Ripple notches win in SEC case over XRP cryptocurrency

https://www.reuters.com/legal/us-judge-says-sec-lawsuit-vs-ripple-labs-can-proceed-trial-some-claims-2023-07-13/

by ideksec • 3 years ago

154 87 3 years ago

This is supposed to be pretty huge. Besides coinbase and others relisting XRP what changes should we expect to see in the short term?

otoburb3• 3 years ago

>[...] what changes should we expect to see in the short term?

The article mentions that since the company definitively sold unregistered securities to hedge funds and sophisticated buyers (without registering with the SEC), a jury will now/soon need to "decide whether or not Garlinghouse or Larson aided in the company's violation of the law."

Seems pretty clear cut that the company, and it's executives, will have further problems to tackle in the near future.

>This is supposed to be pretty huge.

This could become much bigger if the SEC uses this enforcement as an example reference case for future actions against other token projects that followed a similar playbook over the past several years, assuming the case is kicked further up the court hierarchy on appeal.

chrisco2552• 3 years ago

This part I don't understand, aren't those institutions "accredited investors"?

WinstonSmith843• 3 years ago

This could become much bigger if the SEC uses this enforcement as an example reference case for future actions against other token projects that followed a similar playbook over the past several years

There is no other project, not even a close one, who sold tokens worth almost $1b rewarding their execs, while offering no value whatsoever.

This is not a win for the SEC, this is the case they truly couldn't lose. Yes, they didn't lose everything but that was also not possible to begin with

yieldcrv4• 3 years ago

Many ICOs done in the US followed similar but even more refined legal rational

and it doesnt really matter if institutional sales are unregistered securities because there are many registration exemptions to rely upon for sales to institutional

WinstonSmith843• 3 years ago

"partial" win!? It's hard to see what would be a "win" otherwise... It's going to have also larger implications - the SEC somehow manages to lose that one, it was hard to imagine or predict. If not even XRP is a security, there is truly no other coins which could be a security. Hate it or love it, but the SEC is simply going to lose all their other lawsuits

EDIT: oh funny ... Reuters edited their title and removed "partial" :-)

linuxftw• 3 years ago

Only appellate courts and higher set precedent. This is one ruling by one judge, means nothing for other cases.

granzymes• 3 years ago

Appellate courts set binding precedent, but district courts routinely look to eachother for guidance on how to rule on questions where there is no circuit/SCOTUS ruling.

Similarly, a judge in one circuit may look to the decision of a different circuit court when their own circuit has yet to rule on an issue.

dcolkitt4• 3 years ago

Should be noted this decision came from an Obama appointee judge in a fairly liberal district (SDNY). The Second Circuit is half Federalist Society judges, and six out of the nine SCOTUS justices have been on a consistent battle to roll back the power of the regulatory agencies. Pretty hard to see how the case becomes more favorable for the SEC on appeal.

yieldcrv4• 3 years ago

The SEC would be dumb as hell to appeal this ruling, 2nd circuit could rule in the SEC’s favor but this Supreme Court?

I double dare the SEC to appeal

The commission might not exist the very next day and that would be hilarious, they’ll take it back to the New Deal itself and wonder why the SEC survived when so many other New Deal programs got overturned

petesergeant• 3 years ago

If not even XRP is a security

Forgive me, I know little about crypto, and am bearish on it, but:

My understanding is that Ripple was very much meant to be a currency/commodity, unambiguously, where most other crypto backed by whitepapers were meant to be securities on the basis that they were meant to back some hare-brained scheme or have some utility beyond simply being a means of transfer. If I'm right about that, then surely Ripple has one of the strongest arguments for not being a security?

eric_cc3• 3 years ago

Forgive me, I know little about crypto, and am bearish on it

Forgive me, how can you form a bearish opinion on something you know very little about?

yyyk2• 3 years ago

If this stands it clears Ripple, but not necessarily the exchanges (footnote 16 in page 23). If SEC gets that one, that would be enough of a win for them - without the offramps, these coins wouldn't survive.

JeremyNT• 3 years ago

"partial" win!? It's hard to see what would be a "win" otherwise... It's going to have also larger implications - the SEC somehow manages to lose that one, it was hard to imagine or predict. If not even XRP is a security, there is truly no other coins which could be a security.

This is explained in the article. It was good day for this crypto scam, but it wasn't all good news for them:

The ruling was also a partial victory for the SEC. The judge held that Ripple violated federal securities law by selling XRP directly to sophisticated investors, and that a trial should be held over its executives' role in those sales.

