Court Partly Grants Ripple Labs’ Second Motion to Dismiss Securities Complaint

On Oct. 2 Judge Phyllis J. Hamilton of the Northern District of California granted the vast majority of defendant Ripple Labs, Inc., XRP II, LLC, and Ripple CEO Bradley Garlinghouse’s motion to dismiss lead plaintiff Bradley Sostack’s consolidated first amended complaint. In its order, the court considered whether the plaintiff’s fraud allegations met Federal Rule of Civil Procedure 9(b)’s heightened pleading requirement.

The putative class action accused the defendants of issuing and selling Ripple XRP tokens without registering the cryptocurrency as a security with the Securities Exchange Commission. The pleadings also contended that the defendants “made a litany of false and misleading statements regarding XRP” in order to drive up demand and increase the profits they would reap from the digital currency’s sale.

On Feb. 26, the court granted in part and denied in part the defendants’ first motion to dismiss. The court denied that motion with regard to claims accusing the defendants of offering or selling an unregistered security in violation of federal and California law. The defendants succeeded in securing the dismissal of a California Corporations Code and two California Business & Professions Code fraud claims because the plaintiff failed to meet Rule 9(b)’s elevated pleading standard.

The plaintiff’s Mar. 25 amended pleading, among other things, “further detail[ed] the purported misstatements,” in support of his state law fraud claims. The defendants moved to dismiss only the fraud claims, principally arguing that the “plaintiff again failed to show how or why each of the alleged misstatements is false,” the order stated. 

To prevail on a fraud allegation, the accusing party must set forth the circumstances constituting fraud or mistake with particularity, the court explained at the outset of its discussion. The court addressed the alleged misstatements on a category-by-category basis.

It found allegations regarding the defendants’ supposed misrepresentation of XRP’s utility too unspecific to satisfy Rule 9(b). The court determined that the “plaintiff failed to adequately allege why any statement by defendants concerning XRP’s utility is false.”

As to the second category, Judge Hamilton concluded that the allegations accusing the defendants of “conflat[ing] the adoption and use of their enterprise solutions software with that of XRP,” were “unfounded.” After sifting through nearly a dozen separate factual assertions, the court ruled that the plaintiff’s contentions, many of which concerned “implied representations,” did not explain what was false or misleading about the statements, and why it was so.

Likewise, the court held that the plaintiff did not plead with particularity its claim that “Ripple misstated its XRP sales activity during the December 2017 through January 2018 period.” As to the last grouping of supposed misstatements, that CEO Garlinghouse “misrepresented the scope and character of his XRP holdings,” the court partly sided with the plaintiff.

Judge Hamilton held that “the volume of sales made by Garlinghouse throughout 2017 and their quick turnaround timing support an inference that he did not remain “long XRP” and, in actuality, he was not on the “HODL” side.” The court remarked that although it was possible that Garlinghouse actually did not misrepresent his holdings, it also agreed that it would be able to adjudge the claim better once the parties conducted discovery.

In turn, the court dismissed the California Business & Professions Code fraud claims with prejudice, and stated that the California Corporations Code violation may move forward solely based on specific alleged misrepresentations Garlinghouse made concerning the extent and nature of his XRP holdings.

Taylor-Copeland Law and Susman Godfrey L.L.P. represent the plaintiff, and Boies Schiller Flexner LLP represents the defendants.