Prediction Markets Must Go All In On Training, Compliance

The Bottom Line

• The proliferation of sports betting and prediction markets present a business opportunity, as well as significant risks to platforms that don’t have strict guardrails in place.
• Unlike traditional sports betting markets, prediction markets are regulated federally by the Commodity Futures Trading Commission.
• Understanding the types of liability markets can be exposed to, and myriad ways to limit exposure, can mitigate legal risk and build trust with customers.

Consider this scenario: An individual places precise bets on an NBA player’s performance, taking the “under” position that the player will score a certain number of points. The bettor knows something the sportsbooks and public don’t—the player intends to exit the game early to ensure the under bet wins. The bettor learned this information from the player, with the two communicating via encrypted messaging apps to execute the plan. The player fakes an injury, exits the game early, and the bets win.

This scenario was a reality in June 2024, when Brooklyn resident Long Phi Pham was arrested for orchestrating an illegal betting conspiracy with former NBA player Jontay Porter. In just two games, the scheme generated more than $1 million in profits. Prosecutors charged Pham, Porter, and others in the Eastern District of New York with using material non‑public information to defraud betting operators.

While Porter’s case arose in the traditional sports betting context, it offers lessons for prediction markets that allow users to trade event contracts in which the payoff is tied to the outcomes of real-world events, such as an increase or decrease in the price of gold or the performance of a stock index on a given date in the future.

Historically, these event contracts were used to hedge things such as commodity prices. But in recent years, prediction markets have begun offering event contracts tied to a wide range of outcomes—including elections, government appointments, and pop-culture moments ranging from Hollywood awards to celebrity relationships.

The latest frontier in prediction markets is sports event contracts, which allow users to place money on the outcome of games, individual player performances, or even the result of individual plays.

Unlike sports betting markets that are primarily subject to oversight by state regulators, prediction markets are subject to federal oversight by the Commodity Futures Trading Commission. While some states have filed lawsuits to prohibit prediction markets from operating without state gambling licenses given the similarity between gambling and event contracts, several prediction markets are already registered with the CFTC and permit trading.

This CFTC oversight presents unique legal risks for entities and individuals participating in prediction markets related to trading based on material non-public information.

The Porter Case

Porter and his co-conspirators pleaded guilty to conspiring to misuse confidential information in sports betting, in violation of the general wire fraud statute, which prohibits using a wire communication, such as the internet, to obtain money or property through a scheme to defraud through misrepresentations or false promises.

The government alleged Porter and his co-conspirators violated the platform’s terms of service, which users were required to accept before placing a bet. These terms prohibited “wagering in connection with sports contests or individual players’ statistical performances if the users had access to any pre-release, confidential information or other information that was not available to all other wagerers, including any information provided by a professional athlete, such as non-public injury information.”

Under this theory of liability, the defrauded party was the platform receiving the bets. The platform wasn’t implicated in any wrongdoing. The complaint identifies the platform as a victim and highlights measures it had implemented, in addition to having an explicit policy prohibiting insider transactions.

For example, the platform detected the suspicious wagers and suspended Pham’s account before he withdrew most of his winnings, indicating the platform had a robust monitoring system. The platform also reported these suspicious bets to the International Betting Integrity Association (which, in turn, reported the activity to the FBI) and to the NBA, which opened their own investigations.

Although Porter involved sports betting, the case and the actions taken by the betting platform offer guidance for individuals and organizations in prediction markets, which face additional legal risks, including civil liability for insider transactions that occur on prediction markets’ platforms.

Theories of Liability

Event contracts are regulated by the CFTC under the Commodity Exchange Act, which prohibits manipulative or deceptive conduct, such as misuse of material non-public information.

Individual liability. In prediction markets, individuals may face both criminal and civil liability for insider transactions.

As in the Porter case, the criminal wire fraud statute could apply to individuals who trade in prediction markets based on non-public information if they violate a prediction market’s terms of use. Individuals can also face civil and criminal liability under the CEA and the CFTC’s regulations. Section 6(c)(1) of the CEA and CFTC Rule 180.1 prohibit fraudulent or manipulative behavior in connection with transactions under the CFTC’s jurisdiction and can carry both criminal and civil penalties.

While the CEA hasn’t been applied to insider transactions in the event contract space, the CFTC has brought cases against individuals who misappropriated material, non-public information for personal trading gains in other contexts. A number of these cases have involved “front-running,” where an individual employee of a company traded ahead of its client’s positions for a personal profit.

Organizational liability. Under the CEA, prediction market operators and affiliated parties may face civil liability under several theories for insider transactions by its users, even if no one from the market was involved in the scheme. These theories of liability include:

• Failure to comply with core principles and CFTC regulations. Entities operating as prediction markets must register with the CFTC as designated contract markets or swap execution facilities and, as a result, are subject to applicable core principles under the CEA and related CFTC regulations.
  
