Manhattan’s top fraud prosecutors met with Polymarket to discuss whether lucrative bets on the prediction market platform have violated insider trading and other federal laws.

The meeting follows a warning from Jay Clayton, the U.S. Attorney for the Southern District and former SEC chairman, who told a securities law conference that criminal cases involving prediction market activity were coming.

Why? Gamblers are cashing in on U.S. military activity. One newly created Polymarket account turned $32,000 into over $400,000 in less than 24 hours after the capture of Venezuelan leader Nicolás Maduro. In another instance, a trader netted nearly $1 million from making remarkably accurate Iran war bets on the platform.

Platforms Rush To Write Their Own Rules

Polymarket and Kalshi are scrambling to get ahead of the scrutiny. Polymarket issued new rules last week banning trades based on confidential information. Kalshi, which has long banned insider trading, went further by blocking politicians and athletes from trading in their own markets and said it has referred over a dozen cases to law enforcement in the past year.

The legal ground remains untested. A former CFTC director of enforcement told CNN that prosecution may be difficult because prosecutors would need to show trading violated a specific fiduciary duty. The fact that these trades were placed on Polymarket’s offshore site makes jurisdiction even murkier.

Americans are technically not permitted to trade on Polymarket. However, customers access the platform with a VPN, and the Trump administration acted to end investigations initiated during the Biden administration regarding compliance.

Regulatory Walls Closing In From Every Direction

Arizona filed the first-ever criminal charges against Kalshi earlier this month, and California Gov. Gavin Newsom signed an executive order banning state officials from trading on insider knowledge.

On Capitol Hill, multiple bipartisan bills are targeting everything from insider trading by federal officials to outright bans on war and sports betting on the platforms.

CFTC Chairman Michael Selig announced a pro-innovation task force last week, but Manhattan federal prosecutors don’t answer to the CFTC. The Trump administration’s hands-off approach may not matter if the SDNY decides existing fraud statutes already cover the conduct.

What It Means For HOOD And DKNG

Robinhood Markets Inc (NASDAQ:HOOD) CEO Vlad Tenev called prediction markets the fastest-growing business in company history. A DOJ insider trading prosecution, even if unsuccessful, could chill institutional adoption at the exact moment Robinhood is betting its super app strategy on the product.

DraftKings Inc (NASDAQ:DKNG) and Flutter Entertainment (NYSE:FLUT) face the inverse problem. If regulatory pressure slows prediction market growth, the incumbent sportsbooks may keep market share they were on track to lose.

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