Also:

Hate it or love it, but the SEC is simply going to lose all their other lawsuits

Quite a bold statement there, based on a single ruling...

ChainOfFools• 3 years ago

Quite a bold statement there, based on a single ruling...

And a ruling on ripple, which from architectural standpoint is rather stretching the bounds of what is typically thought of as a cryptocurrency -it isnt mined or staked and the blockchain is even more of a pretend decentralization gimmick than the rest of the tokens out there. it's much more like corporate scrip controlled by a handful of bank-owned validator supernodes. In terms of ownership structure it's what Bitcoin would drift into over time if the lightning network actually becomes the predominant means of interacting with it.

choppaface5• 3 years ago

Torres found the company's $728.9 million of XRP sales to hedge funds and other sophisticated buyers amounted to unregistered sales of securities

It would probably have been a bigger win for Ripple had they gotten out of that one.

yieldcrv4• 3 years ago

unregistered sales of securities aren’t violations of the securities act when relying on an exemption from registration, to accredited and qualified investors…

just because they might not have filed a Reg D notice for their SAFE doesnt mean the whole transaction is invalid

modeless2• 3 years ago

But Torres ruled Ripple's XRP sales on public cryptocurrency exchanges were not offers of securities under the law, because purchasers did not have a reasonable expectation of profit tied to Ripple's efforts.
Those sales were "blind bid/ask transactions," she said, where the buyers "could not have known if their payments of money went to Ripple, or any other seller of XRP."

I bet this gets overturned on appeal. It makes no sense to me. Seems like a huge loophole if it stands. Maybe it's explained better in the actual ruling, anyone have a link? Of course you can count on Reuters to never link to important information.

otoburb3• 3 years ago

>Maybe it's explained better in the actual ruling, anyone have a link?

The docket[1] has the ruling[2], but there's very little additional detail provided beyond the focus on "blind transactions" to invalidate one of the Howey prongs[3].

As an aside, thank goodness for Court Listener and the RECAP/PACER archive!

[1] https://www.courtlistener.com/docket/19857399/securities-and...

[2] https://www.courtlistener.com/docket/19857399/874/securities...

[3] https://www.sec.gov/corpfin/framework-investment-contract-an...

chrisco2552• 3 years ago

Not really, unless XRP is a share of a company (it's not) and promises dividends (it doesn't), there's no expectation of profit by purchasers of XRP.

Profits from speculation is not the same as profits from business activities. People purchase everything from bar codes (yes, 11 digit bar codes are a commodity with limited supply), to trailers, to collectible video games, to oil and minerals, precious metals, art, antiques, etc etc all on speculation that they'll be worth more in the future.

modeless2• 3 years ago

Any speculative profit you hope to make on XRP is entirely reliant on the business of Ripple. They control and run and improve and promote the network, and without those efforts XRP would not have any hope of increasing in value at all. It's plain as day that people purchasing XRP rely on the efforts of Ripple the company for their expectation of profit, regardless of who they purchase the XRP from.

DennisP3• 3 years ago

The judge referenced the Howey case, saying that just because you have an investment contract involving an orange grove, that doesn't mean the orange grove itself is a security. A security is a contract, not just anything that people trade around in a speculative way.

William Hinman of the SEC said much the same thing in 2018: https://www.sec.gov/news/speech/speech-hinman-061418

yata69420• 3 years ago

This is pretty obviously the reasonable take.

A security is a contract, not just anything that people trade around in a speculative way.

The scary thing IMO is that I think if you had enough big money trading bottlecaps or baseball cards, you'd quickly find them being considered a security.

But words have to mean something. Things can't just be a "security" because they make the government feel insecure.

pcthrowaway• 3 years ago

I wonder if this will have an impact on non-native tokens (which are implemented with smart contracts)

amluto• 3 years ago

This is IMO rather odd logic. I skimmed the opinion. If identical logic were applied to ordinary stock shares, it seems like it’s saying that shares in a C corp are securities if the C corp sells them to institutional investors, but that if the C corp sells the same shares by putting limit orders on a stock exchange (NASDAQ, for example) and Reddit-reading meme stock buyers buy them, then somehow the C corp didn’t actually engage in a sale of securities.

raingrove• 3 years ago

Not at all. The shares in a C-corp are securities because they will definitely pass the Howey Test. Also, stocks are considered securities by a statute. It is unclear whether XRP tokens themselves pass the Howey test. (I believe the Howey Test is extremely outdated and needs to be revamped, but that's a different topic.)

dcolkitt4• 3 years ago

The holder of a stock certificate has a formal legal contractual relationship with the corporation that issued the stock. The holder of a token does not have a contractual relationship with the entity that issued the token.

