This is a transcript of the GRIP podcast episode Ian McGinley tells us about prediction markets, insider trading risk, and more. The podcast was a discussion between Ian McGinley, partner at Sidley Austin LLP and former director of enforcement at the CFTC, and Julie DiMauro, the head of regulatory content (North America) for GRIP in New York.
[INTRO]
Julie DiMauro: Greetings and welcome to a GRIP, or Global Relay, Intelligence and Practice podcast. I am so thrilled to be joined today by Ian McGinley, who is a partner at Sidley Austin and a former director of enforcement at the CFTC.
Before we start out, Ian, could you please introduce yourself to our audience and let us know a little bit more about your bio?
Ian McGinley: Yeah, thanks, Julie, and a pleasure to be here. I’m a partner now at Sidley Austin in New York. I do regulatory enforcement and white collar work. But before that, I was the director of enforcement for about two years at the CFTC from 2023 to 2025, and so oversaw the entire enforcement program nationwide. And we brought a lot of cases in a lot of the areas we’ll talk about today.
And then before that, I spent the bulk of my career as a federal prosecutor in the Southern District of New York for about 10 and a half years, where I – you start, as every prosecutor does at STNY, doing small scale fraud and street crime. I did terrorism cases for a few years and then spent the last half of my time there doing white-collar matters inside of trading, market manipulation, and cases with the CFTC and SEC.
Julie DiMauro: Terrific. And thanks again for being here with us. Ian, I wanted to ask you about the SEC and CFTC moving toward what they call a more back-to-basics enforcement strategy, focusing on clear investor harm, market manipulation, and individual executive accountability. How are those priorities playing out in practice and affecting the counsel that you provide clients?
Ian McGinley: Yeah, well, I mean, I think to kind of step back, one of the things to remember is that’s certainly more the focus of these agencies right now. And I think that is in distinction to what are more technical cases, so cases that don’t involve willful misconduct, cases that are more technical. They could be a registration violation. It could be a reporting issue or something where the market harm is a little less tangible in the first instance.
But in terms of the core cases that the agencies bring, there’s a through line there through many administrations in terms of what’s important. And I think that when you’re counseling clients and they see changes through different priorities, that is really just a shift in emphasis. I don’t see it as a sea change in terms of enforcement. So when I was the director of enforcement at the CFTC, we brought very bread and butter cases. In fact, I think that’s probably the majority of the cases we brought. So market manipulation, like you said, insider trading, that was a big focal point. It was before I got there as well. I think the SEC has followed the same trend line.
When I was at the CFTC, we worked with the SEC quite a bit, and we often had parallel cases involving manipulation, valuation, other kind of market misconduct. So I think when you’re counseling clients, what you have to think about is while there is changes from administration to administration, that’s certainly true. The basic cases, the basic hygiene, the basic compliance infrastructure, that remains the same throughout. And there have been a lot of cases now where the CFTC and the SEC have been very active in fraud and manipulation.
And this is something we’ll talk about, I think, a little bit later. Even if that’s not geared towards an organization or a company, it can often lead to a company to the SEC or CFTC request for information. So let’s say that there’s an employee that’s being investigated for some of these basic enforcement conduct. There’s still issues that companies need to think through in terms of how they respond to the CFTC and SEC.
Julie DiMauro: So Ian, that makes total sense because all of these frauds, market manipulation, insider trading, they still result in investor harm. It undermines the trust that we have in our markets. So obviously, it’s still top of mind for regulators. And that makes total sense. I’m wondering, though, about the cooperation credit programs that the different regulators have in place, incentives to cooperate and self-report and remediate compliance programs for deficiencies.
What have you seen in your current role in terms of companies cooperating? What does that look like? Good cooperation, fulsome cooperation, timely cooperation? And how does a business effectively make a decision whether to self-report?
Ian McGinley: Yeah. So this has been an issue that confronts businesses for as long as there have been cases, right? And I think the CFTC, SEC, DOJ at different times have put together different policies that change over time. They’re all directed at trying to get companies to self-report. And it’s a very complicated decision for companies because you don’t have a lot of certainty in what’s going to happen once you self-report. I’d say that may be one of the main considerations. There’s others. And so what you saw, the CFTC recently came out with a very detailed policy on cooperation and self-reporting.
