Author: wenser 2010
Under undercover operation, Utah files 14 criminal felony charges against Kalshi and its founder
Predictive market trading volume continues to rise, but the struggle over regulatory authority between U.S. federal and state governments regarding predictive platforms has reached a fever pitch.
On October 20, Utah filed a civil lawsuit against the prediction market platform Kalshi and its affiliates, seeking to recover up to $60 million in ill-gotten gains. On October 27, the U.S. Commodity Futures Trading Commission (CFTC) formally filed a lawsuit in the U.S. District Court for Utah, requesting that the court block Utah from taking enforcement action against Kalshi.
On October 28, Utah Attorney General Derek Brown filed 14 criminal charges against Kalshi and its co-founders, Tarek Mansour (CEO) and Luana Lopes Lara (COO), including one second-degree felony, twelve third-degree felonies, and one Class A misdemeanor. The charges stem from a September investigation by the Utah Attorney General’s Office, during which an undercover agent placed bets on Kalshi using a Utah-based IP address.
Regardless, this is the first time in history that a prediction market platform and its founding members have jointly appeared as criminal defendants, potentially marking the transition of the past two years’ disputes and contradictions surrounding jurisdiction over prediction market platforms, the nature of event contracts, and the regulatory boundaries of prediction markets into judicial adjudication.
Utah “sting operation”: Undercover agent places 12 bets, triggers 14 criminal charges
The entity that brought criminal charges against Kalshi and its co-founders is none other than Utah Attorney General Derek Brown, the very official engaged in a jurisdictional conflict with the CFTC. The 14 criminal charges primarily center on “engaging in illegal gambling activities,” including:
- 1 second-degree felony, pattern of illegal activity;
- 12 third-degree felony charges for promoting online gambling (corresponding to the 12 bets made by the undercover officer mentioned previously);
- One Class A misdemeanor, generally promoting gambling.
It is noteworthy that under Utah state law, a second-degree felony carries a sentence of 1 to 15 years in prison, and each third-degree felony carries a maximum of 5 years; the “pattern of unlawful activity” provision also allows courts to impose fines proportional to the illicit gains.
Kalshi seeks exclusive CFTC jurisdiction, Utah asserts state-level gambling jurisdiction
In February of this year, Kalshi filed a lawsuit against Utah Governor Spencer Cox, Attorney General Derek Brown, and others, seeking a federal court ruling that the Commodity Exchange Act (CEA), which underpins CFTC enforcement, preempts state anti-gambling laws and prohibits state enforcement.
Kalshi’s reaction was not excessive; Utah, like Hawaii, has some of the strictest anti-gambling laws in the United States. The state prohibits all forms of legal gambling, including casinos, lotteries, and sports betting. This stance is heavily influenced by The Church of Jesus Christ of Latter-day Saints (Mormon Church), which has over 2 million members in Utah and views gambling as a vice that leads to addiction, selfishness, and destructive behavior. Mormons wield significant political influence in the state, with nearly all high-ranking political offices held by members of the church. Governor Spencer Cox has publicly criticized prediction markets on multiple occasions and plans to amend the state constitution to include prediction markets within the legal definition of gambling.
In August, U.S. District Judge Robert J. Shelby issued a summary judgment in favor of Utah, ruling that the CEA does not preempt Utah’s anti-gambling laws—particularly as they apply to contracts on sporting events. The court found that gambling has long been within the traditional regulatory domain of the states, and Congress did not intend to strip states of their authority when enacting the Dodd-Frank Act; there is no inherent conflict between federal regulation and state enforcement.
In October, Utah Attorney General Derek Brown filed a civil lawsuit in state court, alleging that Kalshi and its affiliates, including Susquehanna-related trading firms, operated illegal gambling in Utah. The suit seeks to halt their activities, recover an estimated $30 million to $60 million in profits from Utah-based accounts, cease operations, prohibit trading on contracts related to elections, politics, culture, sports, and five other categories of events, require integration with a court-approved geolocation service, and classify Kalshi’s operations as a “public nuisance.” Additionally, it claims that over 30,000 Kalshi platform accounts in Utah have been active with substantial trading volumes.
Subsequently, the "CFTC vs. Utah" drama mentioned at the beginning of the article officially unfolded.