Now there's probably some silliness in the fact that if Alice creates a token and sells it to Bob, it's an investment contract, but if Alice creates a token sells it to Mark the middleman who then sells it to Bob it's not an investment contract and therefore not covered by the SEC. But this really comes down to how Federalist society wing of judges have changed Constitutional law.

Up until about 20 years ago, if Congress passed a law that wasn't very well defined or left a loophole open, courts were generally willing to consider the original intent of the lawmakers and interpret the law relative in a commonsense way even if it went against the specific language used by Congress. Federalist Society judges would argue that courts should generally only apply the law as it's actually written (i.e. an investment contract requires an actual legal contract). The argument is that Congress is around and still exists and perfectly free and able to update the existing laws if they're unhappy with the wording or oversight of previous legislation.

This is a fundamental disagreement in Constitutional law. Should courts use commonsense interpretation of the meaning of the laws or should Congress itself, as the actual elected representative, be responsible for updating laws and courts just enforce the plain meaning. It's also tinted by the fact that Congress today has become hopelessly gridlocked and obstructionist, and we're largely incapable of passing sweeping legislation. So generally if you're not a fan of big government or regulation, you're going to be biased towards one view and vice versa.

yyyk2• 3 years ago

this really comes down to how Federalist society wing of judges

Judge was a former Democratic politician and an Obama appointee, in NY. Probably not Federalist.

Should courts use commonsense interpretation of the meaning of the laws

Whose commonsense? commonsense isn't common.

coolestguy• 3 years ago

I skimmed the opinion

Then don't comment on it

detroitcoder• 3 years ago

I had a similar thought at first but then read the actual ruling and it made more sense and it all stems on the 3rd prong of the Howie Test. It states there needs to be a "reasonable expectation of profits derived from the managerial efforts of others" which a share of stock has via dividends, etc. regardless how it was acquired.

For XRP, there is no explicit rights to profits via the efforts of others via the instrument so you then have to look at the agreement made via the contract between the purchaser and the issuer.

On page 18 of the ruling it outlines this for Institutional Investors:

'''The third prong of Howey examines whether the economic reality surrounding Ripple’s Institutional Sales led the Institutional Buyers to have “a reasonable expectation of profits to be derived from the entrepreneurial or managerial efforts of others.”... Based on the totality of circumstances, the Court finds that reasonable investors, situated in the position of the Institutional Buyers, would have purchased XRP with the expectation that they would derive profits from Ripple’s efforts. '''

However for "Programmatic Buyers" on exchange the ruling said:

'''Having considered the economic reality of the Programmatic Sales, the Court concludes that the undisputed record does not establish the third Howey prong. Whereas the Institutional Buyers reasonably expected that Ripple would use the capital it received from its sales to improve the XRP ecosystem and thereby increase the price of XRP, Programmatic Buyers could not reasonably expect the same.'''

So because there is both no expectation of profits tied to the managerial efforts of others, nor from the contract made by a buyer on exchange, the court ruled the 3rd prong does not apply. Stocks fail the first part of this.

trog2• 3 years ago

'''Having considered the economic reality of the Programmatic Sales, the Court concludes that the undisputed record does not establish the third Howey prong. Whereas the Institutional Buyers reasonably expected that Ripple would use the capital it received from its sales to improve the XRP ecosystem and thereby increase the price of XRP, Programmatic Buyers could not reasonably expect the same.'''

I don't get this - why were Programmatic Buyers buying it then? I would agree if Programmatic Buyers were buying XRP to immediately use to then buy pizza or whatever, but nobody in cryptoassets does this.

Every individual person buying XRP seems to me to be buying it for the same reason as the institutional investors.

choppaface5• 3 years ago

This is a decision on a motion for summary judgement, not on the merits.

fallingknife• 3 years ago

I think that's even worse for the SEC? Isn't a summary judgment basically the judge saying their case isn't even strong enough to go to trial?

monero-xmr2• 3 years ago

2024 will be massive. Shitcoin explosion plus bitcoin halving = crypto mayhem.

Scoundreller• 3 years ago

That and the carrying cost of things that don’t generate income has gone up a lot.

DANmode2• 3 years ago

Could you clarify your meaning here?

