A pair of opinions handed down last Friday from District Judge Analisa Torres keep Ripple CEO Bradley Garlinghouse and board chairman Christian Larsen on the hook for securities violations, but permit a critical defense to stand in the Security and Exchange Commission’s (SEC) case against the cryptocurrency company.
The agency alleges that Ripple engaged in the unlawful offer and sale of unregistered securities in the form of its XRP digital token from 2013 through the present, and that the individual defendants aided and abetted that activity.
The Southern District of New York court’s dismissal opinion comes after Ripple answered the SEC’s amended complaint and while the parties are engaged in discovery. Among affirmative defenses raised in its answer, Ripple said that it lacked, and the SEC failed to provide, “fair notice that its conduct was in violation of law, in contravention of Ripple’s due process rights.” The SEC moved to strike that defense on grounds that it was legally insufficient.
Facing aiding and abetting allegations, the two Ripple leaders sought dismissal in separately filed motions last April. For his part, Garlinghouse argued that the SEC’s view that XRP is a security is far from certain. He also argued that attempts to hold him responsible for the personal sale of his XRPs was grounded in an untested legal theory.
In last week’s 31-page dismissal opinion, the court found that the SEC’s aiding and abetting allegations passed muster. To reach that conclusion, Judge Torres recounted the defendants’ extensive XRP promotion and sales efforts. The decision also recited allegations that the defendants, during their tenures at Ripple, “received some warnings that XRP may be classified as a security.”
The court concluded that the defendants “had knowledge of or recklessly disregarded the facts that allegedly made Ripple’s sale of XRP amount to the unregistered sale of securities, and that Larsen provided substantial assistance.”
Judge Torres also declined the executives’ arguments that their personal sale of XRP was immune from U.S. securities law scrutiny, instead agreeing that the SEC had shown that the sales were domestic and therefore fell within the ambit of the Securities Act. The opinion noted that Larsen and his wife sold more than 1.7 billion XRP for at least $450 million and Garlinghouse more than 357 million XRP for approximately $159 million.
In the court’s other opinion denying the SEC’s motion to strike, Judge Torres said that the agency had not shown that “there are no questions of fact or law that might allow the defense to succeed.” For example, the opinion explained that Ripple’s version of the facts, taken as true, “raise legal questions as to whether Ripple had fair notice that the term ‘investment contract’ covered its distribution of XRP, and the Court may need to consider these questions more deeply.”
Garlinghouse is represented by Cleary Gottlieb Steen & Hamilton LLP and Larsen by Paul Weiss Rifkind Wharton & Garrison LLP.