Prediction market platforms Kalshi and Polymarket are facing a wave of federal lawsuits in Illinois and several other states, with plaintiffs’ attorneys invoking centuries-old gambling laws to challenge their operations. The legal actions represent a new front in the ongoing battle over prediction market regulation, as companies that successfully navigated federal regulatory hurdles now confront state-level legal challenges based on historic anti-gambling statutes.
Attorney Russell Busch filed a federal lawsuit in Illinois against Kalshi in January on behalf of four Cook County residents who each lost more than $50 on the platform. The lawsuit alleges violations of the Loss Recovery Act, an Illinois law enacted in 1819 to discourage illegal gambling, just one year after Illinois achieved statehood.
Prediction Market Lawsuits Target State Gambling Law Violations
The Illinois complaint argues that Kalshi is masquerading as a commodities futures market regulated by the Commodity Futures Trading Commission to circumvent state gambling laws. According to court records, the lawsuit seeks class-action status representing at least 100 people, with potential damages exceeding $5 million.
Additionally, Tampa-based investment firm Veridis Management is funding multiple federal lawsuits against prediction market operators across six states. The firm has filed copycat cases in Illinois, Georgia, Kentucky, Massachusetts, Ohio, and South Carolina, targeting Kalshi and its partners Robinhood and Webull for alleged violations of state gambling laws.
Historic Anti-Gambling Statute Powers Legal Challenge
The Loss Recovery Act, modeled after a British law passed by Queen Anne in 1710, deputizes private citizens to act as attorneys general in enforcing gambling restrictions. Under the statute, gamblers who lost $50 or more on illegal bets can sue within six months to recover losses, while anyone can sue for triple damages after that period expires.
However, Veridis Management’s website indicates the firm specializes in funding complex litigation targeting assets with potential value of $5 million or more. According to the lawsuits, Kalshi has accumulated 2 million users nationwide and traded $1 billion on 3.4 million sports bets during its first five months offering sports betting.
Federal Versus State Authority in Prediction Markets
The Illinois Gaming Board previously sent cease-and-desist letters to both Kalshi and Robinhood, characterizing their operations as illegal gambling. Meanwhile, a Robinhood spokesperson defended the company’s event contracts as regulated by the CFTC, allowing retail customers to access prediction markets in a safe, compliant, and regulated manner.
The lawsuits detail how prediction markets rely on market makers like Philadelphia-based investment firm Susquehanna to provide liquidity. These firms buy undervalued bets and sell overvalued ones, driving event-contract prices to equilibrium reflecting publicly available information, according to court filings.
Kevin Frankel, a partner at national law firm Benesch Friedlander Coplan & Aronoff based in Ohio, explained that the fundamental question involves whether state or federal authority governs these platforms. The lawsuits allege that prediction market operators work in concert with market makers to make illegal, unregulated gambling available within states, violating longstanding public policy restrictions.
Existential Threat to Industry
In contrast to regulatory battles, these private lawsuits pose potentially catastrophic financial consequences for prediction market platforms. Frankel noted that if the legal challenges succeed, damages could swallow any profits produced by the markets, potentially rendering the companies insolvent.
The legal saga may ultimately require resolution by the United States Supreme Court to determine whether federal CFTC regulation preempts state gambling laws. That decision will either legitimize prediction market operations nationwide or imperil the entire industry’s business model, according to legal experts following the cases.
The outcome of these initial lawsuits in Illinois and other states remains pending, with courts yet to rule on motions for class-action certification or the fundamental question of federal preemption. Legal observers expect the litigation to continue for months or potentially years before reaching final resolution.
