Kalshi sued for unscrupulous sports betting practices

Kalshi, a prediction markets operator, is currently facing a class action lawsuit filed against them in the US District Court for the Southern District of New York. This lawsuit alleges that Kalshi is engaging in deceptive practices related to sports event contracts and is in violation of gaming laws in numerous states, including California, Florida, and New York. The lawsuit claims that although Kalshi presents itself as a prediction market, it is actually running an unlicensed sports gambling platform where clients are betting against the house rather than each other.

According to the complaint filed by seven named plaintiffs, Kalshi operates as a highly sophisticated market maker that bets against consumers when their bets do not align with the company’s internal odds. The lawsuit argues that this model is similar to traditional house betting, where the house sets the betting line and profits when consumers make incorrect picks. In addition, Kalshi is accused of coordinating with market makers like Susquehanna International Group to set the betting lines, further disadvantaging consumers.

The lawsuit asserts that Kalshi charges fees to retail traders while offering favorable conditions to sharp bettors and market makers, leading to a situation where smaller bettors face challenges on the platform. Data suggests that the majority of market participants on Kalshi end up losing money, with sports event contracts being highly liquid markets where mispricing opportunities are minimal. Consumers are misled into believing that they are betting against their peers, while in reality, they are wagering against Kalshi itself and its well-equipped market makers.

In addition to deceptive practices, the lawsuit claims that Kalshi is violating various state laws, including California’s unfair competition law, gaming laws in Florida, and New York’s general business law. These allegations have significant implications, considering New York’s status as the largest sports wagering market in the US and the restrictions on sports betting in California and Florida. The plaintiffs seek to recover their wagers, along with costs and attorneys’ fees, citing unjust enrichment on the part of Kalshi at the expense of consumers.

The timing of the lawsuit coincides with reports of Kalshi’s valuation reaching $11 billion and an announcement by Robinhood Markets, a major source of Kalshi volume, about developing its prediction market platform. The legal action against Kalshi underscores the increasing scrutiny faced by prediction market operators and their compliance with regulations and consumer protection laws. It remains to be seen how Kalshi will respond to these allegations and whether this lawsuit will lead to significant changes in the operation of prediction markets in the future.