COPIED FROM TIMES UNION
ALBANY — A federal judge in Manhattan has denied prediction market company Kalshi’s request for a preliminary injunction against the New York State Gaming Commission, a move that opens the way for state Attorney General Letitia James to pursue legal action against the company.
Kalshi and other prediction market companies like Polymarket have exploded in popularity in recent years, their advertising now ubiquitous across social media and sports broadcasts.
The companies offer “event contracts” that allow users to speculate on nearly any type of outcome, from who will win the FIFA World Cup to what words President Donald J. Trump will say in his next speech. The companies claim their products are not gambling, but rather a type of derivative futures contract under the sole regulation of the federal Commodity Futures Trading Commission. Many states and their respective gambling agencies, including New York, don’t see it that way and have taken legal action against Kalshi.
In October, the state Gaming Commission sent Kalshi a cease-and-desist letter alleging violations of New York’s gambling laws. Kalshi responded by suing the gaming commission in U.S. District Court in Manhattan, requesting a preliminary injunction to pause the cease-and-desist order, arguing that their event contracts were the exclusive jurisdiction of the Commodity Futures Trading Commission.
On Wednesday, Judge Analisa Torres dismissed Kalshi’s request for the injunction. In her ruling, Torres said that the Commodity Exchange Act (CEA), the federal statute that regulates futures contracts, did not exclude New York from applying its gambling laws to the company’s sports-related event contracts.
“The CEA leaves room for states to regulate tangential issues that may arise from trading swaps and other financial products,” Torres wrote in her ruling. “New York’s gambling laws, which seek to regulate gaming in the state, complement rather than conflict with federal law.”
Torres also cited changes made to federal regulations under the Dodd-Frank Act, passed in 2010 by Congress in response to the 2008 financial crisis. The law created a “Special Rule” that allowed the commission to review and prohibit certain types of contracts that are “contrary to the public interest” and unlawful under federal law. That includes terrorism, assassination and “gaming.”
Torres’s ruling included remarks made in 2010 by former U.S. Sen. Blanche Lincoln of Arkansas in discussing the Dodd-Frank Act, explicitly warning against the creation of sports-related event contracts.
“It would be quite easy to construct an ‘event contract’ around sporting events such as the Super Bowl, the Kentucky Derby, and (the)
Masters Golf Tournament,” Lincoln said at the time, adding that the contracts “would not serve any real commercial purpose” but “rather … would be used solely for gambling.”
Torres wrote in her ruling that the statements made by Lincoln showed that the federal regulations created by Dodd-Frank regarding futures contracts intended to block the type of services that Kalshi offers.
“When enacting the Special Rule, Congress sought to prohibit the exact types of event contracts that Kalshi seeks to offer,” Torres stated.
In a joint statement released Wednesday, James and Gov. Kathy Hochul praised the federal court decision.
“New York’s gambling laws are designed to protect consumers. Kalshi tried to ignore them. Yesterday, they lost in court,” the statement said. “We will continue to hold all gambling platforms accountable to the law — and that includes prediction markets.”
Kalshi is not the only company in the crosshairs of the state attorney general’s office. In April, James sued cryptocurrency exchanges Coinbase and Gemini after the two companies introduced prediction markets on their platforms. Hochul also signed an executive order banning state employees from using knowledge gleaned from their government work to make transactions in prediction markets.
The Commodity Futures Trading Commission, currently overseen by Trump-appointed Chairman Michael Selig, has given prediction markets like Kalshi broad leeway in how they operate, taking a hands-off approach and allowing them to offer sports-related contracts. The federal commission has also backed prediction market companies in their lawsuits with various states, even suing the state of New York in response to James’ legal action against Coinbase and Gemini.
Torres declined to comment in her ruling regarding the commission’s inaction on prediction markets, but cited another case against Kalshi in the state of Ohio, noting that “inaction is not proof that the sports-event contracts are regulated by or permissible” under the Commodity Exchange Act. The Commodity Futures Trading Commission did not immediately comment regarding Wednesday’s ruling.
The ruling by Torres opens up the possibility for the state attorney general’s office to pursue a possible civil enforcement proceeding against Kalshi, a move that could have devastating consequences for the company should the state prevail in such a case. Under New York law, companies in the state can be required to pay restitution for illegal profits to its customers nationwide if it’s determined they violated statutes or regulations. Legal precedent would also allow company executives to be held personally liable for any violations committed.
Kalshi has appealed the case to the U.S. Court of Appeals for the 2nd Circuit. Company officials did not immediately respond to requests for comment. James’s office declined to comment on any potential future actions against Kalshi.
