CFTC Enforcement Director Says Agency Will Pursue Insider Trading in Prediction Markets

CFTC Top Cop Warns Against Insider Trading on Prediction Markets

A key Commodity Futures Trading Commission official said the agency will use its powers to root out insider trading in prediction markets, as concerns about suspicious activity on the exchanges grow.

“Unfortunately there’s a myth in mainstream media and social media that insider trading doesn’t apply in the prediction markets,” CFTC Enforcement Director David Miller said at a panel at New York University on Tuesday. “That is wrong.” […]

Miller said participants in CFTC-regulated markets are allowed to use their own knowledge and information to make trading decisions, such as a farmer seeing issues with their harvest to hedge their financial risks, but emphasized using “misappropriated information” to place wagers is not allowed.

“We will only be prosecuting cases against those who tip or trade with misappropriated information,” Miller said, adding that they will use their prosecutorial discretion and will not dedicate agency resources to “trivial” cases.

Reading Between the Lines: The New SEC SOX Enforcement Group

Chairman Atkins’ SEC has consistently included financial and accounting fraud as one of its top enforcement priorities. The new SOX Group confirms this. Where the SEC has spent the last year focused on reducing the Enforcement Division’s staff, the new Group stands out as an area of Enforcement expansion.

More significantly, and although the SEC has not explicitly stated as much, the new Group may signal that the PCAOB’s Division of Enforcement and Investigations’ role as the primary cop for auditor misconduct is moving to the SEC. This conclusion is further supported by the recent reductions to the PCAOB budget and its likely impact on staffing, along with Hohl’s recent comments highlighting the confidentiality obligations imposed on the PCAOB — but not the SEC. It also appears consistent Chairman Atkins’ past PCAOB criticisms and his general statements disfavoring overlapping, parallel investigations from a fairness perspective.

FINRA’s Constitutional Wake-Up Call

Last week, in unrelated cases, two federal courts rejected long-held positions of the Financial Industry Regulatory Authority (“FINRA”) and U.S. Securities and Exchange Commission (“SEC”) that (1) FINRA enforcement targets must endure FINRA’s entire internal disciplinary process, followed by the SEC’s entire adjudicatory appeals process, before they get their first chance to ask any court to stop the process due to its unconstitutionality, and (2) FINRA can impose punitive disciplinary sanctions using in-house proceedings and without any jury trial.

In both court cases, however, FINRA was able to seize upon procedural technicalities to escape any binding precedential rulings on these constitutional issues. Thus, unless and until FINRA takes this judicial wake-up call seriously, or the SEC steps in to force FINRA’s hand, for now it’s still business as usual for FINRA enforcement.

Prediction Market Prosecutions May Be Curbed by Decades-Old Case

Federal prosecutors and regulators have announced their intent to police insider trading in prediction markets. But enforcement under the Commodity Exchange Act will require the government to navigate complex factual and legal issues that aren’t necessarily present in other markets.

To avoid those issues, prosecutors targeting on prediction markets may decide to bring charges of insider trading under wire fraud theories, relying on violations of the markets’ user agreements and terms of use to prove the fraud.

Depending on the language in prediction markets’ user agreements and terms of service and the timing of users’ execution, however, prosecutors may find that charging insider trading as wire fraud is constrained by a decade-old ruling that strictly limited fraud theories arising from a breach of contract.

Musk Faces Class-Action Lawsuit From Twitter Investors Over 2022 Buyout

Twitter shareholders gained traction in another lawsuit against Elon Musk over the run up to his 2022 buyout of the social media platform, with a judge granting class-action status to the investors.

The investors claim they were harmed when Musk secretly amassed more than 13 million in Twitter shares over 11 days starting on March 25, 2022. US District Judge Andrew Carter in New York ruled the investors can sue together in a single case, amplifying their leverage to force a settlement or go forward to trial.

The judge cited the investors’ claims of his late filings to the US Securities and Exchange Commission, his alleged posting of “misleading tweets about Twitter’s future” and “a coordinated trading strategy to silently build up” his position in the social media company. The case was filed in April 2022.