17 States, a Congressional Probe, and 400+ Suspicious Trades: Prediction Markets Face Their Biggest Crisis Yet
If you thought the arrest of a US Army Special Forces soldier for betting on a covert military operation was the peak of the prediction market crisis, think again. Over the past ten days alone, three new developments have landed that collectively represent the most serious institutional pressure the industry has ever faced — a surge in flagged trades that dwarfs anything seen before, a formal congressional investigation subpoenaing internal records from the two biggest platforms, and a federal-versus-state legal war that now involves 17 attorneys general across the country.
Taken together, they paint a picture of an industry that has grown faster than its own guardrails — and is now paying the price in congressional hearings, federal lawsuits, and the uncomfortable reality that its most fundamental promise may be harder to keep than anyone first thought.
This is the second in our series on the prediction market integrity crisis. If you missed the first piece — covering the Van Dyke arrest and the Iran trades — you can find it here on Flushdraw.net.
400 Suspicious Trades in Five Months: The Numbers Tell the Story
On May 15, Reuters published a report that deserves more attention than it got. According to two sources familiar with the matter, Kalshi — the CFTC-regulated prediction market exchange based in New York — has probed and flagged more than 400 suspicious trades since January 1, 2026. That is more than double the total number of trades the platform investigated across all of 2025. Some of those flagged trades have been referred to the CFTC for further review, though specifics were not disclosed.
Polymarket, the larger but less regulated offshore platform, has reportedly seen a similar spike in unusual activity, though exact figures remain unavailable. The New York Times, in a separate investigation published this month, identified more than 80 Polymarket users who made bets with suspicious characteristics — including trades placed in the hours immediately before US and Israeli strikes on Iran in late February.
The 400-trade figure is significant not just as a raw number, but as a ratio. Prediction market trading volumes have exploded in 2026 — Bernstein estimates the sector could hit $240 billion in annual volume this year alone, up from $51 billion in 2025. So the question of whether the suspicious trade rate is growing faster than overall volume, or simply in proportion to it, matters enormously for how regulators and investors interpret the data. What is clear is that the absolute number of cases requiring investigation has reached a level that strains the platforms’ own compliance resources.
“If someone has insider information, they might be way more inclined to act on it on prediction markets than on equity markets,” said Charles Martineau, a professor at the University of Toronto’s Rotman School of Management, speaking to Reuters.
Martineau’s point cuts to the core of the problem. In traditional equity markets, insider trading requires an actor to go through a broker, create a paper trail, and transact in assets that are heavily monitored by the SEC and FINRA. On a prediction market — particularly one operating on a decentralized blockchain — the friction is dramatically lower, the anonymity is dramatically higher, and the potential payout on a well-timed binary contract can be extraordinarily large relative to the stake. The incentive structure is, in a meaningful sense, worse than anything the financial industry has seen before.
Kalshi has not been sitting still. In February, the company announced a significant expansion of its market surveillance infrastructure, forming an independent Surveillance Advisory Committee and partnering with Solidus Labs — a blockchain compliance firm — and the Wharton Forensic Analytics Lab at the University of Pennsylvania. CEO Tarek Mansour publicly committed to a zero-tolerance policy on insider trading, explicitly distancing Kalshi’s approach from Polymarket’s historically more permissive stance. The platform also published new market integrity rules in the weeks following the Van Dyke arrest.
The 400-trade figure suggests those investments are working in the sense that Kalshi is finding more bad actors. The uncomfortable corollary is that there are more bad actors to find.
Congress Opens the Books: The House Oversight Investigation
Four days ago, on May 22, 2026, the House Oversight and Accountability Committee formally launched a congressional investigation into insider trading on prediction market platforms. Committee Chairman James Comer, a Republican from Kentucky, sent letters to Kalshi CEO Tarek Mansour and Polymarket requesting a broad range of internal documents and records.
The scope of the document requests is sweeping. According to the letter published by the Committee, Comer is seeking: all documents and communications related to Kalshi’s policies for detecting, investigating, and reporting anomalous or suspicious trading activity; records related specifically to trades on US or allied military operations or geopolitical events; all communications describing Kalshi’s referral procedures for notifying the DOJ, CFTC, or other law enforcement of suspicious activity; and documents sufficient to show the total number and disposition of suspicious activity referrals, including all disciplinary matters.
In short, Congress wants to see Kalshi’s full compliance paper trail. That is an extraordinary level of scrutiny for a company that, just eighteen months ago, was a niche financial platform known primarily to derivatives traders and crypto enthusiasts.
The investigation follows a Senate Commerce Committee hearing earlier in the week, described by multiple attendees as heated, in which lawmakers from both parties directed sharp questions at prediction market platforms. Chairman Comer, in an interview with CNBC on the day the investigation was announced, signaled his personal support for banning members of Congress, administration officials, and other government employees from participating in prediction markets altogether — aligning himself with several of the bills already introduced in the Senate.
