By Anne Sherry, J.D.
The SEC dropped its claims against two officers and directors of Ripple Labs. The SEC had alleged that executive chair Christian Larsen and CEO Bradley Garlinghouse aided and abetted Ripple’s violations of the Securities Act via the unregistered institutional sales of XRP tokens. The dismissal obviates the need for the scheduled trial against the individual defendants, while the SEC’s case against Ripple itself will proceed on the issue of damages (SEC v. Ripple Labs, Inc., October 19, 2023).
This past July, the district court for the Southern District of New York issued a split ruling in the SEC’s case against Ripple. The court held that the sales of XRP tokens to institutional investors constituted the unregistered offer and sale of investment contracts in violation of Section 5 of the Securities Act. However, the “programmatic” sales of tokens to retail investors, for example on crypto trading platforms, were not unregistered sales of securities.
The SEC sought interlocutory appeal of the split ruling, but the district court denied that request earlier this month. The core of the Commission's argument was that the court improperly applied the Howey test—not that it used the wrong standard—and that test depends on the facts and circumstances of a transaction. This question, then, was not an issue of pure law and was not appropriate for interlocutory appeal.
The July decision set for trial the SEC’s claim that Larsen and Garlinghouse aided and abetted Ripple’s Section 5 violations. The parties having stipulated to the dismissal of the aiding-and-abetting claims with prejudice, the trial is no longer necessary, and the scheduling order is moot.
As a result of the court’s decisions and the dismissal of the individual defendants, the only outstanding issue is determining the proper remedies against Ripple for the unregistered institutional sales. The SEC wrote that the agency and Ripple intend to meet and confer on a briefing schedule. The Commission requests until November 9 to either propose a stipulated schedule or to seek a schedule from the court on a contested basis.
Because the SEC did not dismiss all parties or the action in its entirety, the stipulation of dismissal of the two individual defendants has been referred to the district judge for approval.
On X/Twitter, Ripple’s Chief Legal Officer Stuart Alderoty lauded the dismissal, saying, “This is not a settlement. This is a surrender by the SEC.” Larsen retweeted Alderoty while lamenting “how the US actively demolished its global standing as the home for innovation.” Garlinghouse said, “Chris and I (in a case involving no claims of fraud or misrepresentations) were targeted by the SEC in a ruthless attempt to personally ruin us and the company so many have worked hard to build for over a decade. … Feels good to finally be vindicated.”
The case is No. 20-cv-10832.