Lawsuits against prediction market operator Kalshi, and the trading platforms Robinhood, Susquehanna, and Webull, started to pop up across the U.S. this month. So far, lawsuits have been filed in five states, including Kentucky, Ohio, Massachusetts, Illinois, and South Carolina.
Key Insights:
- All five lawsuits have been filed by newly formed limited liability corporations (LLCs) wanting to recoup illegal gambling losses to compensate in-state prediction market bettors.
- The lawsuits also seek damages from companies that enable prediction market operators, including market makers and exchanges.
The lawsuits, first noted by sports betting and gaming attorney Daniel Wallach, aren’t the first legal tussle Kalshi has faced. Ever since the prediction market operator started offering futures contracts based on the outcome of elections and sporting events it has run up against both state and federal regulators.
Last year, Kalshi won a lawsuit against the Commodity Futures Trading Commission (CFTC), allowing it to offer election-based contracts. The CFTC is the federal regulator overseeing commodity and futures contract providers.
State regulators are particularly worried about prediction markets entering the sports betting market. And with good reason. Kalshi and the trading platform Robinhood took in more than $200 million in the early rounds of March Madness. And unlike state licensed sportsbooks, prediction markets pay no state taxes and are not regulated by the state.
As a result, numerous states have issued cease-and-desist orders to Kalshi, and the prediction market operator is fighting back in court. In April, Kalshi filed a motion against the Maryland Lottery and Gaming Control Commission (MLGCC). A similar lawsuit is pending in Nevada.
Other states have sent letters to the CFTC, hoping the federal regulator will ban prediction markets from offering sporting event contracts. Earlier this month, the Arizona Department of Gaming sent a letter to the CFTC, requesting the regulator shut down sports betting contracts offered by prediction market operators such as Kalshi. Last month, the Tennessee Sports Wagering Council issued a similar plea.
Seeking settlements from deep pockets?
These new lawsuits, however, are different. They aren’t filed by state regulators or state district attorneys. In fact, these look like a coordinated multi-state attack. The plaintiffs in these cases are listed as the Massachusetts Gambling Recovery LLC, the Illinois Gambling Recovery LLC, the Ohio Gambling Recovery LLC, the South Carolina Gambling Recovery LLC, and the Kentucky Gambling Recovery LLC.
It’s not even clear what legal standing these LLCs have to make such claims.
In fact, they aren’t just going after Kalshi, they are gunning for the trading platforms and market makers Kalshi uses. Defendants include the trading platform Robinhood, the digital exchange Webull, and the institutional market maker Susquehanna International Group.
“Robinhood’s event contracts are regulated by the CFTC and offered through Robinhood Derivatives, LLC, a CFTC-registered entity, allowing retail customers to access prediction markets in a safe, compliant, and regulated manner,” a Robinhood spokesperson said in a statement. “So far, two federal courts have made initial rulings that the CFTC’s rules preempt state law and we intend to defend ourselves against these claims.”
Nominated CFTC chair is crypto and prediction market friendly
Brian Quintenz is one step closer to becoming chairman of CFTC, the regulatory agency that oversees prediction market operators. Last week, Quintenz testified before the U.S. Senate’s Agriculture, Nutrition, and Forestry Committee as part of his confirmation process. As a Kalshi board member and a16z crypto's global head of policy, Quintenz isn’t shy about his support of financial innovation. And that might mean more headwinds for state gambling regulators and whoever is behind these coordinated LLCs.
