Kalshi Faces Class Action Lawsuit As Legal Troubles Mount
Prediction market platform Kalshi is facing a lawsuit accusing it of running an illegal, unlicensed sports betting platform and indulging in market manipulation.
The lawsuit, filed in the New York federal court, claims thousands of users were misled about how the platform’s markets functioned and who they were actually betting against.
Kalshi Faces Class Action Lawsuit
A group of users has initiated a class action lawsuit against prediction market platform Kalshi, accusing it of running an illegal sports betting platform and misleading customers about its market-making activities. The complaint claims Kalshi claims to be a regulated derivatives exchange, but in reality is operating as an unlicensed sportsbook, offering customers wagers on sports outcomes under the facade of “event contracts.” The lawsuit stated,
“By operating unlicensed sports betting, Kalshi has violated gambling laws, engaged in illegal deceptive activity, and unjustly enriched itself at the expense of tens of thousands of consumers.”
Event contracts act like binary derivatives tied to the real world, permitted under federal rules when used for economic hedging or prediction purposes. The contracts are different from gambling because they do not involve sports or other games of chance.
Kalshi Violated Rules
The lawsuit claims Kalshi violated the rules by taking ordinary sports bets, sidestepping state gambling laws. Regulators in multiple states have argued that sports wagers remain illegal irrespective of how they are marketed. The plaintiffs argued that Kalshi took bets from users in states that ban online sports gambling, marketed itself as legal in fifty states, and ignored warnings and enforcement letters from regulators in Arizona, Illinois, Montana, Nevada, New Jersey, Ohio, and Massachusetts.
Heightened Scrutiny
The class action follows Kalshi’s legal problems in Nevada, where a judge lifted an injunction blocking state regulators from taking action against the platform. With the case active, the Nevada Gaming Commission and the Nevada Gaming Control Board can continue enforcing the law. The decision also undermines Kalshi’s claim that it is accountable only to the Commodity Futures Trading Commission (CFTC).
The judge stated that some of Kalshi’s markets were similar to sports prop bets rather than derivatives due to the presence of information such as contracts linked to football touchdowns. The judge concluded that such contracts are not swaps under federal law, so states can make their own rules to regulate them.
The decision sparked a swift reaction in the stock market, with major sports betting companies like DraftKings and Flutter Entertainment registering substantial gains.
Disclaimer: This article is provided for informational purposes only. It is not offered or intended to be used as legal, tax, investment, financial, or other advice.