Kalshi Faces Legal Scrutiny Over Settlement of Khamenei Contract

Kalshi is facing growing legal and regulatory scrutiny after settling a high-volume prediction market tied to the leadership of Iran's Supreme Leader. The platform's "Ali Khamenei out as Supreme Leader" contract generated more than $50 million in trading activity before reports of Khamenei's death emerged on February 28. 

After Khamenei’s death, traders with a "Yes" position on the contract believed they were getting a full payout, but Kalshi suspended trading and settled the positions at the last traded price before the news came out. 

The operator used a clause in the contract known as a "death carve-out," raising eyebrows among its users and prompting a legal firm to review whether the exchange's disclosure might have been misleading under US restrictions on a market related to a person's death.

This clause cannot settle a contract to "Yes" if the death of a specific individual is involved. The restriction exists because US regulators prohibit prediction market apps from offering event contracts directly tied to death outcomes. Some traders said the carve-out was not sufficiently clear when the market was offered.

In response, the Lieff Cabraser law firm said it is reviewing the settlement to determine whether the platform's disclosures and marketing of the contract may have misled users. The firm is considering whether a potential class-action lawsuit could follow the controversy surrounding the contract's resolution.

Kalshi defended its actions and said the settlement followed the rules published for the market. Co-founder and CEO Tarek Mansour said the death carve-out clause had been included in the contract terms from the start. He stated that the provision was visible on the market page and documented in filings submitted to the Commodity Futures Trading Commission (CFTC).

The company also said it reimbursed all trading fees and covered net trading losses tied to the contract so that no participant finished the market with a net loss. 

Nevada regulators challenge Kalshi's event contracts

The dispute surrounding the Khamenei market arrives as Kalshi faces a separate legal battle with state regulators over its prediction markets. In February, Nevada gaming regulators filed a lawsuit seeking to block the platform from offering contracts that allow residents to take positions on sports outcomes.

The Nevada Gaming Control Board filed the case amid a broader conflict over whether state gambling regulators or federal commodities authorities control prediction markets. The lawsuit was filed the same day the CFTC submitted a legal brief supporting companies such as Kalshi, arguing the agency has exclusive jurisdiction over prediction markets.

Kalshi had previously attempted to prevent Nevada authorities from pursuing enforcement action. A federal appeals court declined to pause a November order dissolving an earlier injunction that blocked the state from proceeding with its case.

The legal conflict intensified this month when US District Judge Miranda Du issued orders remanding the civil case to Nevada's First Judicial District Court. The Nevada Gaming Control Board is expected to seek a temporary restraining order requiring Kalshi to stop offering event contracts to Nevada residents and potentially implement geofencing controls.