The difference in that policy from previous policies, in short, is it has a path towards a declination, right? Which is, that is obviously like the holy grail of self-reporting, where you walk away and there’s no charge against the organization. Interestingly, in that policy, in order to qualify for a self-report, it needs to be prompt, meaning. And they define that as at the earliest possible opportunity. And that can be very difficult to navigate because when you are counseling clients and firms and a problem arises, it often takes time to get your arms around it. I mean, businesses are complex. They’re multi-jurisdictional. They’re international. That’s not easy.
So there’s always a tension between when you self-report and how long you take in terms of gathering the facts and the witnesses you want the self-report to obviously be accurate. Even though organizations now have tried to say, “Look, if you make a good faith self-report and you later correct it, that’s okay because they assume that there could be errors as you are being prompt.”
But I still think as a practical matter, you never want to be in the situation where you’re retracting a previous report you made to a regulator. It changes the dynamic. It changes the trust sometimes. So but I do think there is an opportunity now for a lot of corporations and firms to take advantage of these policies in this environment because there’s differences among all the agencies, DOJ, SEC, CFTC.
But if you look at the CFTC’s policy, for example, it’s very similar in its main principles to DOJ’s. And so in short, under DOJ’s policy, if you follow and meet all the prerequisites, which are self-report and cooperation at a high level, it’s a mandatory deferred prosecution or declination. So the government has no discretion. It used to be you could be presumed getting a declination now.
So the idea is to make the path very, very clear for businesses to know that if they go in self-report, cooperate, remediate, that they’ll get credit, including a declination. And I think that from what you hear from people in the market, those policies are having an impact. And I think that my understanding from the public statements that regulators have given, I think they’d love to highlight examples of this, of good conduct. I think any regulator or any government agency that puts out a policy, it’s for a reason. They want and they hope for that policy to be successful.
And if they can point to examples that fit under that policy, I think they will. And so while there’s still plenty of time under current leadership at these organizations, I think it’s a very interesting and potentially opportune time to self-report.
Julie DiMauro: Ian, I want to talk about something that is getting a lot of press coverage and the regulators talk about it a lot as well, which is prediction markets and insider trading. And companies are forced now, thanks to prediction markets, to have policies around these things, right, about what you can disclose, how you can use confidential information, what is a poor use of kind of using information, corporate information that you privy to. How do you think businesses should navigate this minefield considering it’s still kind of a relatively new arena?
Ian McGinley: Yeah, it is new. But as you said, there have been cases already and examples of insider trading and prediction markets. I think at a high level, it’s a bit of a challenge because prediction markets cover all kinds of industries, right? Whereas you had a model that had existed for a very long time with inequities, with exchanges and banks and employers that had very advanced and evolved compliance programs to deal with that kind of trading.
And prediction markets just expands the playing field quite a bit. So I think it is new, but I think now regulators have definitely put out a message that that will be a focus of their attention in terms of resources like the current director of enforcement at the CFTC said insider trading and in particular in prediction markets would be a top priority of the agency. And we’ve seen a number of cases already. So I do think in some ways, you know, the industry and clients are on notice, right, that they have to account for this. I think when talking to clients, we think about a few things.
First of all, a lot of clients have a general policy, if not one that particularly applies to prediction markets, but that applies to confidential client information. Right. And I think that that’s typically worth re-emphasizing throughout an organization. And then, you know, like you said, I think that a lot of firms are evaluating how to adjust their policies for prediction markets. And I don’t think there’s one kind of off the shelf answer.
I think different firms have different risk tolerances and different thoughts on what markets are potentially troublesome to have their employees trading, given the business they’re in, which I think sometimes dictates how they approach it. We have seen outright bans in some cases that are public.
There are also obviously more kind of tailored policies, policies that track by and large a securities compliance program to prevent insider trading. So restricted lists, restricted contracts, pre-approvals. We’re seeing now a lot the development of technology to keep up with prediction markets.
