Fantasy sports platform Sleeper accused the Commodity Futures Trading Commission (CFTC) of violating law by blocking its attempt to enter the prediction market space.
Letter alleges CFTC is breaking the law
Milbank partner Joshua Sterling sent a letter to the Office of the Inspector General (OIG) for both the CFTC and the U.S. Department of the Treasury (USDT) on behalf of Sleeper’s prediction market business, Sleeper Markets LLC. Sterling alleged that the CFTC denied the company’s application to register as a futures commission merchant (FCM) with the National Futures Association (NFA) and argued that in doing so, CFTC has contravened federal law.
The counsel for Sleeper Markets stated the CFTC’s denial is an “illegal delay” and requested the OIG from both the CFTC and USDT to investigate the company’s application process.
“If this is as far as the misconduct goes, it is bad enough,” said Sterling in the letter. “But we are concerned that this kind of misconduct may be more widespread.”
Sleeper claims it is entitled to register for approval as an FCM under the Commodity Exchange Act (CEA). Attaining that status would allow it to partner with a designated contract market (DCM) to offer sports event contracts. Broadly speaking, an FCM (such as Robinhood) accepts customers’ money on orders to buy or sell futures or swaps contracts, while DCMs like Kalshi are the platforms that set and operate the markets.
Sterling claimed the CFTC blocked its NFA application without explanation and contested that the federal derivatives regulator has “no discretion to delay approval of materially complete FCM applications.” The NFA allegedly reviewed Sleeper’s application in August and was prepared to greenlight it, wrote Sterling, before the CFTC instructed the association to withhold the application.
Lack of communication with the CFTC
Sterling sent the letter to the Office of the Inspector General following a lack of communication with the CFTC after first sending a formal letter to Acting CFTC Chairman Caroline Pham requesting Sleeper’s application approval.
“In light of our understanding for the reason for the delay of a complete and satisfactory application, and the lack of engagement by the commission, we are deeply concerned that the CFTC is arbitrarily and capriciously exercising its power to obstruct a timely issuance of Sleeper’s license in a manner that flagrantly violates the CEA,” continued Sterling.
Sterling called the CFTC’s intervention “abuse, mismanagement and a waste.” He added that as FCMs have “no involvement in exchange operations or decision-making,” issues about Sleeper’s entry into prediction markets should be addressed with actual exchanges.
Sterling also claims Sleeper’s application denial hinders competition in the market while preventing further innovation in the prediction market space. Sleeper, which is looking to follow fellow DFS brand Underdog in entering the prediction markets space, will be on the outside looking while a probe into its application denial is being considered.
The OIG of the USDT can investigate the CFTC’s actions for potential violations of law using special agents. In some cases, the investigations can lead to a referral for criminal or civil prosecution. Administrative actions are also considered.
The CFTC’s OIG will leverage its Division of Enforcement to investigate the claims from Sleeper. The OIG at the CFTC can also prosecute violations of the CEA and provide “other adjudicatory forums to address alleged misconduct.”
Sleeper hires Kalshi’s legal representation
While he is representing Sleeper here, Sterling is also an independent counsel of Kalshi in legal disputes over cease-and-desist orders sent by regulators in multiple states. Sterling believes event contracts should be under federal authority and that consumer protection concerns over event contracts aren’t something the CFTC should worry about.
“People are adults, and they’re allowed to spend their money however they want it, and if they lose their shirt, that’s on them,” said Sterling at the National Council of Legislators from Gaming States (NCLGS) summer meeting in Kentucky earlier this year.
He is taking this stance as Kalshi faces a new lawsuit filed by Massachusetts Attorney General Andrea Joy Campbell, who alleges Kalshi offers illegal sports betting and believes the platform must obtain a wagering license and follow state laws in order to offer trading on sports.
Kalshi is also facing lawsuits in Nevada and California over its sports event contracts.
