It was easy for me to ignore all the news about the prediction markets for quite a while. No securities are involved, and I’m a securities lawyer. So…I don’t need to worry about this. Right? I wish that were true. But as Liz shared last week, savvy securities lawyers are thinking about whether and how their codes of conduct and insider trading policies should address prediction market insider trading.

Why? As Liz noted, Kalshi recently announced that it has been actively investigating potential insider trading activity on its platform and shared details of closed cases. And last week, the CFTC’s Division of Enforcement issued an advisory on these two cases. The press release says (case citations removed):

While Kalshi’s internal enforcement program handled these matters, under the [Commodity Exchange Act], the Commission has full authority to police illegal trading practices occurring on any [Designated Contract Market], including those described above related to prediction markets. Without limitation, these practices include:

– Misappropriation of confidential information in breach of a pre-existing duty of trust and confidence to the source of the information (commonly known as “insider trading”) pursuant to Section 6(c)(1) of the Act, and Regulation 180.1(a)(1) and (3).

– Pre-arranged, noncompetitive trading and wash sales, under Section 4c(a)(1) and (2)(A) of the Act, and Regulation 1.38(a).

– Other prohibited trading practices including disruptive trading pursuant to Section 4c(a)(5).

– Fraud and manipulation under various sections of the Act.

As this Braeden Anderson post explains, “We are accustomed to discussing insider trading in the securities context, grounded in Section 10(b) of the Exchange Act and Rule 10b-5. But the CFTC has long had parallel authority under Section 6(c)(1) and Regulation 180.1 to pursue fraud and misappropriation in commodities and derivatives markets.” Gibson Dunn notes that many public companies already prohibit employees from insider trading on prediction markets — that is, to the extent their codes of conduct forbid employees from using confidential information obtained from their employment for personal gain or engaging in conflicts of interest.

But currently, those codes — and employee training — may not further explain that prediction market trading using confidential information obtained from an employer would violate both these code provisions and federal law. (There’s a good chance most employees don’t know this?) And it wouldn’t be the greatest thing in the world if the news was suddently reporting that one of your employees was trading on an outcome based on confidential company information or an event they controlled or influenced. Read on (in today’s next blog) for recommendations that public companies might want to consider.

– Meredith Ervine