Thanks!

yieldcrv4• 3 years ago

The SEC would be really dumb to take this to this Supreme Court

I wouldn't even appeal to the appellate court if I were them, if they want to even exist after the subsequent round

I think we got this in the bag ya’ll

rvz• 3 years ago

Looks like the crypto critics are now confused and have gone silent again after the Bitcoin leveraged ETFs getting approved and now they got this one wrong again. Just for the ones at the back, it is absolutely NOT the SEC that determines what is and what isn't a security and the SEC does NOT get the final say, which this summary judgement has already shown.

But of course complain all you want, but there was a reason why the SEC did not want the Hinman documents unsealed (whilst everyone else was screaming at another hysteria around Coinbase in [0]) and the SEC attempted to request those documents to be sealed and that was denied as well. [1]

[0] https://news.ycombinator.com/item?id=36302231

[1] https://news.ycombinator.com/item?id=36306757

eric_cc3• 3 years ago

There is a lot of hate here for crypto but you have seen nothing yet. The cognitive dissonance is going to be a sight to behold in the next 365 days.

shrimpx2• 3 years ago

The SEC should've left crypto alone. Instead of crypto getting destroyed by the SEC, now it looks like the SEC might get destroyed by the judicial branch if they choose to go up the chain with this case. This SCOTUS is massively unfavorable toward the executive making up rules to enforce, or taking liberties with interpreting standing law. If it gets there I imagine a 6-3 Alito opinion gutting the SEC's wiggle room in defining a 'security' and enforcement reach.

constantly• 3 years ago

And with the deep pockets of the crypto puppet masters and all the evidence coming out about the Justice’s susceptibility to taking as many “gifts” as they can get their hands on, that just further solidifies the pre-determined outcome.

shrimpx2• 3 years ago

The US has a standing doctrine called 'delegation', where the executive is allowed to make up rules and enforce them. The Federalist Society finds that doctrine to be unconstitutional and wants to chip away at it. All 6 conservative justices have ties to the Federalist Society, so it really doesn't require any lavish gifts in this case.

nobrains• 3 years ago

What does this mean for Ycombinator's Stellar?

wonderwonder3• 3 years ago

probably not good news, Stellar was created to compete with XRP

DennisP3• 3 years ago

The markets seem to disagree, Stellar is up 53% today.

rahimnathwani• 3 years ago

IANAL

The court ruled that:

- Ripple's sales of XRP to institutional buyers were investment contracts, but

- programmatic sales via an anonymous exchange were not.

The ruling emphasises the distinction between an asset and an investment contract. An orange grove isn't an investment contract. The sale of an orange grove may or may not be an investment contract. Determining whether or not is governed by the Howie test.

If ChatGPT is to be believed (ha!), secondary sales of common stocks are not investment contracts: https://chat.openai.com/share/d3865e23-9210-4977-bda5-b4ded8...

If you don't want to read the whole ruling, look at pages 13-15 and 22-24.

travisjungroth• 3 years ago

The sale of an orange grove may or may not be an investment contract. Determining whether or not is governed by the Howie test.

I liked the era when people vaguely claimed that their coins weren’t a security because securities need to be registered. It had an “I’m not an alcoholic, alcoholics go to meetings” flare to it. I tried to get in on the fun with a vaporware cryptocurrency, OrangeGroveCoin. It got a disturbing amount of investment interest.

glerk• 3 years ago

Great day for crypto and for financial freedom in general. Great to see the justice system finally rebuking these unelected bureaucrats and placing some limits on the power they claim to have.

choppaface5• 3 years ago

Ripple still faces over $700m of unregistered security sales as part of the decision.

wonderwonder3• 3 years ago

That's really not a lot of money for them to lose. This is a massive win for them and alt coins in general.

LatteLazy2• 3 years ago

You don't have to register to sell to qualified investors right (which those were)?

burnte3• 3 years ago

The unelected bureaucrats are authorized by duly elected politicians. They do not coalesce in office from the ether, they're put there by elected officials. It's not like there's no oversight.

LatteLazy2• 3 years ago

Um, the judge just ruled that they are NOT authorised by duly elected officials in this case. That's sort of the point of the case...

trompetenaccoun• 3 years ago

They are not authorized to regulate which isn't their authority, they were breaking the law. I don't even like Ripple, I think it's a scam. But if the SEC can't even win on this one, which they clearly picked first because it would have been the easiest given it's extremely centralized nature, Gensler's game is over.

1vuio0pswjnm7• 3 years ago

https://www.courtlistener.com/docket/19857399/874/securities...

https://storage.courtlistener.com/recap/gov.uscourts.nysd.55...

Ripple notches win in SEC case over XRP cryptocurrency

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