Ruling may open door to Arizona prosecution of online gambling site

The 9th Circuit Court of Appeals rejected Kalshi's arguments that it is exempt from oversight by the Nevada Gaming Commission because its activities are regulated by federal law. The three-judge panel said Friday that the regulations of the Commodities Exchange Act under which Kalshi operates do not preempt state oversight of wagering on sports.

That's significant for Arizona because a federal judge had barred Attorney General Kris Mayes from pursuing Kalshi on criminal charges based on his conclusion that the Commodities Futures Trading Commission has exclusive jurisdiction over what it calls the trading of "swaps.''

That judge, Michael Liburdi, had said the wagering of money on future events, including gambling on the outcome of upcoming elections, fits the legal definition of swaps. He ruled that preempts state law that specifically restrict such wagering.

But the 9th Circuit sets precedent that must be followed by trial judges in nine Western states, including Arizona. So if the Nevada ruling is upheld on subsequent appeals — Kalshi could seek U.S. Supreme Court review — Mayes said she believes it provides the opening for her to go back to Liburdi and force him to take another look.

Even if the 9th Circuit decision is upheld, though, it's not that clear that the Nevada case will provide the go-ahead for Arizona to pursue each and every claim it has against Kalshi.

Strictly speaking, the new ruling deals only with efforts by Nevada to regulate gambling on sporting events. That is an element of the Arizona case.

Wagering on elections

But Mayes also charged Kalshi with violating a separate law that bans games of chance involving  money. That covers other topics on which Kalshi takes bets, such as who will win an Oscar for best actor or what the high temperature will be on a certain date.

There also is another Arizona law that specifically outlaws all wagering on elections. Yet right now it is possible to place a bet on who will be the next governor, or whether Democrat Mayes will survive a challenge from Republican Warren Petersen in the November election.

In fact, as of Friday, about a third more people who have so far put down close to $10,400 on that race (they don't have to be from Arizona to bet) think Mayes will survive the election challenge.

The Arizona case started when the Arizona Department of Gaming, which has oversight of legal sports gambling in Arizona, sent a letter earlier this year to Kalshi saying its practices run afoul of laws that regulate gambling on professional and college sports. Douglas Jensen, the department's  chief law enforcement officer, said state law says only companies with a state license can do that.

But the letter said this isn't just about whether Arizonans can wager on their favorite teams. He said the state criminal code makes it illegal to accept wagers, not just on games of skill or chance but on "any other unknown or contingent future event or occurrence whatsoever.''

Kalshi responded by filing suit in federal court, asking Liburdi to rule its activities are regulated by federal law that preempts any state regulation. It asked the judge to bar Arizona from trying to enforce its laws against it.

Mayes responded by turning the tables, filing 20 separate criminal charges against Kalshi for taking wagers on not just sporting events but future elections.

That state-court prosecution came to a halt in April after Liburdi sided with the company. The judge said Congress, in enacting the Commodity Exchange Act, did intend that the regulation of "swaps'' — what he said this kind of wagering is labeled — be handled at the federal level.

"Congress built a comprehensive regulatory structure to oversee the volatile and esoteric futures trading complex,'' Liburdi wrote. That includes the regulation of what federal law considers "designated contract markets,'' or DCMs, meaning companies such as Kalshi and Polymarket.

"These provisions regulate every aspect of DCMs, including what contracts may be listed and how trading may be conducted, leaving no room for state regulations,'' the judge wrote. "That comprehensive framework is so pervasive that it forecloses parallel state regulation of DCM trading.''

Details of 9th Circuit's ruling

Appellate Judge Ryan Nelson, writing in the Nevada case in Friday's ruling, acknowledged that the Commodities Exchange Act expressly preempts state law regulating swaps traded on a designated contract market. But the judge wasn't buying Kalshi's explanation of its activities.

"The substance of the sports events contracts offered on Kalshi's DCM is sports gambling, regardless of whether Kalshi calls them swaps,'' he wrote.

Nelson even quoted Shakespeare's "Romeo and Juliet'' line about "that which we call a rose by any other name would smell as sweet.'' 

"Kalshi users can effectively place prop bets, bet the point spread, bet a specific score, or create a several-leg parlay,'' Nelson wrote. "And the payout depends on the performance of a sports team or player.''

Nor was the judge persuaded by the argument that Kalshi doesn't operate like a traditional betting operation.

For example, it doesn't profit when customers lose but instead makes money by charging transaction fees on each wager.

It also doesn't set the odds. Instead, they are based strictly on the number of people who bet on one side or the other, a figure that changes each day.

(So, for example, on Friday Kalshi said that, based on its wagering, there was a 65% chance that Brigham Young University will win the Sept. 12 football game against the University of Arizona. That means someone would have to put up 65 cents to win a $1. By contrast, just 30% of betters said UA would win. The longer odds mean a 30-cent bet could win a dollar.)

Nelson was unimpressed.

"None of those distinctions have any connection to the statutory definition of 'swap,' '' he wrote. "That Caesar's or MGM are 'market makers' while Kalshi supposedly is not, is not relevant to the CEA's (Commodities Exchange Act) definition of 'swap' or the ordinary meaning of 'bet' or 'wager.' ''

There was no immediate response from Kalshi.

The whole question of futures markets came into sharp focus earlier this year when an Army soldier was charged with using confidential information to win more than $400,000 through a Polymarket wager on the timing of a military operation to capture Venezuela President Nicolas Maduro.