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CFTC and DOJ Crackdown on Illegal Prediction Market Trades Continues
The Commodity Futures Trading Commission (“CFTC”) filed a complaint in the U.S. District Court for the Southern District of New York against “AlphaRaccoon,” alias for MicheleSpagnuolo, a resident of Switzerland. The complaint alleges Spagnuolo, a Google software engineer, engaged in insider trading on Polymarket.com using sensitive nonpublic information regarding Google’s official Year in Search list for 2025.In a parallel criminal case, the U.S. Attorney, Jay Clayton, and the FBI unsealed a criminal complaint in the same court against Spagnuolo for commodities fraud, wire fraud and money laundering.
“[T]he Commission will not tolerate fraud, manipulation, or insider trading, regardless of the technology or platform that is used,” said Chairman Michael S. Selig. “Today’s action further underscores our commitment to rooting out insider trading and promoting market integrity in prediction markets.”
Case Background
Spagnuolo misappropriated sensitive nonpublic information concerning the results of Google’s official Year in Search list for 2025. As a Google employee, Spagnuolo owed a duty of trust and confidence to Google to maintain the confidentiality of that information and not use it for personal gain. In violation of those duties, Spagnuolo purchased “Yes” or “No” shares on at least twenty-three of the 2025 Year in Search List contracts on Polymarket.com, including “#1 Searched Person on Google this year” and “Top 5 Most Searched People on Google 2025,” with near-perfect accuracy. The complaint alleges Spagnuolo generated $1.2 million in profits through his trading.
Legal Theory
The facts of the case are reminiscent of those in the 1987 Supreme Court case, Carpenter v. United States, where R. Foster Winans, coauthor of the Wall Street Journal’s Heard on the Street column, was convicted of misappropriating the highly confidential (and market moving) contents of the column prior to publication.The WSJ was deprived of the right to exclusive use the information in the column prior to publication. Winans violated his fiduciary obligation to protect his employer’s confidential information and committed insider trading in violation of Section 10b of the Securities Exchange Act of 1934 (“1934 Act”) and Rule 10b-5 thereunder.He was also guilty of mail and wire fraud.
The current case does not involve the illegal purchase or sale of securities. Consequently, the SEC is not involved.Rather, it involves commodities fraud in violation of Section 6(c)(1) of the Commodities Exchange Act (“CEA”) and CFTC Regulation 180.1(a)(1), (3), patterned after Section 10(b) and Rule 10b-5.
Event contracts on the prediction markets are “swaps,” as defined in the CEA, because they are settled based on the occurrence or nonoccurrence of a specified future event with potential financial, economic or commercial consequences, such as the occurrence of a weather event, the outcome of an election, the price of a market index, or prevailing interest rates.[1]
In addition to commodities fraud, the criminal complaint charges Spagnuolo with wire fraud in violation of 18 USC Section 1343 as well as money laundering in violation of 18 USC Section 1956. If convicted, Spagnuolo faces a maximum prison sentence of 10 years for commodities fraud and 20 years for each of the wire fraud and money laundering charges.
Conclusion
This case is just one of a growing list of recent coordinated civil and criminal filings related to insider trading in the prediction markets. Investment advisers should ensure that supervised persons are aware that insider trading of any asset—not just securities—is illegal. Besides training, advisers may consider tracking trading in prediction markets as well as periodic certifications from supervised persons that they are aware the firm’s prohibition against violating all insider trading laws. It is also necessary that firms make it explicitly clear to their employees that purchasing event contracts while in possession of any non-public information obtained through work, regardless of the platform, is highly illegal and potentially career ending.