So, you know, surveillance tools that you would think about in a compliance program that would surveil an employee’s trading in their personal account in equities markets now exists for prediction markets, where they’ll get a feed from the prediction market of the trading. So if your employee tells you they’re trading a particular way, you can verify that. So it’s become a very interesting area, particularly for law firms and lawyers advising in this space. And I think, you know, a few things also to keep in mind about where these cases are going.
They have been focused on individuals, not entities. But that’s not to say entities shouldn’t be paying attention to these cases, because a lot of the times in a case against an individual, the policies of that individual’s employer will be scrutinized by regulators. Right. You know, I’m thinking back a few years ago, there was the first NFT insider trading case in the Southern District of New York in my old office.
And that case was overturned on appeal. The defendant had been convicted at trial. But one of the main issues was what did the policy at the NFT exchange, what did it prohibit, what didn’t it prohibit. And so when you’re a firm thinking through how you approach this, it could be one day if you know something happens with an employee who allegedly commits a wrongful act.
Your policies and procedures may still be scrutinized. I think the other area to think about and regulators have talked about this is just because there hasn’t been an organizational level case doesn’t mean that there couldn’t be. The CFTC has said that, you know, for an organization to be liable in this situation kind of generally, there has to be a real reckless approach to insider trading or other kind of malfeasance in the organization.
And, you know, regulators, prosecutors, prosecutors, less so. But regulators will often look to whether an employee was supervised. Were they trained? Did the company have an effective program? So even though the cases have not been at the organizational level, there’s still a lot to think about at that level.
Julie DiMauro: Absolutely. And I do want to touch you about technology and emerging technologies like AI, especially in terms of bad actors leveraging it. So we have spoofing that will never go away, creating fake orders, especially in the energy and precious metals, arenas, wash trading. We’re always reading about them. What do you tell businesses in terms of protecting themselves from regulatory penalties in this arena?
Ian McGinley: So I think about it from a few ways. And my colleagues and I recently put out an article on what you do if AI malfunctions in thinking through corporate principles of liability and ways to protect organizations. I mean, I think all very familiar now with court hallucinations. So when people have used AI to put together a brief and it goes to a court and it doesn’t cite the right case.
And that has led to some very harsh consequences for the litigants that have submitted those briefs. And when I think, you know, where I sit now counseling firms, where I think about a lot of, you know, potential areas for AI is, you know, what if what if firms incorporate and their public reports about a number of them doing so already, AI into a trading strategy or a trading algorithm? And what is that? What does that mean?
And I think there’s a few a few things that that firms need to think through there. I mean, one, and regulators aren’t as focused on this, but you can see a situation where where they would be, whether the AI agent is acting as an adviser or a commodity trading adviser in some way. And does that prompt some kind of registration? I think even more seriously would be where you see a hallucination in a trading strategy and what happens then, you know, and what do you do? And I think, you know, there’s a few tried and true, you know, general principles that apply even to new technology. And I think the first is you have to know what the AI is doing.
I mean, it’s a bedrock principle, but I think things move very quickly and businesses are always trying to find a way to be more competitive.
But even just taking stock of where AI is used, how it’s used, through what tool and then what are the inputs? What is the AI agent considering when it’s making these trades? Because if something goes wrong, regulators will look to the root causes. There’s a human behind everything that’s set in motion or not everything that’s set in motion, but there’s a human, at least initially, I think now. Although you never, you never, but I think that just proves the point of really just understanding what’s going on with any model you’re using.
And then if it does start to malfunction, to have a plan in place to stop it, to remediate and, further what we were talking about earlier, to potentially report something to a regulator to to get out in the market, because like any new area, regulators will look to make an example of any bad conduct in the space because that’s how you get deterrent value in that particular area. And I think that’s been one of the main objectives of the prediction market cases is to deter others from doing similar conduct because that is that is a new area. And so I think regulators, I think, will look very closely at a NFA is misused because you’re right.
The other the other side of it, right, if you are someone who is inclined to spoof or manipulate markets or to insider trade, it’s obviously now become a tool that you can use to to aid yourself in doing so. And I think that that regulators will look to really focus on those cases if they’re there.
Julie DiMauro: Absolutely. I’m glad you brought up the advisory element of it, too, because there are a lot of supervisory implications there and the duty of care that is supposed to be apparent in those in those relationships, right, whether it’s best interest standard or fiduciary duty. But how does the technology provide that? And where’s the human oversight in terms of being able to provide that level of care?
