Eight days have passed since April 23, when the Department of Justice (DOJ) charged U.S. soldier Gannon Ken Van Dyke with making a number of insider trades on Polymarket’s global site on the removal of Venezuelan President Nicolas Maduro. The trades, the DOJ claims, resulted in more than $400,000 in profit for Van Dyke.
But what about that $400,000? What if you were unlucky enough to stake money on Maduro remaining in power through the end of January, and lost money because of the alleged insider trades?
The charges are a landmark because it is the first instance of a criminal insider trading case involving a prediction market. But the question of making other traders whole also sits in fairly uncharted territory.
The Commodity Futures Trading Commission (CFTC) is specifically asking a court to take action to ensure that those traders get repaid. The agency regulates prediction markets, but Polymarket’s global site is not registered in the U.S.
In its own civil action against Van Dyke — separate from the DOJ’s criminal charges — the CFTC asks the court to, “Enter an order requiring Van Dyke, as well as his successors, to make full restitution, pursuant to such procedure as the Court may order, to every person who has sustained losses proximately caused by the violations described herein, including pre-judgment interest and post-judgment interest.”
The law grants the courts the power to provide “equitable remedies” including restitution to victims of insider trading, if the CFTC calls for it.
There have been few cases where criminal charges have actually been filed in a CFTC-regulated market. And in the public cases, there has usually been only a single wronged party. For example, the Matter of Arya Motazedi was the first case in which the regulator brought insider trading charges — having been granted more power to do so under the 2010 Dodd-Frank Act. But in that case, the victim, and therefore the sole person to be repaid, was Motazedi’s employer, not a range of market participants.
“Just one person was harmed,” David Aron, special counsel at Lowenstein Sandler, says.
CFTC cases with a number of different harmed parties across an exchange are more rare. However, that doesn’t mean other parties can’t be made whole.
“I was a little surprised at first, but in theory you know how much this person made. And there is another person on the other side in theory,” Aron says.
What may be helpful is that Van Dyke was charged relatively quickly.
“They tracked down where the guy moved the money to and they caught him fairly quickly. In a typical fraud maybe they’d spend the money on jewelry and cars,” Aron says.
Proximately caused
Under the rules, restitution is limited to losses “proximately caused” by the violation. That would ensure that not everybody who traded on Maduro to stay in power would be eligible for restitution. However, based on how the SEC applies the rule, it can still be fairly wide-reaching, applying not just to direct counterparties, but also to any “contemporaneous traders.” A more limited history makes the CFTC’s approach less certain.
Technically, some other Polymarket users profited from Van Dyke’s alleged insider trades. The DOJ says that he bet “yes” on the market “Will the U.S. invade Venezuela?” This ultimately resolved as no, after a lengthy dispute, as Polymarket’s “oracle”-based resolution process determined that the operation to capture Maduro didn’t meet the definition of an “invasion” given the market rules.
Blockchain-based site
Things are made both easier and harder by the fact that Polymarket’s global site — which does not legally operate in the U.S. — is built on the blockchain. On the one hand, it is possible to see which crypto wallets were on the other side of the trades. On the other hand, the actual identities behind these accounts are typically unknown because users are not required to enter the same identity data when signing up as they would on a CFTC-registered exchange.
“I don’t know how much Polymarket knows about who these parties are,” Aron says. However, he says the practical challenges should be something the authorities can overcome. It may take some time, though, particularly if Van Dyke ultimately chooses to fight the charges.
The court may be able to require an individual found guilty of insider trading to pay back a crypto wallet. But when courts have done this in the past, there has generally been an identified victim. For example, in the case of fraudulent crypto platform Debiex, a court ordered that assets in a relief defendant’s exchange account be transferred to a wallet that “belongs to Customer D.”
But in that case, the victims were still identified and known to the court. Victims whose identities are unknown, but who have crypto wallets that can easily be repaid, may be new territory.
