Kostelanetz Partner Victor Suthammanont filed an amicus brief on behalf of Gary Gensler—a former Chair of both the Commodity Futures Trading Commission (CFTC) and the Securities & Exchange Commission (SEC)— in the U.S. Supreme Court in Flaherty v. KalshiEx LLC, a case in which New Jersey gaming regulators are requesting that the high court resolve a circuit split on whether Kalshi’s “prediction market” is subject to state gambling regulations.
Victor, who previously worked as Gensler’s Enforcement Counsel at the SEC, served as co-counsel on the brief with attorneys at Zuckerman Spaeder LLP.
The brief supports New Jersey’s petition to resolve the circuit split between the Third Circuit Court of Appeals and the Ninth and Sixth Circuit Courts of Appeals.
The appeals court split revolves around whether the 2010 Dodd-Frank financial services bill passed by Congress included language that preempted states’ traditional police power to regulate gambling within their borders. The brief urges the Supreme Court to grant New Jersey’s petition for certiorari to resolve the circuit split.
Gensler, who was CFTC Chairman when Congress debated Dodd-Frank, argues that, contrary to the Third Circuit’s decision in the New Jersey case, Congress did not intend to supplant states’ rights to regulate gaming when it included some event contracts within the statutory definition of a swap.
Kalshi has argued in several cases against state gambling regulators that the sports event contracts listed on its exchange fit the Dodd-Frank definition of “swaps” and therefore should be regulated by the CFTC, not state regulators.
While the Ninth and Sixth Circuits have determined in separate cases involving Kalshi’s prediction market that Kalshi is likely subject to state gaming laws, the Third Circuit found that Kalshi was instead likely to prevail on its argument.
The brief explains why the Supreme Court should grant review of the Third Circuit’s decision, including:
When Congress amended the [Commodity Exchange Act (CEA)] through Dodd-Frank, it was addressing the causes of the recent financial crisis, not undoing federal policy against sports betting and displacing traditional state and tribal regulation. …
In the wake of the then-unregulated [over-the-counter] derivatives market’s contribution to the 2008 financial crisis, Congress and the Obama administration focused on establishing a regulatory regime for swaps (including certain event contracts incorporated in the definition of swap) in Dodd-Frank. In so doing, Congress did not include sports-betting contracts within the statutory definition of swap. Such contracts do not fit the CEA’s purpose or the statutory language defining swap, which focus on hedging economic risk. Sports bets are not designed for and are very rarely, if ever, entered into for the purpose of hedging.
The brief cautions that if the Supreme Court were to uphold the Third Circuit decision and vacate the Ninth and Sixth Circuit decisions, it would render “all off-exchange retail sports bets since October 2012—in every state … illegal,” because the law prohibits anyone other than “eligible contract participants” from entering into off-exchange swaps.
The brief also notes that “common sense confirms that Congress did not make the CFTC the nation’s sports-betting regulator,” stating:
Congress does not make fundamental changes in the balance of state and federal power in isolated snippets of text. As the Court has said, Congress does not “hide elephants in mouseholes.” Whitman v. Am. Trucking Ass’ns, 531 U.S. 457, 468 (2001). Preempting state authority over sports betting—an over $165 billion per year industry—has major implications for states’ power to protect their residents. It is not the kind of thing Congress hides in a subpart of a definition. If Dodd-Frank had preempted the states and tribes on sports betting, it would have been one of the biggest stories about Dodd-Frank at the time. But nobody ever mentioned it.
The full brief is available here.
Law 360 covered the amicus brief here. Politico’s coverage can be found here.
About Victor
Victor served for a decade as a securities enforcement attorney in the U.S. Securities and Exchange Commission, including as a Senior Trial Counsel and as the Enforcement Counsel to Chair Gary Gensler. Prior to his extensive experience in the SEC’s Division of Enforcement, Victor represented and advised clients in private practice in complex commercial disputes and litigations, as well as in internal and governmental investigations.