Ian McGinley: Yeah. And even figuring out who is providing that right? Who’s in charge? I mean, that’s going to be one of the big questions if there are issues.
Julie DiMauro: So true. Absolutely. Chairman Selig is always talking about, like they have a lot of jurisdiction and here and he’s always talking about where under the CEA the jurisdiction lies. And he’s trying to demarcate that more clearly for the marketplace in the absence of Congress acting with the Clarity Act, etc. What I want to ask you about is that jurisdiction and about where we stand on that? And is more clarity (pun intended) needed here?
Ian McGinley: Well, I think we’ll get more clarity. I think that there’s a few a few different things playing out. You have court cases which have by and large, although there’s a lot of different buckets of cases. But I think the ones that have gotten the most attention have been state regulators suing prediction markets saying that the event contracts are not swaps that they’re actually gambling. And so that litigation is playing out really across the country.
And you’ve seen circuit courts take different decisions on that. And so I think conventional wisdom is that we’ll reach the Supreme Court at some point. We don’t know when, of course, that’s up to the Supreme Court, but probably in the next year or so. So a Supreme Court decision could have pretty wide ranging implications. It depends what question they address. If most of the cases have really revolved around sports event contracts, event contracts on politics and elections and on more kind of financial metrics, real world current events, those have not been challenged as much as being outside of the CFTC’s jurisdiction.
But to the extent the Supreme Court weighs in on the definition of a swap and what a swap is, that may have implications for other parts of the prediction market space in terms of what contracts can be offered. In the meantime, the CFTC has been very active on the regulatory front. I think that’s a misnomer. I think it’s a misconception rather that the CFTC is not regulating this market. They have. They’ve put out a number of guidance about what they expect in terms of standards for contracts and not being susceptible to manipulation.
But they’ve also published rules that should eventually take effect. The first rule, which should be coming out shortly, is on how you define which contract should be banned. It lays out a test for evaluating these contracts and whether they’re in the public interest. Recently, the CFTC came out with two other rules saying that swaps do not include casino style games. That’s a very interesting rule because it also relates to the litigations that are ongoing because some courts in those litigations said, “Well, this definition of a swap is very broad.”
So it could sweep in what we would traditionally think of as a casino style game like Roulette. And so the CFTC is addressing that in part through this rule, which makes clear that they don’t believe that that type of activity is covered. CFTC also published a notice of proposed rulemaking on explicitly stating that event contracts on sports are swaps. And so I think those are all in the vein of being very clear to the market as to what the CFTC believes.
And we’ll see if those rules get challenged. I mean, the Congress has given the CFTC power to put forward rules defining a swap. And I think that that’s what the CFTC is relying on here. But like with any rule, there are often legal issues as to the extent of that power. And then after Loper-Bright, which basically said courts don’t have to defer to an agency’s interpretation of a law, that has opened up a new challenge to all agency rulemaking.
Julie DiMauro: Absolutely. So Ian, I’ve read statements from you explaining how commodities law has always treated information differently than securities law. In commodities markets, the classical insider trading theory generally does not apply the same way. Can you explain what you mean?
Ian McGinley: Yeah, sure. And I think insider trading law is often misunderstood. So there’s two theories of insider trading, the classical theory and the misappropriation theory. And by the way, neither of them relies on a level playing field. That is actually not the purpose of the current insider trading law. And in fact, it’s actually incorrect to say there is an insider trading law. There are laws that address insider trading.
There are anti-fraud statutes that have been applied by courts to insider trading. And so under the classical theory, and there’s a number of elements, I won’t go into all of them. But one of the elements is a breach of a fiduciary duty. And the example is a corporate insider who has a fiduciary duty to the shareholders of the corporation and breaches that duty when they go out based on inside information they obtain in the course of their employment and trade for a profit in the market.
Now, that doesn’t apply to commodities markets because you are allowed in commodities markets because their function is different. I’ll talk about that in a second. If you know the common example is a farmer who knows something about his or her crops for a particular year, you can go out.
