Judge Torres deals blow to Kalshi as 3 states target prediction markets

Judge Analisa Torres, who presided over the SEC's landmark case against Ripple, denied Kalshi's request for a preliminary injunction against New York state, ruling that gambling laws apply to the prediction market's sports-event contracts.

"New York state gambling laws are not preempted by the Commodity Exchange Act," Torres wrote in KalshiEX LLC v. Williams, clearing the way for the lawsuit to proceed. New York Attorney General Letitia James is expected to file a civil enforcement action seeking restitution, disgorgement, civil penalties and injunctive relief, according to the ruling.

Kalshi had argued its sports-related event contracts qualified as CFTC-regulated swaps traded on a designated contract market. Torres disagreed, finding that federal oversight does not supersede state gambling statutes. The decision marks a major loss for the prediction market firm, which had sought a temporary restraining order and preliminary injunction to block New York regulators from enforcing gambling laws against its platform.

The ruling could have ripple effects beyond New York. A Minnesota federal judge recently agreed with that state's argument that prediction platforms such as Kalshi and Polymarket have "far exceeded what Congress initially intended" when creating the CFTC framework in 1974. Kentucky has also joined other states in suing both operators, with Attorney General Russell Coleman alleging they offer illegal sports betting subject to gambling laws rather than financial regulations.

Sports betting and gaming law attorney Daniel Wallach called the Torres decision a major loss for Kalshi, noting it could potentially impact other ongoing cases. Prediction markets may be forced to obtain state licenses or restrict operations in New York, he said.

The legal headwinds extend beyond state-level gambling challenges. Two Polymarket traders, William Wood and Thomas Bush, filed a lawsuit in the New York Supreme Court on July 3, alleging the platform retroactively changed a market's rules to deny them a winning payout. The disputed market asked whether Strategy — the Michael Saylor-led firm formerly known as MicroStrategy — would sell any Bitcoin by May 31. Strategy disclosed in a June 1 SEC filing that it sold 32 BTC between May 26 and 31, its first such sale since 2022. But because the disclosure landed a day after the deadline, Polymarket added a note that "confirmation achieved outside of the market's timeframe does not qualify," and the contract resolved "No" after a vote by holders of UMA, the oracle Polymarket uses to settle disputes.

The plaintiffs allege breach of contract, breach of the implied covenant of good faith and fair dealing, and deceptive practices, seeking the $1-per-share value of their "Yes" shares plus damages. Polymarket has logged more than 1,150 disputed markets in 2026, already surpassing last year's total, according to the complaint. Investigations by Bloomberg and the Wall Street Journal found that a small cluster of large wallets swings many outcomes, with many UMA voters also holding stakes in the markets they judge.

Despite the mounting legal pressure, Polymarket's valuation has continued to climb. The platform, whose U.S. arm is now a CFTC-registered exchange, has drawn close to $2 billion from NYSE parent Intercontinental Exchange and was last valued at $9 billion. In April, the firm was reportedly seeking to raise $400 million at a $15 billion valuation.

For Kalshi, the Torres ruling sets up a potential state enforcement action that could restrict its operations in New York, one of the largest financial markets in the U.S. The decision also signals that courts may treat prediction market contracts as gambling rather than financial derivatives, a classification that would subject the industry to a patchwork of state laws rather than unified federal oversight.

This article is for informational purposes only and does not constitute investment advice.