SEC Files Motion to Dismiss Kraken’s Legal Defenses in Crypto Suit
On Tuesday, November 5, 2024, the U.S. Securities and Exchange Commission (SEC) filed a motion in the U.S. District Court for the Northern District of California, seeking to dismiss three defenses put forth by crypto exchange Kraken. The SEC’s action is part of an ongoing case alleging that Kraken violated securities laws by offering crypto assets without the necessary registration.
The SEC’s lawsuit targets Payward Inc., which operates under the name Kraken, claiming that the platform failed to register as a broker, dealer, clearing agency, or securities exchange. According to the SEC, Kraken facilitated digital asset transactions that qualify as investment contracts, yet did not adhere to the regulatory requirements for a registered entity. The agency also contends that Kraken did not maintain adequate business practices, internal controls, or recordkeeping protocols expected of regulated firms.
In its motion, the SEC requested a judgment on the pleadings concerning three of Kraken’s affirmative defenses. The agency asserted that existing legal definitions around “investment contracts” are clear and provide sufficient notice to entities operating in the financial space. The SEC argued that Kraken’s invocation of the major questions doctrine—a principle stating that agencies cannot exercise powers not specifically granted by Congress—does not apply to this case, as the court has previously determined it does not involve a “major question.”
The SEC criticized Kraken for attempting to revisit issues that the court has already addressed, arguing that the court previously ruled that the SEC’s actions do not represent an overreach of regulatory authority. The motion emphasized that while cryptocurrency is a relatively new type of financial instrument, the legal principles guiding the SEC’s regulatory framework are well-established.
The SEC maintained that the term “investment contract” has a defined legal meaning and that individuals with ordinary intelligence would understand what constitutes a violation. The agency pointed out that Kraken, as a sophisticated corporation, should have been aware of the standards set by the 1946 U.S. Supreme Court ruling in SEC v. W.J. Howey Co., which clarified the criteria for classifying a financial instrument as a security.
The SEC argued that Kraken cannot claim ignorance regarding these standards, especially as it began listing what it termed “Kraken-Traded Securities” long after the Howey decision and following various court rulings interpreting the application of Howey in relation to crypto assets. The SEC also noted that at least one court has previously dismissed similar due process defenses in the context of cryptocurrency.
Two weeks prior, the SEC urged the court to reject Kraken’s request for intervention from the Ninth Circuit on the question of whether an alleged investment contract could be in violation of securities laws without a formal agreement between the parties involved. The SEC contended that this issue is not ripe for appeal, as district courts have consistently dismissed arguments from cryptocurrency defendants asserting that investment contracts necessitate a common-law agreement.
In August, U.S. District Judge William H. Orrick denied Kraken’s motion to dismiss the SEC’s lawsuit. Judge Orrick stated that the SEC had “plausibly alleged” that some cryptocurrency transactions facilitated by Kraken could be classified as investment contracts, which would subject them to securities regulations.
Please contact BlockTribune for access to a copy of this filing.