The investigation was, in part, spurred by a bipartisan push. Seven House Democrats, led by Representative Chris Pappas of New Hampshire, had written to Comer earlier this month urging him to issue subpoenas and open a formal investigation into what they described as apparent corruption and insider trading on the platforms. That a Republican committee chairman responded to a Democratic request for action in the current political environment, speaks to how bipartisan the anxiety around this issue has become.
Both platforms responded carefully. Kalshi’s head of communications, Elisabeth Diana, said the company is “proud of our comprehensive protections against insider trading” and looks forward to engaging with the Committee. Polymarket similarly indicated it would cooperate, describing itself as “a pioneer in transparency.” Given that the investigation will test exactly those claims, both companies face a significant moment of institutional reckoning.
17 States vs. Washington: The Legal Map Is Getting Complicated
While Congress investigates from above, the states are fighting from below — and the battlefield is expanding rapidly.
As of this week, 17 states are involved in legal proceedings related to prediction market platforms. The CFTC and the Department of Justice have filed lawsuits against six of them — Wisconsin, New York, Connecticut, Illinois, Arizona, and Minnesota — in an effort to assert exclusive federal jurisdiction over event contracts under the Commodity Exchange Act. Those six states all have Democratic attorneys general, a fact that has not gone unnoticed by the states themselves.
“I cannot answer for the Trump Administration as to why they would have chosen to sue only certain states with Democratic leadership, bypassing others who have taken similar enforcement postures,” said Connecticut Attorney General William Tong, a Democrat, in a statement to CNBC.
The CFTC’s position, as articulated by Chairman Michael Selig, is unambiguous: event contracts traded on a federally licensed Designated Contract Market are federal instruments, governed exclusively by the Commodity Exchange Act, and state gambling laws do not apply to them. That is the same preemption argument that federal regulators have deployed in other regulated industries for decades — and in some cases it has worked.
But the states are pushing back hard. Arizona went further than any other state in its enforcement posture, filing criminal charges against Kalshi for allegedly offering sports betting products without a state gambling license. A bipartisan coalition of 37 attorneys general — including those from states like New York and Oklahoma, spanning both parties — filed an amicus brief in a Massachusetts federal court earlier this month, urging the court to uphold a January ruling that Kalshi cannot offer sports event contracts to in-state Massachusetts residents without a state Gaming Commission license.
The only state with a Republican attorney general where the CFTC has taken any action at all is Ohio — and there it merely filed an amicus brief in support of its jurisdiction claim, rather than a lawsuit. That asymmetry has given the states’ coalition a political argument to go alongside their legal one.
Minnesota represents perhaps the sharpest edge of the state response. Its legislature voted — in both chambers, by wide bipartisan margins despite those chambers being closely divided by party — to effectively ban prediction markets from operating in the state. That is the kind of cross-aisle consensus that rarely emerges in modern state legislatures and signals that this is not simply a partisan regulatory dispute.
For the industry, the proliferation of state lawsuits creates exactly the kind of fragmented, inconsistent regulatory environment that makes national-scale operations enormously expensive and complicated. Each state that issues a cease-and-desist order or brings criminal charges forces a platform to make a difficult choice: fight the case in federal court (expensive, slow, uncertain), comply with state law (which may mean shutting off users in that state), or ignore the order and risk escalation. Kalshi has generally chosen to fight. The legal bills are mounting.
The Third Circuit’s recent ruling in KalshiEx LLC v. Flaherty — which found that the CFTC does have jurisdiction over sports event contracts on its regulated exchange — was a meaningful win for the industry. But it covers only the Third Circuit’s jurisdiction. It does not bind courts in the Ninth Circuit, where California’s regulatory posture is being watched closely, or in the First Circuit, where the Massachusetts ruling runs in the opposite direction.
The Business Is Booming Anyway — And That’s Part of the Problem
Here is the paradox at the center of this story: despite the congressional probes, the state lawsuits, the suspicious trade surge, and the first criminal conviction in the industry’s history, the money keeps pouring in.
Kalshi recently closed a funding round that valued the company at $22 billion — more than ten times its valuation less than a year ago. Polymarket is reportedly pursuing financing that would value it at approximately $15 billion as it works to expand its US operations. Robinhood and Coinbase have both entered the space. DraftKings and FanDuel have been building out event contract products. The Wall Street analyst consensus, as reflected in the Bernstein report, still projects $1 trillion in annual trading volume by 2030.
Donald Trump Jr. signed on as an adviser to both Polymarket and Kalshi last year — a detail that adds a layer of political complexity to the CFTC’s decision to sue only Democratic-led states while leaving Republican-led states with similar enforcement postures largely untouched.
What the investor enthusiasm reflects is a genuine belief that prediction markets, at scale, perform a useful function — as real-time probability engines for events that matter to businesses, governments, and individuals. The Nieman Journalism Lab at Harvard published a piece in April noting that Kalshi has struck distribution deals with CNBC, CNN, Fox News, and the Associated Press, while Polymarket has partnered with Substack and Dow Jones. These platforms are positioning themselves not just as gambling venues but as news infrastructure — a live, financially-backed data feed on the probability of future events.