That’s inside information. You can go out and trade in commodities markets to hedge on that. If you think if you want to lock in a higher price, you can do that. That is part of a well-functioning derivatives market. But what you can’t do is steal information. And that is kind of a very simple way, I think, to think of the misappropriation theory. So the breach of the duty there is to the source of the information who has kept that information confidential.
Think about a very sensitive business decision, a very sensitive decision, just taking the allegations in one of the cases about whether the United States is going to conduct a military action or not, something that you would conceive of as being secret or confidential. Right. When someone basically steals that information and uses it not for the purpose of the original purpose of that information, but to trade in a market for his or her benefit, that is a form of insider trading. And that is illegal. It’s always been illegal.
And I think that when you hear about insider trading and prediction markets, and I know there have been efforts, should there be a new law? Should there be a particular law that mentions prediction markets? It’s certainly a well-intentioned effort, but the law already exists. It’s always been there. And in commodities markets, when I was at the CFTC and before me, there were many cases where the CFTC brought misappropriation. Insider trading cases based on the misappropriation theory.
There is one fun quirk in CFTC law under the Commodity Exchange Act, where there is a particular law that says you cannot trade on inside government information. And it’s fondly known as the Eddie Murphy rule from trading places. Because in that movie, there was insider trading based on crop reports that affected the price of frozen concentrated orange juice futures. So that’s a big thing in the lore of the CFTC.
But it’s a very, again, particular law about government information, because you can see that commodities markets are very sensitive to government decisions. And I’ve seen that in reports about people trading on the price of oil in response to government announcements. So that’s an area, insider trading, that I think is commonly misunderstood in terms of the actual legal basis. But it’s an active area.
I think the CFTC will continue to be active. The current director of enforcement, when he gave a speech laying out his priorities, he talked about not only insider trading in prediction markets, but he talked about insider trading generally as being the focus of the agency.
Julie DiMauro: Interesting. And it’s not that easy to prove, is it? I mean, proving that there was that duty and that doesn’t one party have to know that the other has a duty or an obligation not to be giving that information away? All of that is tricky to prove.
Ian McGinley: It is. It can be challenging, particularly because traders have a lot of reasons for a particular trade. I mean, a common defense when I was prosecuting these cases, both at SDNY and the CFTC was, no, I didn’t use that information. I used a model that I had created. Or there was another piece of information out there that was public that I relied upon.
I think the only thing I’d say, though, while it can be sometimes hard, the government has a lot of tools to really try to get inside people’s heads as to what they were thinking. And that can range from very overt to talking to witnesses and to more covert stuff like DOJ can get a search warrant on your email accounts or your text messages and see kind of what was going on right at the time of the trade.
Julie DiMauro: Ian, as we are going into this last quarter and heading toward 2027, what are your clients most concerned about? What are they talking to you about in terms of regulatory change or issues percolating in Congress or just tried and true compliance program challenges? And what’s on your mind that you would like to see the regulators kind of add more clarity or framework around?
Ian McGinley: Yeah, so I think, you know, clients are very interested, as they have been for many years in crypto. And the obviously the Clarity Act was not passed. And I think right after the Clarity Act, you saw both the SEC and the CFTC come out with rules in pretty quick succession. And the CFTC rules are fairly comprehensive and in some ways mirror what would have been in the Clarity Act.
But what’s very interesting is the CFTC does not have jurisdiction over the spot market in crypto. It has regulatory jurisdiction over derivatives based on digital commodities. And then it has jurisdiction over, it has anti-fraud and anti-manipulation jurisdiction over the spot market, but it doesn’t regulate the products.
Now, under the current CFTC proposal, though, there is a way for CFTC to have some authority over spot transactions that are offered to customers on a margin or leverage basis. And that is something that they talk about prominently in the rulemaking. And it’ll be interesting to see how wide of the market that that covers. And, you know, clients are thinking through because the new regulation would have a new registration category within the DCM [designated contract markets] framework.
So clients are asking about I think two big questions, how much of the market does that encompass and then what does registration in that look like? A few other things really on clients minds, obviously, is trying to get registered. There’s a lot of new entrants into these markets, into prediction markets, but other very kind of cutting-edge markets that are now mostly regulated by the CFTC.
