SEC case against Kraken gains momentum as judge dismisses appeal

• A California federal judge denied Kraken's request for an interlocutory appeal, stating it would delay resolving the SEC lawsuit.
• The judge found the SEC adequately alleged Kraken’s activities may qualify as investment contracts under the Howey Test, requiring further discovery.
• The court rejected Kraken’s stance on contractual formalities for investment contracts, citing existing precedents against its interpretation of securities.

A federal judge in California has rejected Kraken's request to appeal a ruling allowing the Securities and Exchange Commission (SEC) lawsuit against the cryptocurrency exchange to move forward. On Monday, judge William Orrick ruled that permitting an interlocutory appeal now would only postpone the case's resolution.

The judge noted that the SEC provided enough allegations to claim that the cryptocurrencies traded and sold on Kraken qualify as investment contracts under the Howey Test.

“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,” he said.

Kraken faces uphill battle as legal precedent favors SEC

Judge William Orrick noted that the SEC's claims against Kraken seemed reasonable, but additional discovery is needed to determine if the platform's operations meet the Howey Test criteria.

The Howey Test is the framework set by the United States Supreme Court to determine whether a transaction qualifies as an investment contract and is therefore subject to securities regulations.

Kraken plans to appeal judge Orrick’s August ruling that denied the exchange's motion to dismiss the SEC lawsuit.

Kraken argued in its appeal that the case posed essential questions about the existence of an investment contract without a formal agreement or post-sale obligations, asserting that these issues warranted review by a higher court. Orrick rejected these arguments, stating that no legal precedent since the Howey decision requires formal contracts to establish investment contracts.

Judge Orrick pointed out that multiple courts have dismissed Kraken's view on securities laws. The SEC filed a lawsuit in November 2023 accusing Kraken of not registering as an exchange, broker, dealer and clearing agency. This month, the SEC filed a motion asking the court to dismiss several of Kraken's defenses, claiming that current laws clearly define an investment contract.

The agency argued that eliminating Kraken's defenses would simplify the litigation process and prevent unnecessary re-litigation of established legal principles.