As you probably already know, on 13 July 2023, Hon. Analisa Torres, a district judge at the United States District Court for the Southern District of New York, gave her ruling in the SEC vs Ripple Labs lawsuit, which was initiated in December 2020.
The U.S. Securities and Exchange Commission (SEC) had filed a lawsuit against Ripple Labs Inc. and its two senior executives, Bradley Garlinghouse and Christian A. Larsen. The SEC claimed that Ripple and its leaders unlawfully offered and sold securities, which breached Section 5 of the Securities Act of 1933. The SEC further accused Garlinghouse and Larsen of aiding and abetting these violations committed by Ripple.
Both parties had submitted their summary judgment motions to the court. After reviewing the case, the court made a decision, partially granting and partially denying the motions from both the SEC and Ripple and its executives.
According to the ruling, the court granted the SEC’s motion for summary judgment concerning the Institutional Sales but denied it for other matters. On the other hand, the court granted Ripple’s motion for summary judgment regarding the Programmatic Sales, the Other Distributions, and the sales made by Larsen and Garlinghouse. However, the court denied Ripple’s motion concerning the Institutional Sales. As for the SEC’s motion for summary judgment on the aiding and abetting claim against Larsen and Garlinghouse, it was DENIED.
In particular, with regard to Larsen’s and Garlinghouse’s XRP sales, the judge said:
“Like Ripple’s Programmatic Sales, Larsen’s and Garlinghouse’s XRP sales were programmatic sales on various digital asset exchanges through blind bid/ask transactions … Larsen and Garlinghouse did not know to whom they sold XRP, and the buyers did not know the identity of the seller. Thus, as a matter of law, the record cannot establish the third Howey prong as to these transactions. For substantially the same reasons discussed above … Because the Court determines that the record does not establish the first Howey prong as to the Other Distributions, the Court does not reach whether the second or third Howey prongs have been satisfied … Garlinghouse’s offer and sale of XRP on digital asset exchanges did not amount to offers and sales of investment contracts.“
Here is what Judge Torres said about the XRP token:
“XRP, as a digital token, is not in and of itself a “contract, transaction[,] or scheme” that embodies the Howey requirements of an investment contract.“
The SEC’s recent stance on their lawsuit against Ripple Labs emerged in the context of another legal battle. This separate case involves Terraform Labs and its founder, Do Kwon, who stand accused of engineering a multi-billion dollar crypto asset securities fraud.
In response to Terraform Labs’ motion to dismiss on 21 July 2023, the SEC pointed out several issues it has with Judge Torres’ decision on XRP. The defendants in this case had referred to Judge Torres’ ruling, which could potentially set a precedent.
The SEC expressed disagreement with the defendants’ claims, stating that a significant part of the Ripple ruling actually supports the SEC’s allegations in this case and dismisses the arguments put forth by the defendants. However, the SEC took issue with the parts of the ruling related to Programmatic and other sales. They argued that the Ripple ruling contradicts and introduces unwarranted stipulations to the Howey test and its descendants.
The SEC further stated that they believe certain aspects of the Ripple ruling were incorrectly decided and advised the court not to adhere to them. The SEC staff is currently contemplating different options for further review and plans to recommend that the SEC pursue such a review.
This has led to some concern among XRP holders about what an appeal could mean for Ripple and XRP.
However, John Deaton, a prominent American attorney closely monitoring the lawsuit, has offered words of reassurance. In a series of tweets on 22 July 2023, Deaton downplayed the threat of an appeal. He pointed out that even if an appeal were to occur, it would be at least two years before a decision is issued by the 2nd Circuit. Until then, Judge Torres’ decision remains the law.
Deaton further argued that even if the 2nd Circuit found Torres to be wrong regarding her application of the third Howey factor, it doesn’t necessarily mean the SEC wins on Programmatic sales. Torres could still rule the same way, concluding that the SEC didn’t satisfy the common enterprise factor.