Kraken wins $22 million arbitration against auditor Mazars for ditching the firm during Operation Choke Point 2.0

Kraken’s parent company, Payward, has secured a legal victory against auditor Mazars USA, which had abruptly pulled out of a nearly completed audit during the height of Operation Choke Point 2.0 in 2022.

According to a blog post on Tuesday, Payward is asking the Delaware Court of Chancery to enter final judgment on the $22 million that an arbitrator awarded to the company after it sued Mazars for abandoning its audit of Kraken, likely due to political pressure, causing reputational harm.

"An audit is not a favor. It is oxygen. Banking relationships, licenses, counterparties, and regulators all depend on it. When your auditor quits with no findings against you, you inherit a cloud you did nothing to create, and you pay to clear a name that was never dirty. We spent years and millions in legal fees doing exactly that," Payward co-CEO Arjun Sethi wrote in the post.

Operation Choke Point 2.0 is a widely used term to cover the Biden administration’s unofficial pressure campaign against the crypto industry following the collapse of FTX. The term, coined by crypto venture capitalist Nic Carter, references a similar policy during the Obama administration to pressure banks to cut ties with unsavory businesses like arms dealers.

Sethi notes that top banking regulators in the U.S., including the Federal Reserve, FDIC, and OCC, issued a joint letter in January 2023 that raises soundness concerns for banks about working with crypto firms. "Behind the scenes, the FDIC sent at least 25 letters to 24 banks instructing them to pause or refrain from expanding crypto-related activity," Sethi wrote.

At the same time, the Securities and Exchange Commission, then headed by Biden appointee Gary Gensler, had begun suing or investigating dozens of crypto firms, including Kraken. Sethi noted Mazars “pointed to uncertainty and risk from legal developments,” including the SEC’s complaint against Kraken, when firing the firm.

“When they withdrew, Mazars confirmed in writing that they had no disagreement with our management, no concerns about our integrity, and that they had found no fraud,” Sethi said. “Read that again. An auditor abandoned a nearly finished audit of a client it had no professional dispute with.”

Notably, the SEC’s complaint against Kraken was later thrown out after Gensler stepped down, along with almost all of the agency's other crypto-related enforcement actions.

Operation Choke Point 2.0 has also largely been wound down, with previous guidance and restrictions rolled back, and the Trump administration beginning to investigate wrongful cases of debanking.

Mazars, for its part, had been pulling back from the crypto industry beginning in 2022, when it halted all crypto proof-of-reserves work.

Sethi’s post notes that Kraken suffered reputational harm from this policy, including Mazars decision to abandon its audit, but also Kraken’s founder and former CEO Jesse Powell, who had his home raided by federal agents in March 2023. Likewise, smaller companies than Kraken were likely permanently impacted by OPC2.0.

Clarity Act

In addition to calling for final judgment, Sethi used this blog post as a bullhorn to call for passing the Clarity Act, which would establish clear regulatory boundaries for the SEC and Commodity Futures Trading Commission over the crypto industry. The Clarity Act is currently being debated among various Senate committees.

“Vindication is not the point. The point is that no founder, no developer, and no customer should ever need to win an arbitration to prove they deserved a bank account, an auditor, and the basic infrastructure of doing business in America,” Sethi wrote. “We won this fight. Now our congressional leaders from both sides of the aisle need to come together to finish the bigger one. Pass the CLARITY Act.”