CFTC Chair Michael Selig has formally filed a lawsuit in federal court against Utah and Derek Brown, seeking to block Utah from enforcing its regulations against CFTC-registered markets. This is the tenth such action taken by the CFTC against a U.S. state. The agency’s core argument is that the CEA grants federal authority priority over swaps and designated contract market (DCM) trading, and state laws cannot supersede the federal system authorized by Congress.
On the other side, Utah’s reasoning also appears compelling. Utah Attorney General Derek Brown stated in a declaration: “In Utah, gambling is illegal, whether you’re placing bets, organizing gambling activities, or promoting gambling. Calling it a ‘prediction market’ doesn’t change its nature, and obtaining federal registration doesn’t place a company above the law.”
Both sides have presented conflicting statements, and the conflict has escalated. The origin of the 14 criminal charges brought by Utah stems from a "sting operation" conducted in September of this year.
Utah cracks down on prediction markets with a sting operation
To demonstrate Kalshi's illegal operations and assert the authority of state law enforcement, Utah employed undercover tactics.
The primary agencies driving this dispute are the Utah Attorney General’s Office (led by Derek Brown) and the Utah Bureau of Investigation (responsible for undercover operations), jointly leading Utah’s civil and criminal enforcement efforts.
The primary factual basis for Kalshi’s illegal operations in Utah stems from undercover agent Scott Eggerman, who in September opened an account on the Kalshi platform using a Utah residency identity (Utah address, phone number, bank account, and IP), and subsequently placed 12 bets on NFL, MLB, MLS, NHL, and college football games, totaling $114.
The key controversy lies in the fact that Kalshi charged transaction fees and permitted such activities after the August federal ruling. The state of Utah argues that Kalshi benefited from these actions and that the founders, as controlling persons, should be held personally liable. This marks the first time in the United States that founders have been named as criminal defendants (with potential felony charges carrying imprisonment), significantly increasing the liability risk for executives of prediction market platforms.
The most paradoxical aspect is that, following the August federal court ruling in Utah, Kalshi immediately appealed to the Tenth Circuit Court, and during the appeal, Kalshi’s related request for an injunction was denied; moreover, the Tenth Circuit’s substantive review of the appeal is still ongoing and no final ruling has been issued. According to public records, both Kalshi and Utah are currently submitting briefs, with Utah’s response brief expected to be due in mid- to late October.
In other words, the state's criminal prosecution occurred before the federal appellate process had reached a conclusion, allowing Utah to exploit this timing gap and leverage the federal court's ruling to launch a "procedurally valid, factually clear" enforcement action against Kalshi.
Kalshi responds: The allegations are “a serious overreach,” and Utah is engaging in politics.
Following criminal charges in Utah, Kalshi called the charges a "crazy overreach" and accused Utah authorities of acting with political motives.
The company stated: "We look forward to stopping this behavior in court, just as we did in Arizona."
In May of this year, a federal judge ruled that Arizona cannot enforce its gambling laws (criminal or civil) against CFTC-registered Designated Contract Markets (DCMs), including Kalshi, determining that federal agencies have exclusive enforcement authority over these matters. The case has since been appealed to the Ninth Circuit Court.
Looking at previous circuit court rulings, the situation is also unfavorable for Kalshi: only New Jersey has ruled that Kalshi falls under CFTC jurisdiction and permits operations; other states such as Nevada, Ohio, and Tennessee have ruled that state regulatory agencies hold enforcement authority. Moreover, most states are still in litigation and remain in a “available but risky” status.
On October 23, New York Attorney General Letitia James also sued Kalshi, seeking $36 billion in damages and demanding the shutdown of its operations in the state; previously, a federal judge in New York had denied Kalshi’s request to block state enforcement.
Currently, the states with restricted operations on Kalshi include Michigan (requires geolocation; violations incur fines of up to $500,000 per day), Nevada (contracts for sports, elections, entertainment, etc., are subject to geolocation), Washington (restricts sports, elections, political, entertainment, cultural, and technology/science markets, retaining only commodities, climate, economic, and financial markets), and Massachusetts (restricts sports contracts; Kalshi is currently appealing).
After the CFTC joined this "predictive regulation battle" and Utah proactively escalated the dispute, litigation related to Kalshi has expanded to around 20 states, and the final ruling may still depend on a clear decision from the U.S. Supreme Court. Perhaps the Trump family could once again mobilize federal power, given that Donald Trump Jr., the eldest son of Trump, serves as a strategic advisor to Kalshi.
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