Judge blocks Arizona prosecution of prediction markets operator

In an order late Friday, U.S. District Court Judge Michael Liburdi blocked a proposed hearing set for Monday, where Kalshi LLC had been ordered to appear in Maricopa County Superior Court to answer charges by Attorney General Kris Mayes that it violated 20 separate state laws that make most forms of gambling a crime.

The judge said there are legal issues that need to be resolved over any conflict between state and federal laws.

Strictly speaking, Liburdi has not accepted arguments by the Commodities Futures Trading Commission that letting the state enforce its criminal laws interferes with the agency's authority to regulate what it calls "events contracts.'' These are wagers that pay out depending on the outcome of something set to happen in the future.

But Liburdi accepted arguments by the federal agency that there is no immediate harm to the state if it cannot immediately pursue those criminal charges while the question of federal preemption is litigated.

Jordan Minot, deputy general counsel for the CFTC, pointed out that the state waited 10 months after sending a "cease-and-desist'' letter to Kalshi before filing criminal charges. "A short delay in Arizona's criminal case causes no harm to Arizona,'' he argued.

At the very least, Liburdi's order delays the criminal case against Kalshi until April 24.

What's next is unclear.

"We disagree with the court's ruling,'' said Richie Taylor, an aide to Mayes. As to whether the Attorney General's Office will seek an immediate appeal, he said, "We are weighing our options.''

But an appeal by Arizona may not be necessary.

The 9th Circuit Court of Appeals is set to hear arguments next week on the conflict between state gaming restrictions in Nevada and federal laws. Liburdi said that the outcome of that case could determine whether he eventually allows Mayes to pursue Kalshi in state court in Arizona on the charges of illegal gaming.

It's not just what Kalshi is doing that is at stake.

Attorneys for the North American Derivatives Exchange filed legal papers saying they, too, are affected by whatever Liburdi rules. That firm, known as Crypto.com, also got a letter from the state last year claiming its practice of allowing Arizonans to wager on future events, like that of Kalshi, also violates state gaming laws.

The difference is that the state has not yet filed criminal charges against it. But the company's lawyers say the legal issues in both cases are the same.

Central to all of this are "event contracts," through which Arizonans wager on future events. The payout is set by odds determined by how many people bet on a specific outcome.

So, for example, the Kalshi site said someone trying to win $1 on which party will win the 2026 Arizona election for governor would have to wager 80 cents. By contrast, it cost only 23 cents to bet that it will the winner will be whomever the Republican Party nominates.

Kalshi makes money by charging a fee on each bet.

Mayes says that violates state laws making it a crime to wager on elections.

But she is also going after Kalshi for allowing Arizonans to bet on future professional and college sports events. Mayes said only those licensed and regulated by the state can accept such wagers.

Kalshi challenged the state laws, at least as they apply to the company, saying they are preempted by the Commodity Exchange Act. Liburdi, in a previous ruling, refused to delay the state's criminal case.

But then the CFTC itself entered the case, arguing that, as a federal agency, it is entitled to protect its regulations from state interference.

"The Commodity Exchange Act expressly and implicitly preempts state gaming laws as applied to CFTC-regulated markets and market participants,'' attorneys for the agency argued. More immediately, they told Liburdi that he needed to halt the state's criminal case from going forward on Monday.

"An immediate temporary restraining order is necessary to prevent Arizona from further disrupting federally regulated markets by attempting to enforce preempted state gambling and wagering laws in a state criminal proceeding,'' they argued, pointing out to Liburdi that, as recently as Thursday, the Attorney General's Office refused to delay the case.

"Every step Arizona takes towards criminally prosecuting one of the CFTC's regulated entities causes additional disruption to the markets exclusively regulated by the CFTC and thus causes irreparable harm to the CFTC's exclusive jurisdiction, authority and operations,'' the government's attorneys argued.

That apparently was enough for Liburdi to put the state's criminal case on ice.

There already is some case law on the issue.

Last week, the 3rd Circuit Court of Appeals sided with the CFTC, ruling that New Jersey could not enforce its gaming laws against Kalshi. The divided panel said federal law preempts that state's laws governing how bets can be placed on sporting events.

Liburdi, however, said he wants to see how the 9th Circuit rules on the similar challenge to gaming laws in Nevada involving both Kalshi and Crypto.com. It is the 9th Circuit that sets precedents for Arizona and Nevada.