Lawsuit Against Ripple Over CEO’s Alleged Violation of California Securities Laws Given Go-Ahead by Court
Ruholamin Haqshanas
Last updated: June 21, 2024 01:35 EDT | 2 min read
A federal court judge in the United States has approved a civil securities lawsuit against Ripple Labs, rejecting the company’s request for summary judgment.
The lawsuit accuses Ripple CEO Brad Garlinghouse of violating California securities laws.
The recent order by California District Court Judge Phyllis Hamilton means that a jury will ultimately decide whether Garlinghouse made false statements in a 2017 interview.
While the judge dismissed four allegations related to Ripple’s failure to register XRP as a security, one claim regarding Garlinghouse’s alleged false statements remains.
Garlinghouse Sold XRP Despite Claiming to Be Bullish on Token
In an interview with Canada’s BNN Bloomberg, Garlinghouse expressed being “very, very long” on XRP.
However, the lawsuit alleges that this statement was false as he supposedly sold millions of XRP throughout the same year.
Ripple’s Chief Legal Officer, Stu Alderoty, expressed satisfaction with the court’s decision, stating that all class action claims were dismissed and the remaining individual state law claim would be addressed at trial.
Judge Hamilton’s order addressed Ripple’s argument that the claim of false statements should be dismissed since XRP does not meet the criteria for a security under the Howey test.
The judge referred to a significant ruling in July 2023 by Judge Analisa Torres in a lawsuit by the Securities and Exchange Commission (SEC).
However, Judge Hamilton disagreed, asserting that XRP could be considered a security when sold to non-institutional investors.
She emphasized that these investors would have expected profits from Ripple’s efforts, a crucial factor in the Howey test.
The court found that a reasonable investor might have anticipated profit due to Ripple’s initiatives to facilitate the use of XRP in cross-border payments and other applications.
Consequently, Judge Hamilton concluded that it could not be determined as a matter of law that Ripple’s actions would not have led a reasonable investor to expect profit resulting from the efforts of others.
Initially, the crypto industry celebrated Judge Torres’ decision as a significant victory, expecting it to set a precedent in other crypto-related cases.
However, its impact has been limited, as demonstrated by Judge Jed Rakoff’s differing perspective in the Terraform Labs case, where he rejected the dismissal motion, ultimately leading to a $4.5 billion settlement with the SEC.
Ripple’s Victory Against the SEC
In May last year, a US court ruled in favor of Ripple in the ongoing lawsuit brought by the SEC, stating that selling XRP on exchanges alone does not constitute an investment contract.
The ruling, issued by the District Court for the Southern District of New York, stated that the “offer and sale of XRP on digital asset exchanges did not amount to offers and sales of investment contracts.”
However, the federal judge also ruled that XRP is a security when sold to institutional investors, as it met the conditions set in the Howey Test.
As reported, the XRP Ledger (XRPL) has seen a rise in transaction activity, with the number of transactions more than doubling from the fourth quarter of 2023 to the end of the first quarter of 2024.
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