  These include requirements to establish, monitor, and enforce compliance with the market’s rules, including rules prohibiting abusive trade practices. Such abusive trading practices include front‑running, wash trading, pre-arranged trading, fraudulent trading, money passes, and other trading practices the market deems abusive.
  
  Failure to implement and enforce anti-fraud procedures regarding the misuse of inside information may violate, accordingly, both the CEA’s and the CFTC’s regulations, resulting in civil liability.
  
• Failure to supervise. Under CFTC Rule 166.3, entities have a duty to diligently supervise their employees’ handling of commodity interests. In one case, the CFTC charged an entity for, among other things, failing to have an adequate system of oversight in place to detect or prevent the misappropriation of inside information.
  
• Aiding and abetting. The CEA contains aiding and abetting language modeled after 18 USC Section 2, the federal criminal aiding and abetting statute. Under Section 13(a) of the CEA, “[a]ny person who commits, or who willfully aids, abets, counsels, commands, induces, or procures the commission of, a violation” may be held responsible for such violation as a principal. To the extent an organization or intermediary is aiding and abetting others in trading based on insider information, they may also face liability.

Limiting Exposure

To reduce liability exposure, entities registering with the CFTC should adopt several controls.

Policies and procedures. Enact policies and procedures prohibiting employees from trading on events when they hold inside information, and from disclosing such information to individuals outside the company, in addition to requiring employees to regularly certify their compliance with these policies and procedures.

They should also prohibit the platform from accepting transactions from those who have inside information concerning a particular event based on their personal participation in that event. The platform’s terms of service, which users must accept before trading, should separately impose prohibitions on users, including a ban on transacting when they possess inside information.

Independent surveillance and third-party audits. Require periodic independent reviews of surveillance systems, compliance programs, and internal controls. Third-party assessments can identify gaps internal teams might miss and help demonstrate to regulators the platform’s monitoring framework is objective, credible, and continually strengthened.

Restricted lists. Maintain and enforce restricted trading lists that prohibit employees from participating in prediction markets where the organization and its members have access to non-public information. Such lists should cover company outsiders who have access to material, non-public information about a particular event.

At least one prominent prediction market operator has already begun publishing lists of source agencies prohibited from trading to mitigate the risk of insider transactions and has partnered with monitoring systems to restrict the activity of prohibited users.

Detection systems. Deploy monitoring tools to detect suspicious trading patterns, such as sharp, unexplained volume spikes around certain contracts. These tools can serve as early-warning indicators of insider activity and can mitigate organizational liability.

Whistleblower and internal reporting channels. Establish anonymous reporting mechanisms for employees, and for users where feasible, which allows early detection of potential insider trading or other market abuses. Robust reporting channels, coupled with protections against retaliation, align with regulatory best practices and can effectively identify misconduct.

Self-reporting to the CFTC. Establish policies for self-reporting suspicious activity to the CFTC. Prompt notification can be particularly helpful given recent guidance from the CFTC’s Enforcement Division, which seeks to incentivize and reward a company’s self-reporting and cooperation with any investigation.

Employee training. Regularly educate employees on the legal risks of insider transactions in prediction markets and the criminal and civil penalties for violations. The training should cover the duty to protect the company’s confidential information, which shouldn’t be used for an employee’s personal gain or shared with any company outsiders who may seek to trade on the information.

Key Takeaways

The risks of trading based on material, non-public information exist in any market. As prediction markets continue to mature and attract new entrants, market platforms should consider these risks and proactively address them, as some prediction market operators have already done.

New platforms should be mindful of the risks and implement internal controls, such as explicit policies and procedures, restricted trading lists, detection systems, formal protocols for reporting to regulators, and comprehensive employee training programs. By embedding these safeguards, prediction markets can mitigate legal risk and build the trust essential to their long-term legitimacy in mainstream finance.

The cases are USA v. Porter, E.D.N.Y., 1:24-cr-00270, filed 7/2/24 and USA v. Pham, E.D.N.Y., 1:24-cr-00359, filed 9/9/24.

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law, Bloomberg Tax, and Bloomberg Government, or its owners.

Author Information

Ian McGinley is partner at Sidley and a former Commodity Futures Trading Commission director of enforcement.

Andrew Sioson is partner at Sidley and is a former special counsel at the SEC in the Division of Trading and Markets.

Nathan Howell is partner at Sidley focusing on US commodities law and regulation.

Kate Lashley, Daniel Hay, Michael Borden, Reina Won, and former summer associates Soobean Jo and Elliot Zornitsky contributed to this article.

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