A reply brief submitted late last week in a cryptocurrency case brought by the Securities and Exchange Commission (SEC) against Ripple Labs and two principals argued that the agency’s arguments did not meet federal pleading standards. The brief also argued that the complaint did not adequately allege that current Ripple CEO and co-defendant Bradley Garlinghouse sold or offered XRP cryptocurrency personally. The brief was filed in the Southern District of New York.
Last December’s complaint alleges that since 2013 the defendants sold over 14.6 billion units of XRP in return for cash or other consideration worth over $1.38 billion to fund Ripple’s operations and line the pockets of Larsen and Garlinghouse. The SEC asserted that the defendants should have registered XRP as a security. The question, last week’s brief contends, “is far from straightforward even now.”
Garlinghouse’s reply takes issue with the mid-May opposition’s “mischaracterization,” of his argument for dismissal of the claims that he aided and abetted the unregistered offering and sale of XRP. The SEC’s amended complaint does not plead that Garlinghouse “knowingly or recklessly associated himself with anything improper, so instead the SEC now argues that it need only plead ‘knowledge of the circumstances that constitute the primary violation,’” the reply states. The CEO contended that this assertion transforms the aiding and abetting claim into a strict liability violation, which it is not.
As for the SEC’s Section 5 Securities Act claims contending that Garlinghouse engaged in the domestic offer or sale of XRP, the defendant claims that the operative complaint offers no proof that he did. Instead, the reply brief explains, the SEC tries to sidestep this requirement by advocating for a novel approach no court has yet adopted.
The novel approach reportedly lies within a 20-year-old regulation promulgated by the commission itself, Garlinghouse explains. Yet, the brief argues, the regulation is no substitute for the law, as set forth by Supreme Court precedent. Finally, the SEC’s “fallback argument” fails to persuade because the SEC cannot prove that sales of XRP occurred on a domestic exchange, and indeed concedes that they did not.
Oral argument is requested, but a hearing date is not yet scheduled.
Garlinghouse is represented by Cleary Gottlieb Steen & Hamilton LLP.