US: Fraud and Platform Failures Raise Legal Risks in Prediction Markets

United States – 11 November 2026 – www.zonadeazar.com The rapid expansion of prediction markets in the United States is creating new challenges involving consumer protection, fraud prevention and the legal responsibilities of trading platforms.

A legal analysis published on 10 November 2026 warns that participants may suffer financial losses not only because their forecasts are incorrect, but also as a result of bank card fraud, insider trading, contract manipulation and operational failures.

Recent cases involving Polymarket and Kalshi illustrate the complexities of determining who should bear financial responsibility when these irregularities harm users.

Polymarket Faces Scrutiny Over Payment Fraud

One of the most significant cases concerns a fraud scheme identified in February 2026 involving Polymarket’s US platform.

According to an investigation published in September, criminals used stolen debit cards to fund thousands of accounts before attempting to withdraw the money to payment methods under their control.

The attempted fraudulent transactions reportedly reached at least US$10 million, although most deposits were unsuccessful and the amount actually withdrawn was not disclosed.

At one point, payment processor Checkout.com reportedly identified more than 80% of the deposits it handled as fraudulent, compared with an industry average of approximately 1%.

Changes to Fraud Controls and Executive Departures

The investigation also highlighted potential weaknesses in Polymarket’s fraud prevention procedures.

These included the reported removal of a requirement that withdrawals be returned to the same payment method originally used for deposits.

In April 2026, Polymarket US’s Chief Compliance Officer resigned after submitting a report concerning the irregularities.

The chief executive of its US operations and senior officials responsible for regulatory affairs and anti-money laundering subsequently also left their positions.

Polymarket stated that it had strengthened its controls, while fraud rates reportedly returned to levels close to industry norms by May.

Four Groups Exposed to Financial Losses

The legal analysis identifies four principal categories of people who may suffer financial harm from irregularities in prediction markets.

• Identity theft victims: individuals whose personal information or payment cards are used without authorisation.
• Legitimate customers affected by operational failures: users experiencing frozen accounts, rejected deposits or delayed withdrawals.
• Traders harmed by manipulation: participants trading against individuals using confidential information or manipulating market outcomes.
• Users in restrictive jurisdictions: participants operating in states where certain event contracts may be considered illegal gambling.

Each situation presents different opportunities for financial recovery and distinct legal obstacles.

Kalshi and Market Manipulation Cases

Insider trading and contract manipulation represent another growing concern for US regulators.

In July 2026, former Congressman George Santos reached a settlement with the Commodity Futures Trading Commission (CFTC) over allegations involving manipulation of a Kalshi contract linked to his attendance at the State of the Union address.

The settlement included a payment of approximately US$35,070 and a three-year trading ban, without Santos admitting the agency’s findings.

The case demonstrates how individual conduct can generate financial consequences for other market participants when gains and losses are directly linked through opposing positions.

Investigations Involving Confidential Information

Two additional criminal proceedings could help establish important legal interpretations for the industry.

In United States v. Van Dyke, a US Army Special Forces master sergeant is accused of using classified information concerning the January 2026 operation to capture Nicolás Maduro.

According to prosecutors, he allegedly turned approximately US$33,000 in prediction market trades into more than US$400,000.

In a separate case, United States v. Spagnuolo, a Google engineer is accused of using internal company information to trade contracts related to Google’s annual Year in Search rankings.

Authorities allege that he earned more than US$1.2 million through trades conducted under a pseudonym.

Both proceedings remain subject to judicial determination, and the allegations do not constitute final findings of guilt.

Debate Over the Legal Classification of Contracts

One of the central legal questions concerns whether prediction market contracts qualify as financial derivatives under the Commodity Exchange Act (CEA).

The defendants in the criminal proceedings challenged whether certain Polymarket contracts could be classified as swaps under the legislation.

In October 2026, US District Judge Margaret Garnett rejected a motion in the Van Dyke case, finding that the defence had not established that the instruments were necessarily excluded from the statutory definition.

The issue will remain under consideration during the trial scheduled for December.

The eventual ruling could affect future civil claims involving fraud and market manipulation.

Conflicting Federal Court Decisions

Regulatory uncertainty is also reflected in conflicting decisions issued by federal appellate courts.

In April 2026, the Third Circuit Court of Appeals found that Kalshi’s sports event contracts were likely protected from New Jersey gambling legislation because of their classification as financial derivatives.

However, in August, the Ninth Circuit ruled that Nevada could regulate those contracts as sports betting.

New Jersey has asked the US Supreme Court to resolve the conflicting interpretations.

New York has also initiated legal proceedings against several platforms, while Kentucky sued Kalshi and Polymarket in June.

Legal Options for Recovering Losses

Individuals affected by fraud or operational failures may have access to several legal remedies, depending on the circumstances.

Section 22 of the Commodity Exchange Act provides a private right of action for actual financial damages arising from certain violations, including fraud and market manipulation.

However, establishing platform liability can be challenging.

In some circumstances, claimants must demonstrate that an exchange acted in bad faith when enforcing, or failing to enforce, its own rules.

Other potential claims may involve breach of contract, negligence or state consumer protection legislation.

Protection Against Unauthorised Bank Transfers

Victims of debit card fraud may benefit from specific protections under the Electronic Fund Transfer Act and Regulation E.

In general, consumers’ financial liability may be limited to:

• US$50: when the loss or theft is reported within two business days of discovery.
• US$500: when notification occurs after that period, subject to applicable conditions.
• Potentially greater liability: when more than 60 days pass after a relevant bank statement is issued and additional transactions occur that could otherwise have been prevented.

Banks are also required to investigate reported unauthorised transfers.

These provisions may offer a more direct recovery mechanism than pursuing litigation against a prediction market operator.

Gambling Loss Recovery Laws and Arbitration

Some US states maintain legislation allowing individuals to recover certain losses arising from illegal gambling activities.

In New York, for example, an individual who loses US$25 or more may bring a claim against the winner within three months of payment.

Kentucky provides recovery mechanisms for certain losses of US$5 or more and, under specific conditions, allows claims for damages equivalent to three times the original amount lost.

However, such actions can be difficult when the counterparty to a transaction is another user rather than the platform itself.

Many operators also include mandatory arbitration provisions and class-action waivers within their user agreements.

Next Steps and Industry Impact

The expansion of prediction markets is placing increasing pressure on traditional financial oversight and consumer protection frameworks.

Legal proceedings involving Polymarket, Kalshi and other operators could help determine the extent of platform liability for fraud, manipulation and operational failures.

The legal classification of event contracts will also play a crucial role in establishing which regulations apply and what options are available to users seeking compensation.

For the industry, the challenge involves developing stronger prevention systems, ensuring effective operational controls and establishing transparent dispute resolution procedures.

The future growth of prediction markets will depend not only on commercial expansion, but also on the industry’s ability to provide legal certainty and effective safeguards for participants.

Editó: @fonta