The US District Court for the Southern District of New York received a proposed class action complaint against Kalshi on Wednesday. The petition alleges that the prediction markets operator violates gaming and other laws in dozens of states and uses deceptive techniques on sports event contracts.

Although Kalshi presents itself as a prediction market, the lawyers for seven named plaintiffs contend that the company "operates an unlicensed sports gambling platform" that deceives customers into believing they are placing bets against one another and receiving better prices than they would at traditional sportsbooks. Customers' realities diverge greatly from Kalshi's pitch, according to the lawsuit.

"Defendants Kalshi Trading LLC and KalshiEX, both wholly owned subsidiaries of Kalshi, operates as highly sophisticated ‘market makers,’ which bet against consumers when their bets stray from Kalshi’s internal projected odds,” according to the complaint.

The injured parties' attorneys further draw attention to the fact that Kalshi collaborates with hedge funds such as Susquehanna International Group to take opposite stances on customers' wagers.

“Market makers operate using a model indistinguishable from House betting in other illegal sports betting that the law expressly prohibits,” according to the legal document. “While consumers may bet on either side of the House in any sportsbook, the House sets the betting line, and profits when consumers pick wrong. Kalshi’s market makers set the baseline. Upon information and belief, Kalshi coordinates directly with its market makers to set betting lines.”

Retail Traders Do Not Like Kalshi

It is well known that Kalshi charges fees to smaller retail bettors and traders while limiting or eliminating those costs for astute bettors and market makers in exchange for the liquidity those market participants provide. Kalshi is currently facing increasing state-level legal opposition and has lost some of those cases.

That's one instance of how smaller bettors on Kalshi have an uphill battle ahead of them, and statistics show that the majority of market players on the site lose money. Some experts contend that identifying mispriced markets is the secret to constantly making money on platforms like Kalshi. Due to the considerable liquidity of those markets, sports event contracts, especially those related to popular sports like basketball and football, are unlikely to be mispriced on a frequent basis.

The proposed class action's attorneys claim that Kalshi clients are being tricked into believing they are betting against peers when, in fact, they are betting against Kalshi itself, which is backed by market makers with better technological skills.“Consumers do not realize they are actually being tricked into betting against Kaslshi,” note the lawyers.
“When consumers place bets on Kalshi, they face against money provided by a sophisticated market maker on the other side of the ledger.”

State Laws Violated by Kalshi, Claim Class Attorneys

Additionally, the proposed class action claims that Kalshi broke other state laws, including as New York's general business statute, Florida's different gaming regulations, and California's unfair competition legislation. Given that New York is the biggest sports betting market in the United States, that type of betting is governed by the Seminole Tribe in Florida, and it is legal in California, those are potentially significant assertions.

“By operating unlicensed sports betting, Kalshi has violated gambling laws, engaged in illegal deceptive activity, and unjustly enriched itself at the expense of tens of thousands of consumers,” the complaint says. “Accordingly, Plaintiffs on behalf of themselves and a Class of similarly situated individuals, bring this lawsuit to recover their wagers, as well as costs and attorneys’ fees.”

The lawsuit was launched a day after Robinhood Markets, a significant source of Kalshi volume, announced it was developing its own prediction market platform and a few days after estimates that the company's valuation had skyrocketed to $11 billion.