12,600 XRP holders demand their day in court in SEC v. Ripple lawsuit

Michelle Lim

4 years ago

Potentially moving the U.S. Securities and Exchange Commission lawsuit against Ripple Labs in a new direction, XRP holders have filed a motion to intervene in the litigation as a third-party defendant.

According to a new legal filing submitted by Rhode Island-based attorney John Deaton on behalf of XRP holders on April 19, XRP users, investors, holders and developers as well as content providers and small businesses that utilize the digital asset XRP and the XRP Ledger “have a significant interest in the property at issue in this enforcement action.”

More than 12,600 XRP holders have contacted Deaton seeking to join the intervention, according to the document. XRP holders are seeking to participate in the lawsuit as a third-party defendant to protect their interests, and are not asserting any claims or counterclaims against the SEC.

“There was never one phrase in the mountain of pages the SEC has filed since December 22, 2020 that showed one bit of consideration for the retail investors they are supposed to be defending by their every enforcement action,” Deaton wrote in a blog post.

“When we asked the court to hear our voice, the SEC scoffed and insulted us in their formal response, saying that all of us who suffered collateral damage from their ill-conceived lawsuit should remain silent,” Deaton added. “Without our intervention, we are without a voice in a debate of great stakes for us and the holders of all digital assets in the United States.”

Is XRP a ‘security’?

The SEC filed a lawsuit against Ripple in December, alleging that its sale of XRP was an unregistered securities offering worth over US$1.38 billion. The SEC also named Ripple’s executive chairman Chris Larsen and CEO Brad Garlinghouse as co-defendants for allegedly aiding and abetting Ripple’s violations and making US$600 million in personal profits from their unregistered sales of XRP. According to legal filings earlier this month, Garlinghouse and Larsen are seeking to have the charges against them dropped.

At the heart of the lawsuit is whether transactions involving XRP constitute “investment contracts” and therefore securities subject to registration under Section 5 of the Securities Act of 1933.

The SEC has alleged that XRP is a security under the Howey’s test — the legal basis for determining whether a financial product should be deemed a security. “Ripple publicly offered and sold XRP as an investment into a common enterprise that included Ripple’s promises to undertake significant entrepreneurial and managerial efforts, including to create a liquid market for XRP, which would in turn increase demand for XRP and therefore its price,” according to the SEC’s amended complaint.

Ripple has counter-argued that the Howey’s test does not apply, as XRP was sold as an asset and is not a security. In an earlier 93-page court filing, Ripple also asserts that XRP “is not a security and the SEC has no authority to regulate it as one.

See related article: No Ripple-SEC lawsuit settlement in sight as XRP prices tumble

The price of XRP, which was the third-largest largest cryptocurrency in the world by market value prior to the SEC’s enforcement action against Ripple, plummeted by more than 60% following the SEC’s lawsuit and subsequent suspension of XRP trading on U.S. cryptocurrency exchanges. XRP has remained popular in parts of Asia, however, and is now ranked fourth, with a total market value of US$58 billion. XRP is currently trading at US$1.27 as of publishing time, an increase of over 400% since the start of the year.

The SEC’s lawsuit against Ripple is being closely watched by the XRP community and the cryptocurrency industry not only because of its potential impact on XRP investors, but also the legal precedent it could set for other cryptocurrencies.

See related article: Ripple: SEC did not give fair notice that XRP violated law

Deaton’s latest filing follows the decision by U.S. District Court Judge Analisa Torres in March granting the request by XRP holders to file a motion to intervene in the SEC lawsuit against Ripple. The SEC had tried, unsuccessfully, to block the XRP holders’ bid to intervene on the grounds of statutory and sovereign immunity.

This week’s filing is Deaton’s second attempt at filing a motion to intervene on behalf of XRP holders. His first motion had been rejected because he had failed to submit a pre-motion letter in accordance with Judge Torres’ court rules.

Why intervention by XRP holders matters

Deaton has argued that XRP holders have to intervene as neither the SEC — the very agency supposed to protect investor interests — nor Ripple — which has no ethical responsibility to XRP holders — are representing their interests.

“By failing to distinguish specific prior sales and distributions by Ripple from present- day XRP, the SEC has put the property of XRP Holders at the heart of this case and positions its interest at the complete opposite end of the spectrum from that of XRP Holders,” Deaton wrote in the memorandum of law filed in support of the motion to intervene. “Without intervention, the SEC can continue to manipulate the role of XRP Holders to fit its narrative against Ripple and its two executives and potentially destroy the property interests of XRP Holders.”

Deaton also took aim at the SEC’s attempt to meet the common enterprise prong embodied in the Howey test, arguing: “the SEC absurdly claims that because ‘XRP investors stand to profit equally if XRP’s popularity and price increase,’ all XRP Holders entered into a common enterprise with Ripple. This claim is ridiculous because the same statement equally applies to Bitcoin, Ether, XRP, or even gold or silver investors.”

“The language utilized by the SEC in the Complaint is both reckless and dangerous as it could be applied not only to every cryptocurrency but every commodity,” Deaton added.

The SEC would have the authority to regulate a vast number of non-parties, including digital asset exchanges, developers, vendors, ordinary users and retail holders of XRP if it was successful in its claims against XRP, Deaton wrote. “This would dramatically affect the entire secondary retail market for XRP and possibly, all of cryptocurrency.”

See related article: XRP holders seek to join Ripple in fighting SEC lawsuit

“The law is well settled that if there is no investment intent a transaction does not fall within the scope of the securities laws,” Deaton wrote. “Clearly, the SEC is either unaware of XRP Holders’ use of XRP or they are choosing to ignore such use for litigation reasons.”

From 2013 to present, XRP Holders have been using XRP and the XRPL for purposes such as for everyday payments, collateral for loans and bridge currency to transfer assets between exchanges.

“The absurdity and arrogance of this unrestrained, out-of-control regulator’s claims could not be further from the truth,” said Deaton, in his blog post. “Their logic could only be sustained if the SEC was able to suppress any XRP retail holder from speaking up and telling our stories of how we use this digital currency in a variety of ways.”

Ripple and SEC continue to battle over discovery

Aside from XRP holders’ bid to join as a third party, the SEC’s lawsuit against Ripple is currently in its discovery phase, with the two sides now battling over what information they need to share with the other side.

Last week, Ripple’s lawyers filed a letter asking U.S. Magistrate Judge Sarah Netburn to stop the SEC from using Memoranda of Understanding (“MOU”) with foreign regulators to obtain information on Ripple and XRP.

“The MOU process involves a foreign securities regulator in the discovery process, which has a significant impact on the recipient of the requests, including Ripple’s overseas business partners, and amounts to an unwarranted intimidation tactic,” the lawyers wrote.

In two separate rulings earlier this month, Judge Netburn rejected the SEC’s demand for up to eight years of Garlinghouse and Larsen’s personal financial information, and granted Ripple access to the SEC’s communications with third parties regarding Bitcoin, Ether and XRP.