Kraken Faces Legal Setback as Judge Blocks Appeal in SEC Case
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A California federal judge has rejected crypto exchange Kraken’s request to challenge an earlier decision permitting the U.S. Securities and Exchange Commission (SEC) to proceed with its lawsuit. The SEC alleges Kraken engaged in the sale of unregistered securities.
Court Denies Kraken’s Appeal on Unregistered Securities
Judge William Orrick ruled against Kraken’s motion for an interlocutory appeal on November 18, stating that allowing the appeal would “only delay resolution.” He maintained that the SEC had “adequately alleged” that crypto transactions on Kraken met the Howey test criteria, thus falling under securities laws.
Orrick emphasized that “only discovery will establish whether the sales, trades, and exchanges on Kraken truly met all the Howey elements.” This means the lawsuit will continue into the discovery phase, where detailed evidence will be examined to determine if the SEC’s claims hold legal merit.
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Kraken had previously argued that substantial questions regarding securities laws warranted a higher court’s intervention. It raised concerns over whether a transaction could qualify as an investment contract without formal contracts or post-sale obligations.
However, Orrick dismissed these arguments, noting that Kraken had “not cited a case since Howey” supporting its position. He added, “Several courts have addressed these issues and disagreed with Kraken’s position.”
SEC Pushes Back Against Kraken’s Legal Defenses
The SEC initiated its lawsuit against Kraken in November 2023, accusing the exchange of operating without proper registration as an exchange, broker, dealer, or clearing agency.
Earlier this month, the SEC sought to dismiss three of Kraken’s defenses, asserting that the exchange was attempting to pursue “irrelevant and burdensome discovery.”
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The regulatory body argued that the laws defining investment contracts provided Kraken sufficient notice regarding compliance expectations. This defense strategy, the SEC claimed, could be a tactic to prolong the case unnecessarily.
Judge Orrick sided with the SEC, agreeing that Kraken’s arguments did not merit an early resolution of the case. He reiterated that the litigation process was necessary to determine the facts comprehensively.
Kraken’s legal team, as of now, has not commented publicly on the recent ruling.
This latest development in the legal tussle between Kraken and the SEC is coming after the re-election victory of Donald Trump, who has criticized the regulator’s chairman Gary Gensler and vowed to sack him on his first day in office.
In anticipation of Trump’s inauguration in January 2025, there have been speculations on who will be the next SEC’s chair, with news of Robinhood’s CLO Dan Gallagher being considered for the role.
