of them targeting wagers tied to political events or military operations in Iran and Venezuela, according to people familiar with the matter.

The arrest of a special forces soldier last month who allegedly bet on the ouster of Venezuelan strongman Nicolás Maduro underscored the risk of government insiders betting on events they plan or oversee. Officials at the Justice Department and Commodity Futures Trading Commission say there is more to come.

The lawsuit "shows we are going to be making cases, and that is not the only investigation or case we have," David Miller, the CFTC's enforcement chief, said Wednesday at George Washington University Law School.

"Unfortunately, as people know, it's become a real problem in prediction markets," he added. "It has serious consequences for market integrity and trust."

The CFTC and the Manhattan U.S. Attorney's Office, which is led by former Wall Street lawyer and regulator Jay Clayton, are steering most of the probes.

Kalshi's co-founder said earlier this year that the company has conducted over 200 investigations and referred several to law-enforcement authorities. Its internal investigators have recently looked into whether spouses of military members are betting with nonpublic information, according to a person with direct knowledge of the matter. The internal investigators suspect military officials have discussed the events with their spouses, who have tried to make money by betting on event contracts, this person said.

A Kalshi spokeswoman declined to comment about the investigations.

Kalshi said last month that it fined and suspended three congressional candidates for betting on their own races. The platform prohibits political candidates from making bets in markets related to their own elections. The candidates all earned under $6,500, and Kalshi didn't ask the Justice Department or CFTC to investigate them further, it said.

Polymarket, which is based offshore but has attracted many American users, says it analyzes trading for signs of illegal conduct. The exchange is "KYC free," referring to federal know-your-customer rules that require banks and brokers to guard against illicit finance and fraud by requiring users to disclose their identities. But trading is recorded publicly on a blockchain, making it easier to spot lucky bets that stand out.

"Our internal process has led to the company affirmatively referring nearly 100 wallets to the authorities," Polymarket Chief Legal Officer Neal Kumar said.

Polymarket has a data partnership with Dow Jones, the publisher of The Wall Street Journal.

Any enforcement push faces hurdles both legal and practical.

"It's one thing if you go after bread-and-butter insider trading and you catch an investment banker," said James Angel, an expert in financial regulation at Georgetown University's McDonough School of Business. It is another thing altogether, he said, if the person is someone powerful in Washington.

The CFTC under the Trump administration has supported the expansion of prediction markets and sued states that sought to regulate the platforms' sports bets. Donald Trump Jr. is a paid adviser to Kalshi and an investor in Polymarket.

On the legal front, market cops will have to establish that betting based on sensitive, nonpublic government information actually meets the definition of insider trading.

Courts have defined the crime based on cases that charged executives with using material nonpublic information to buy or sell their own stocks, on the grounds that executives had a duty to not misuse the information for personal profit. Courts have also punished corporate outsiders who gleaned lucrative information from insiders. Charging the cases requires law enforcement to show that the person knew the information was confidential and they shouldn't have traded on it.

"It's very rare that the government is going to get a smoking gun to prove the trader had material nonpublic information," said former CFTC Commissioner Christy Goldsmith Romero, who teaches at Georgetown. "In the very clear cases, which seems to be what we just saw in the Maduro prediction market case, it is really important for the government to bring that case fast."

Prosecutors charged Gannon Ken Van Dyke, the U.S. Army special forces soldier, with misusing confidential information he was given about the plan to capture then-President Maduro in Venezuela. Van Dyke allegedly earned $400,000 by betting on Polymarket that Maduro would be ousted before February. He has pleaded not guilty.

Van Dyke had signed an agreement to "never divulge, publish, or reveal," including through any conduct, what he knew about the operation to capture Maduro, according to the CFTC's lawsuit against him. That agreement will be critical evidence, lawyers said, because it would show that he was aware the briefing he received wasn't to be used for personal gain.

The Senate last month banned its members from trading in prediction markets. Federal ethics rules for executive-branch employees prohibit trading on nonpublic information, but most agencies lack express rules to address trading in prediction markets.

Other trades that federal prosecutors and CFTC officials are investigating include a spike in bets on oil futures that were placed on March 23, minutes before President Trump announced a delay in attacks on Iranian power plants, people familiar with the matter said. Trump's post triggered a huge drop in oil prices and a jump in the S&P 500 index. The following day, the White House warned staff against improperly using their positions to place bets in futures markets.

Clayton, the Manhattan U.S. attorney, this week criticized prediction markets for failing to keep the records that would aid law enforcement's ability to catch customers involved in wrongdoing. Polymarket's bigger exchange, which it says is based offshore, doesn't comply with U.S. laws that require brokers to collect information about individual traders.

"If they are going to function in a way that society can have confidence in them, I think they are going to have to have that record-keeping," Clayton said at a hedge-fund industry event on Wednesday.

While Kalshi, which the CFTC regulates, collects basic information about its users, it doesn't ask for employer information, like many stock brokerages do.

Polymarket is officially closed to Americans, but many U.S. traders have accessed its event contracts using virtual private networks, which disguise their internet addresses. It paid a $1.4 million fine to the CFTC in 2022 for offering unregulated bets to Americans that didn't comply with federal customer-protection rules.

Write to Dave Michaels at dave.michaels@wsj.com, Joel Schectman at joel.schectman@wsj.com and Brian Schwartz at brian.schwartz@wsj.com

(END) Dow Jones Newswires

May 16, 2026 21:00 ET (01:00 GMT)

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