So perpetual futures markets have gotten a lot of attention. So I think I think clients are. And the CFTC has really prided itself on moving registrations very, very quickly and as fast as they can. You’re seeing a lot more DCMs get registered every year. I think we’ll see that trend continue. But clients are very much trying to figure out, how best do you access these markets? Do you need your own registration? Can you act as an intermediary without being registered in some fashion? The CFTC put out some guidance following a no-action letter about being essentially a technology service provider. So offering some form of access to these new markets, but not having to register yourself.
And so I think clients are trying to balance a lot of those issues. I think for me, obviously, all those issues are important. And in addition, prediction markets. We’ll see the I think we’ll see some final rules come out from the CFTC. They had an extreme number of comments, I think, for all of these rules so far that have closed. And we’ll see how the CFTC comes out on these final rules. And then invariably, as with any rule, there’ll be challenges to that. So that’ll be that’ll be a really interesting area. And that’s going to play out for a number of months.
Julie DiMauro: Absolutely. Ian, can you tell us a little bit about how your experience at the CFTC informs your practice at Sidley Austin? And maybe some words of advice you would have to either someone transitioning from public life into the private industry sector, or maybe in the other direction.
Ian McGinley: I’ve moved back and forth a few times. I started in private practice. I was at SDNY for almost 11 years. I was at another law firm for a year and a half, and then CFTC director for about two years and now at Sidley Austin. And I think that when you’re a younger lawyer, public service is a great thing. It’s not only incredibly rewarding and satisfying, but you get a lot of opportunities to learn how to have a lawyer and you’re thrown into situations where you have to exercise discretion very early in your career.
And I think that that’s a very good thing for junior lawyers at some point. It’s good for senior lawyers too, but that tends to be when a lot of people get into government is not right away, but fairly early in their career. And before I joined the Southern District as a prosecutor, I clerked for a federal judge in Philadelphia. And she was an amazing judge and she would, like most judges impart wisdom. And she would say the best thing about clerking for a judge is you see how judges exercise to the point where they’re not just a judge. And judges exercise discretion because you learn, I think most lawyers, they can learn the law, they can dig deep into a statute, they can make distinctions among cases.
But being inside an organization, being with a judge and seeing how they navigate questions that are not easily answered, right? Because I think in a lot of what we do in our profession, they’re not easy, easy questions. I mean, looking at the prediction market litigation, right? You have some of the best legal minds in the world approaching these questions and often coming to different answers. And so I think it’s the same thing in terms of what my judge said. It’s the same thing when you’re in any organization.
So being at the CFTC as director, love the job, amazing experience. I learned a lot about commodities laws, sure. But I think what I learned more about is how the CFTC approaches its decision making, whether it’s cases, whether it’s regulation and how it deals with competing interests, different laws that oftentimes are very hard to put together in one coherent way and seeing how that organization makes decisions on important issues.
At the same time, I do think it’s also good for lawyers to have private sector experience. You learn a lot. I mean, problems and issues reach you in the private sector much sooner than they reach government. And maybe that gap, just given how fast information travels now, is narrowing. But I deal now and talk with clients about issues and new industries and new products. And you learn just so much about it. And when you’re on the other side also, you learn how the impact of government on clients. And government is powerful in understanding that it affects the lives of even a corporate investigation, affects the lives of individuals tremendously.
It’s a power that should be exercised very precisely and dutifully. And so I think that it’s very good to have that perspective when you go into government so that you know what it’s like when you send a document request or a subpoena, which when you’re in government sometimes seems what you do every day, maybe even every few hours. But when you’re the recipient of that and you’re counseling a client, it’s a very big thing. It’s a very big thing in someone’s life. It’s a very big deal for a corporation. It’s a very big deal for an individual. And so I’ve loved both experiences. And I think to the extent that lawyers can do both, it’s good to do so.
Julie DiMauro: Thank you, Ian McGinley, partner at Sidley Austin and former CFTC Director of Enforcement. Thank you so much for being on the group podcast program.
Ian McGinley: My pleasure. Thank you.
The views, thoughts, and opinions expressed on this podcast are those of the guests and do not necessarily reflect the official policy or position of their employer, the moderator, or Global Relay.