California District Judge Denies Kraken’s Request to Appeal Judgement in SEC Case

Key takeaways

• A US District judge rejected Kraken's bid to appeal a court order allowing an SEC lawsuit to proceed.
• Crypto exchange Kraken had sought permission to appeal the court's rejection of its motion to dismiss the SEC case.
• Judge William Orrick says an appeal would delay resolution, noting that the SEC's allegations against Kraken are convincing.

Judge Rejects Kraken's Appeal Move

Judge William Orrick of a California district court rejected Kraken's motion to appeal his judgment in its case with the US SEC.

In an order, Judge Orrick dismissed the crypto exchange's motion for interlocutory appeal. He stated that the SEC adequately alleged" that crypto assets traded on the exchange were investment contracts subject to US securities laws.

The SEC sued the crypto exchange Kraken in November 2023. The regulator alleged that the crypto trading platform failed to register as an exchange, dealer, broker, and clearing agency. The SEC also alleged that most crypto assets offered on the platform qualify as investment contracts.

Meanwhile, Kraken filed a motion to dismiss these claims, which the district court denied in August. In September, Kraken filed a motion seeking permission to appeal the August court order rejecting its motion to dismiss the lawsuit.

It said there was substantial ground" for deferring opinions on securities laws, which a higher court could answer, possibly ending the lawsuit early.

Furthermore, Kraken said it needed to know whether an investment contract without a contract or post-sale obligations violates securities laws. It also raised questions about whether an investment in an enterprise was necessary in Howey.

Judge Says SEC's Securities Violation Claims Against Kraken Are Plausible

However, Judge Orrick disagreed with these reasons. According to the judge, Kraken failed to cite a case since the inception of the Howey test where a court determined that investment contracts needed post-sale obligations or contractual formalities.

The judge also noted that many courts have addressed the issues and disagreed with Kraken's viewpoint.

Orrick noted the SEC convincingly alleged that crypto traded on Kraken constitutes investment contracts. However, only discovery will determine whether the sales on Kraken indeed met the Howey prongs. Therefore, he ordered that the litigation continue.

The judge 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."

This ruling comes after an earlier SEC motion requesting that the court dismiss Kraken's fair notice defense and two other key arguments. The commission argued that existing laws have defined securities contracts, which constitute enough fair notice for the crypto exchange.

The SEC claimed that Kraken would pursue burdensome and irrelevant discovery claiming they relate to its due process defense. Meanwhile, Kraken has yet to respond to requests for comments regarding the latest development.

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