SEC’s Case Against Kraken Moves Forward
California federal Judge William Orrick denied Kraken’s motion for permission to appeal an earlier decision that allowed the U.S. Securities and Exchange Commission’s case to continue. Orrick said certifying an interlocutory appeal would not facilitate the litigation, affirming the SEC has sufficiently alleged Kraken sold unregistered securities under the Howey test.
In his Nov. 18 order, Orrick wrote, “Fundamentally, I do not believe that certification will materially advance the ultimate termination of the litigation. While the SEC has plausibly alleged its theory of securities violations against Kraken, only discovery will establish whether the sales, trades, and exchanges on Kraken truly met all the Howey elements.”
Key Points in the Judge’s Decision
Kraken’s lawyers had argued there was “substantial ground for difference of opinion” on the main securities law questions. It said the case raised questions such as whether an investment contract required a formal agreement or post-sale obligations. Orrick rejected those arguments, observing that no court has so held since the landmark Howey decision.
“Several courts have addressed these issues and disagreed with Kraken’s position,” Orrick said. He said Kraken’s appeal probably would delay resolution of the case without offering clarity on the legal questions involved.
Background on the SEC Lawsuit
The November 2023 lawsuit filed by the SEC alleged that Kraken was operating without proper registration as an exchange, broker, dealer, or clearing agency. It also faults Kraken for selling unregistered securities by permitting the trading of cryptocurrencies which SEC claims qualify as investment contracts under U.S. securities law.
In November, the SEC filed with the court a request to strike three of Kraken’s defenses, claiming they were irrelevant and intended solely to delay discovery. The regulator said that existing laws are already clear as to what constitutes an investment contract and that Kraken had fair notice of the legal requirements.
Next Steps in the Case
The case will proceed to the discovery phase with Orrick’s denial of the appeal, in which both sides will gather evidence on whether Kraken’s cryptocurrency transactions constitute investment contracts according to the Howey test.
The decision represents an important move by the court in a broader effort by the SEC to regulate the industry and impose securities laws on platforms dealing with digital assets.
