Thursday links: Event contracts are commodities, too

The SDNY policies prediction markets

Michele Spagnuolo has been charged with commodities fraud in the Southern District of New York.

Spagnuolo, we learn, is an Italian national who lives and works in Switzerland (which is not in New York) and was accused of fraudulently trading event contracts related to celebrity Google searches (which are commodities, apparently) on Polymarket’s global prediction market (which is offshore and unregulated).

All this will be adjudicated in a New York courtroom because, the complaint says, “Polymarket’s website is accessible via the internet throughout the world, including in the Southern District of New York.”

Spagnuolo accessed that website from Switzerland, and there’s no indication his counterparties were in New York either. (If so, they’d have had to sneak on to the site with a VPN: Polymarket’s global exchange is geofenced — albeit weakly — to keep Americans out.)

But US prosecutors nonetheless claim jurisdiction.

“Today’s charges reinforce a decades-old message: Corporate insiders cannot use confidential business information to turn a profit in our markets,” US Attorney Jay Clayton said.  

Our markets!

A prediction-market crime anywhere, it seems, is a prediction-market crime in New York. 

He did a TED Talk

On his personal website, Spagnuolo notes that he’s the co-author of a JavaScript specification that “protects more than a third of the internet's HTML traffic against Cross-Site Scripting (XSS).”

Impressive!

At Google he’s an engineer in charge of “the Agent & Web Observability area in the Information Security team.” (Or was, at least. His Google Research page has been scrubbed.) 

On LinkedIn he shares that he achieved a 4.0 GPA in computer science at the University of Illinois. At the Polytechnic University of Milan, he scored a perfect 110 out of 110 in computer engineering.

How such incredibly smart people can do such incredibly dumb things is an enduring mystery.

The case of the incredibly smart Michele Spagnuolo is particularly puzzling because he also claims “extensive technical experience in blockchains.”

And yet, prosecutors say they identified him as an insider trader because he submitted a copy of an Italian government ID card to the crypto exchange he used to cash out his Polymarket winnings.

Pretty dumb.

Spagnuolo even gave a TED Talk — eight years ago — explaining how crypto works and what it might be used for.

Blockchains, he said, “could become a formidable tool of democratization of wealth resources.”

Perhaps he thought the average Polymarket bettor is wealthier than a Swiss-based Google engineer? 

Still, the TED Talk suggests he should have known better than to try playing Robin Hood this way. Blockchains’ “transparent nature could provide the solution to age-old problems like corruption,” he explained, “allowing, for example, citizens to verify the flow of public funds.”

Another updated example might be public law enforcement verifying the flow of illicit funds to a KYC’d off-ramp.

If nothing else, he must have known that Polymarket wallets — being on a blockchain — are visible to all.

And that a wallet with a 100% hit rate betting only on Google search rankings was inevitably going to be outed on social media as belonging to an insider at Google.

On LinkedIn, Spagnuolo also says he’s been an “expert witness in legal cases” related to blockchain. 

That work experience will come in handy, at least.

The Eddie Murphy Rule

Billy Ray Valentine’s famous caper in orange juice futures was probably legal: Trading Places was made in 1983 when insider trading was more or less allowed in commodities. 

In principle, it was even encouraged. Farmers, for example, have a lot of non-public information — about their crops, local weather, logistical snafus — and regulators want them to share it with everyone by trading futures. 

This changed in 2011 when Section 746 of the Dodd-Frank Act amended the Commodity Exchange Act (CEA) to treat commodities insiders just like stock market insiders.

“We have recommended banning insider trading on non-public information sourced from government agencies,” then CFTC Chair Gary Gensler told Congress at the time. “We’re calling it the 'Eddie Murphy Rule.'"

Gensler specifically cited the plot of Trading Places as precedent for the change: “The Duke brothers obtained an advance copy of a USDA orange crop report,” he explained in a congressional hearing (as if that needed explaining).

But the resulting CFTC Rule — 180.1 — didn’t exactly spell things out for us: There’s no mention of insider trading, material non-public information or stolen crop reports.

Instead, the rule broadly prohibits “any act, practice, or course of business, which operates or would operate as a fraud or deceit upon any person.”

This is what prosecutors say Spagnuolo did: 

In other words, he broke the Eddie Murphy Rule.

— Byron Gilliam

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