New York sues Kalshi, seeks $36B in penalties over prediction markets

New York has sued Kalshi, seeking to block its prediction markets and recover at least $36 billion in penalties and restitution over alleged violations of the state’s gambling laws.

According to the New York Attorney General’s Office, Attorney General Letitia James filed the lawsuit on Friday, asking the court to stop Kalshi from operating prediction markets in the state and require the company to pay restitution to affected users along with civil penalties.

The complaint alleges that Kalshi has been offering event contracts tied to sports, elections and cultural events without obtaining a license from the New York State Gaming Commission. State officials argue those contracts fall within New York’s legal definition of gambling rather than federally regulated derivatives.

New York also alleged that Kalshi allowed residents under the state’s legal gambling age of 21 to participate in its markets, exposing them to financial risks while bypassing consumer protections required under state law. The lawsuit further accused the platform of avoiding taxes associated with gambling operations.

Filed alongside the complaint, New York’s motion for a temporary restraining order asks the court to immediately halt Kalshi’s relevant event contracts in the state. The filing also seeks restitution for users, disgorgement of revenue earned through the offerings, treble damages and an additional $100,000 penalty for each offering.

Court filings cited by the attorney general’s office estimate that the requested compensatory damages could reach at least $36 billion, subject to a complete accounting of Kalshi’s business in New York.

“Kalshi has chosen to ignore New York’s gaming laws, which exist to protect consumers, prevent problematic gambling, deliver funding for critical public services, and ensure that every company plays by the same rules,” New York Governor Kathy Hochul said in a statement released by the attorney general’s office.

Attorney General Letitia James also defended the lawsuit, saying, “New York’s gambling laws protect children from underage betting and help combat gambling addiction. No matter what they call themselves, prediction markets like Kalshi are gambling platforms, plain and simple.”

New York has expanded its legal challenge against Kalshi

The latest lawsuit follows several months of legal disputes between New York regulators and Kalshi over whether the company’s sports-related event contracts fall under federal commodities law or state gambling rules.

Earlier this week, U.S. District Judge Analisa Torres again declined Kalshi’s request for emergency relief while its appeal continues before the Second Circuit.

As previously reported, Torres denied Kalshi’s request for an injunction pending appeal on July 27 after concluding that the company had not satisfied the higher legal standard required for emergency relief. The judge also rejected Kalshi’s request for short-term administrative protection from New York enforcement.

Her decision followed an earlier July 7 ruling that found the Commodity Exchange Act was unlikely to preempt New York’s gambling laws as applied to Kalshi’s sports-event contracts. Kalshi appealed that ruling to the U.S. Court of Appeals for the Second Circuit, where the case remains pending.

In rejecting the emergency request, Torres said Kalshi’s claim that compliance with New York law could jeopardize its federal registration was speculative. She also found that the company’s expected compliance costs were largely financial and therefore did not amount to irreparable harm under the legal standard for an injunction pending appeal.

The judge further declined to rely on the Commodity Futures Trading Commission’s proposed June rule on prediction markets. Although the proposal states that the Commodity Exchange Act expressly preempts conflicting state laws for transactions on CFTC-registered exchanges, Torres said courts must independently interpret federal statutes under the Supreme Court’s Loper Bright decision because the proposal has not become a final rule.

The CFTC has continued pressing its federal jurisdiction argument

Separate from New York’s lawsuit, the Commodity Futures Trading Commission filed its own motion for a temporary restraining order on Thursday seeking to prevent New York from pursuing criminal or civil enforcement against Kalshi and other CFTC-registered prediction market platforms.

The regulator has argued in multiple cases that Congress gave it exclusive authority to oversee federally registered event-contract markets and that states should not regulate products listed on designated contract markets.

That position remains central to Kalshi’s appeal as the company continues arguing that its contracts fall within the CFTC’s exclusive jurisdiction under the Commodity Exchange Act.

The commission has also proposed a new regulatory framework that would establish a contract-by-contract review process for event contracts involving gaming, unlawful conduct, war, terrorism and assassination. The proposal’s public comment period closed on July 27, but the agency has not announced when it will issue a final rule.

Courts across the U.S. have reached different conclusions on prediction markets

New York’s latest action comes as courts around the country continue issuing conflicting rulings on prediction markets.

Only days ago, Judge Katherine Menendez temporarily blocked Minnesota from enforcing its new prediction market ban against CFTC-registered designated contract markets, including Kalshi and Polymarket US, before the law’s Aug. 1 effective date.

In that case, Menendez found that the plaintiffs were likely to succeed, at least in part, on their argument that the Commodity Exchange Act gives the CFTC exclusive jurisdiction over qualifying swaps traded on federally registered exchanges. At the same time, she emphasized that the ruling was only preliminary and did not establish that every prediction market contract offered by Kalshi or Polymarket qualifies for federal protection.

Menendez also noted that permanent relief could ultimately apply to fewer contracts after a detailed review because some event contracts may not meet the legal definition of swaps.

Minnesota Attorney General Keith Ellison has said the state will continue defending its law, maintaining that prediction markets constitute gambling and that Minnesota has authority to regulate unlicensed gambling activity.

Other states have taken a different path. Last month, a Michigan judge temporarily barred Kalshi from offering sports-related event contracts in the state, while a Washington court granted similar temporary relief last week after concluding that the platform was operating illegal gambling activities under state law.

Earlier this year, the Third Circuit ruled that New Jersey could not regulate Kalshi’s sports-event contracts because they fell within the CFTC’s exclusive jurisdiction. New York federal courts, however, have adopted a narrower interpretation of federal preemption, leaving the legal dispute unresolved as multiple appeals continue.

The outcome of Kalshi’s pending Second Circuit appeal, together with the CFTC’s future rulemaking and the growing number of state lawsuits, is expected to determine how far states can regulate prediction market platforms operating under federal registration.