That positioning makes the integrity problem more urgent, not less. If prediction market odds are going to appear on CNN chyrons and AP news wires, the assumption that those odds reflect genuine crowd wisdom — rather than the knowledge of someone with a security clearance — becomes a matter of public information quality, not just financial regulation.
What Happens Next
The next sixty to ninety days will be decisive for prediction markets in the United States. The CFTC’s Advance Notice of Proposed Rulemaking closed its public comment period on April 30. The agency is expected to publish proposed rules in the second half of 2026, though the timeline remains unclear. Those rules will attempt to define, for the first time with regulatory specificity, which contract types are permissible, what anti-manipulation obligations look like in practice, and how insider trading will be policed on platforms that operate with a degree of anonymity that traditional exchanges do not.
The House Oversight investigation will produce document requests, likely followed by public hearings, likely followed by legislative proposals that will compete with the four bills already in the Senate queue. The question of whether Congress can agree on a single approach — given that some members want to ban large categories of contracts and others want to regulate and tax them — remains genuinely open.
The state lawsuits will grind through the federal courts for the better part of a year or more before any definitive rulings emerge. In the meantime, platforms will operate in a patchwork environment, blocking users in some states, fighting cease-and-desist orders in others, and hoping the Third Circuit precedent holds.
For the gambling and gaming industry, the outcome of all three tracks — regulatory, congressional, judicial — will determine whether prediction markets become a permanent and regulated part of the American betting landscape, or whether they end up in the same limbo that online poker occupied for most of the decade following Black Friday in 2011: technically operating, heavily restricted, and perpetually one enforcement action away from a crisis.
The industry has reached the moment of reckoning. How it performs in the next ninety days will define what it becomes.
Eric Sawyer is a writer for Flushdraw.net covering all things related to the US gaming industry, the latest in betting markets, and regulatory updates to the space as they happen.
Sources & References
- Reuters / US News — Prediction Markets See Surge in Suspicious Trades as Popularity Explodes (May 15, 2026) — https://www.usnews.com/news/top-news/articles/2026-05-15/prediction-markets-see-surge-in-suspicious-trades-as-popularity-explodes
- CDC Gaming — Prediction markets see surge in suspicious trades as popularity explodes (May 18, 2026) — https://cdcgaming.com/brief/prediction-markets-see-surge-in-suspicious-trades-as-popularity-explodes/
- CNBC — Prediction markets are fueling a high-stakes brawl between states and federal regulators (May 21, 2026) — https://www.cnbc.com/2026/05/21/where-the-feds-are-fighting-states-over-prediction-markets.html
- CNBC — Despite murky legal landscape, companies are undeterred in their prediction market investments (May 22, 2026) — https://www.cnbc.com/2026/05/22/companies-keep-investing-in-prediction-markets-despite-legal-battle.html
- CNBC — Oversight Chairman Comer launches congressional probe into insider trading on Kalshi, Polymarket (May 22, 2026) — https://www.cnbc.com/2026/05/22/kalshi-polymarket-comer-insider-trading-probe-congress.html
- Roll Call — Prediction markets put under spotlight by House Oversight panel (May 22, 2026) — https://rollcall.com/2026/05/22/prediction-markets-put-under-spotlight-by-house-oversight-panel/
- CoinDesk — Congress hits Polymarket and Kalshi with a massive insider trading probe (May 22, 2026) — https://www.coindesk.com/policy/2026/05/22/congress-probes-polymarket-and-kalshi-over-fears-government-employees-are-trading-on-secret-info
- House Oversight Committee — Letter to Kalshi CEO Tarek Mansour (May 22, 2026) — https://oversight.house.gov/wp-content/uploads/2026/05/Kalshi-Prediction-Markets-Letter.pdf
- The Block — CFTC sues Wisconsin escalating federal-state clash over prediction market oversight (April 2026) — https://www.theblock.co/post/399253/cftc-sues-wisconsin-federal-state-clash-prediction-market-oversight
- SBC Americas — CFTC Escalates Prediction Markets Fight by Suing 3 States (April 2, 2026) — https://sbcamericas.com/2026/04/02/ctfc-sues-arizona-connecticut-illinois
- Gambling Insider — Federal Government Sues States Over Prediction Market Crackdowns (April 3, 2026) — https://www.gamblinginsider.com/news/152266/federal-government-sues-states-prediction-markets
- Nieman Journalism Lab — Prediction markets are breaking the news and becoming their own beat (April 15, 2026) — https://www.niemanlab.org/2026/04/prediction-markets-are-breaking-the-news-and-becoming-their-own-beat/
- YourNews — Betting on the Future: Prediction Markets Face Rising Scrutiny as Suspicious Trades Surge (May 15, 2026) — https://yournews.com/2026/05/15/6969216/betting-on-the-future-prediction-markets-face-rising-scrutiny-as/
- CoinDesk — Bernstein: Prediction Markets Could Hit $1 Trillion by 2030 (April 2026) — https://www.coindesk.com/policy/2026/04/bernstein-prediction-markets-trillion
COMMENTS