Pentagon Bars Personnel From Trading on Military Information After $400K Prediction Market Scandal
Defense Secretary Pete Hegseth issued an October 20 memo barring Department of Defense personnel from making financial transactions using non-public information, explicitly naming Polymarket and Kalshi. The directive follows the prosecution of a Special Forces soldier accused of making more than $400,000 on Polymarket by betting on a mission to capture Venezuelan President Nicolas Maduro. Hegseth's rationale is a national-security concern: a bet on a military outcome creates a market signal that adversaries can read. 'Our enemies watch movements in these markets,' the memo states.
Defense Secretary Pete Hegseth issued a memo on October 20, 2026 barring Department of Defense personnel from making financial transactions using non-public information, whether directly or through third parties, and explicitly naming the prediction market platforms Polymarket and Kalshi. The memo, obtained and reported by CBS News and DefenseScoop, extends beyond prediction markets to cover any financial transaction based on non-public information, but the prediction market context is the proximate cause. The directive follows the prosecution of a Special Forces soldier accused of making more than $400,000 on Polymarket by betting on a military mission to capture Venezuelan President Nicolas Maduro — a bet that, if the allegations are accurate, was placed with advance knowledge of a classified operation. Violations may result in administrative, disciplinary, or criminal action under military rules and federal law.
The rationale Hegseth gave introduces a national-security dimension to the prediction market insider-trading problem that is distinct from the financial-integrity concerns raised in other contexts. The memo's logic is that a financial transaction on a military outcome does not merely enrich the insider improperly — it creates a market signal that adversaries can observe. If prediction market prices on, for example, a military operation or a geopolitical event move sharply before any public announcement, that movement is itself information: it signals to anyone watching that someone with knowledge is positioning, which can tip off the target of an operation or reveal that something is imminent. 'Our enemies watch movements in these markets,' the memo states. This transforms the insider-trading concern from a question of individual misconduct into a question of operational security: the prediction market becomes a potential channel through which classified information leaks into public view via price movements, regardless of whether the insider is ever identified.
The concern is not hypothetical. Beyond the Maduro-operation case, reporting has noted that newly created Polymarket accounts placed suspiciously timed bets shortly before President Trump announced a US-Iran ceasefire in April, and the White House subsequently warned staff against trading on confidential information. The pattern — sharp, well-timed positioning in geopolitical and military event contracts immediately before public announcements — is exactly what the Hegseth memo is designed to prevent within the Department of Defense. The CFTC, which regulates the platforms, has separately said it is monitoring for manipulation and has acknowledged that it often catches political figures attempting to trade 'after the fact.' The combination of a national-security ban from the Pentagon and manipulation monitoring from the CFTC reflects a growing recognition across the federal government that prediction markets on sensitive government actions create information-security risks that did not previously exist at this scale.
The Pentagon directive is significant for the prediction market sector because it comes from a part of the government that is not party to the commercial or regulatory disputes over the platforms' legal status. The CFTC defends the platforms' federal jurisdiction; state attorneys general attack it; the platforms litigate. The Department of Defense has no stake in that fight — its concern is purely operational security — which makes its action a more neutral signal about the genuine risks that prediction markets on government actions create. It also highlights a category of contract that sits uneasily within the platforms' defense of their business: contracts on military operations, geopolitical events, and government decisions are harder to defend as legitimate hedging instruments than economic or financial contracts, and they carry risks (classified-information leakage, operational-security compromise) that have nothing to do with gambling or consumer protection. The platforms have generally not emphasized these contract categories in their public defense, and the Pentagon's action underscores why: the national-security contracts are the ones where the case for restriction is strongest and least contested.
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Recent updates
CFTC Chair Says Agency Is Watching Prediction Markets for Manipulation Ahead of Midterms
CFTC Chairman Michael Selig said on October 23 that the agency is closely monitoring prediction markets for manipulation ahead of the November 3 midterms, and that it is separately scrutinizing oil market trading tied to President Trump's announcements about the war in Iran. Combined midterm open interest on Kalshi and Polymarket stood at $250 million as of October 18, with Kalshi holding 84%. Selig acknowledged the agency often catches political figures attempting to trade 'oftentimes after the fact.' The remarks highlight the CFTC's dual and somewhat conflicting role as both the platforms' federal protector and their manipulation watchdog, at a time when the agency has shed enforcement staff.
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Crypto.com and Novig filed federal lawsuits on October 16 challenging Missouri's cease-and-desist orders, arguing their sports event contracts fall under exclusive CFTC jurisdiction. The suits came as Missouri's 30-day compliance window closed. Notably, the market leaders — Kalshi, Polymarket, Robinhood, and Underdog — have not sued; Missouri said it is in 'ongoing discussions' with Kalshi. The outcome is tied to the Eighth Circuit, which is now weighing the same preemption question in Kalshi's appeal of a preliminary injunction denial in Iowa — the fourth federal circuit to take up the prediction market question.
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