Yesterday, Utah indicted Kalshi (legally, KalshiEX, LLC) and its two co-founders, Tarek Mansour and Launa Lopes Lara of 13 felonies and one misdemeanor relating to offering gambling in Utah. This is not the first state that criminally indicted Kalshi; that distinction goes to Arizona. However, I think this case is likely to last.
A brief history is needed here. In February, Kalshi sued Utah (including the Governor and Attorney General of Utah), alleging that the federal Commodity Exchange Act barred Utah from regulating Kalshi. In August, US Ditrict Judge Robert Shelby granted summary judgement to Utah, stating that federal law does not override Utah’s gambling law. (Utah’s constitution prohibits all gambling.) Kalshi appealed; on September 8th, the 10th Circuit Court of Appeals denied Kalshi’s request to block enforcement of Utah’s laws pending appeal. Last week, Utah filed a civil lawsuit against Kalshi calling it a “public nuisance” that is causing ongoing harm to Utahns, and demanding that Kalshi stopped offering bets in Utah (asking for a permanent injunction). On Tuesday, the Commodities Futures Trading Commission (CFTC) sued Utah, asking for an injunction to stop Utah’s civil lawsuit. “This action reflects the CFTC’s firm commitment to maintaining its exclusive jurisdiction over CFTC-registered prediction markets.” [emphasis added] (This case was assigned to Judge Shelby.) Yesterday, Utah criminally indicted Kalshi and the co-founders. Unrelated to everything in Utah, there are numerous other state actions ongoing, and New Jersey filed a cert petition with the Supreme Court over its loss at the 3rd Circuit on its case against Kalshi (the response by Kalshi is due on November 9th). Also, Kalshi has asked the 9th Circuit to conduct an en banc review of its loss in the 9th Circuit (allowing Nevada to bar Kalshi).
McKay Coppins interviewed Utah Attorney General Derek Brown (the interview is available here). “They bet that as a state we’re not going to enforce our laws.” Kalshi called it “crazy overreach.” So what will happen here?
First, we’ve already seen how Judge Shelby ruled the first time; I doubt anything is going to change this time. This doesn’t bode well for Kalshi in Utah. And given that the 10th Circuit ruled against Kalshi before, I doubt anything is going to change.
So what happens after that in regards to Utah?
Businesses don’t want to be criminally indicted; it tends to be a death sentence (or close to it) even when they’re found to be not guilty! Consider Arthur Andersen. If you don’t know who they are, back in 2002 the accounting firm of Arthur Andersen (one of the original “big eight” accounting firms) was found guilty of obstruction of justice in the Enron scandal. Later, the Supreme Court unanimously overturned the conviction, but the damage had been done. Arthur Andersen is gone.
Members of Boards of Directors are really risk averse toward criminal indictments. I know that if I were on the board of a company offering prediction markets (in gambling), I would be asking if we offered services in Utah–and asking why (if we did). I suspect those discussions are happening today.
Eventually, the Supreme Court will rule on a case on prediction markets. I strongly believe that the states have the far better arguments on this (gambling has been historically regulated by the states and the Commodity Exchange Act doesn’t have language regulating gambling–see Loving vs IRS about overreach by federal agencies). While prediction market companies are correct that on the back end they are different than traditional sportsbooks, from the consumer standpoint they’re identical. Only time will tell if I’m correct.
UPDATE: Published reports are that DraftKings is no longer offering gambling-related prediction contracts in Utah.
