Heating up its legal war against XRP, the U.S. Securities and Exchange Commission is striking back at Ripple, saying its “fair notice” defenses are improper and that Ripple is wasting the court’s time.
In a letter to the judge on Mar. 9, the SEC asserted that “Ripple seeks to avoid liability for its unregistered offering by diverting the Court’s attention with a number of affirmative defense arguments sounding in equity but all pigeonholed into the label ‘fair notice.’”
“These allegations — also the basis of Ripple’s attempts to seek a multitude of privileged SEC deliberations — will lead to ‘wasteful forays’ in this litigation), and should be stricken,” the SEC asserted.
In an earlier court filing, Ripple alleged that the SEC had insufficiently defined the term “investment contract,” failed to provide fair notice that XRP transactions violated laws, and — through the agency’s determination that bitcoin and Ethereum’s ether were not securities — led Ripple to believe that XRP, too would not be deemed a security.
See related article: Ripple: SEC did not give fair notice that XRP violated law
Last December, the SEC filed a lawsuit against Ripple, 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.
A central issue in this case is whether transactions involving XRP — the native cryptocurrency for the Ripple platform — constitute “investment contracts” and therefore securities subject to registration under Section 5 of the Securities Act of 1933.
Even though major cryptocurrency exchanges like Coinbase have delisted XRP in the United States as a result of the SEC’s lawsuit, XRP — which has been in the market for the last eight years — remains popular in Asia and is still ranked, by market capitalization, the seventh largest cryptocurrency in the world, as of this publishing time.
The outcome of the SEC’s lawsuit against Ripple and determination of XRP’s status are also being closely watched by industry leaders and investors alike for its potentially far-reaching implications for the cryptocurrency industry.
Ripple has argued that the SEC’s Howey’s test does not apply to XRP, as “it is not a security and the SEC has no authority to regulate it as one.”
But the SEC asserts that Howey embodies a “flexible rather than a static principle, one that is capable of adaptation to meet the countless and variable schemes devised by those who seek the use of the money of others on the promise of profits.”
“Ripple essentially capitalized its entire business by selling a digital asset security to the public while promoting to investors the potential for profits based on Ripple’s future efforts,” the SEC stated in its letter to U.S. District Court Judge Analisa Torres of the Southern District of New York. “Yet Ripple now claims surprise that the SEC filed this enforcement action.”
See related article: No Ripple-SEC lawsuit settlement in sight as XRP prices tumble
Referring to Ripple’s argument that a different government regulator, the U.S. Department of Treasury’s Financial Crimes Enforcement Network had made an earlier determination that XRP was a virtual currency, the SEC said: “The FinCEN settlement itself distinguished XRP from a traditional ‘currency,’ and FinCEN, the SEC, and courts have been uniformly clear that the application of one regulatory regime to digital assets says nothing about the application of a separate, overlapping regulatory regime to the same asset.”
In its legal response filed last week, Ripple also highlighted that lack of notice was apparent when market participants discussed the regulatory status of XRP with the SEC, but were not told that the SEC considered XRP to be a security.
See related article: XRP prices see ‘pump and dump’ as Ripple outlines legal defense strategy
But the SEC says it had no legal duty to explain the XRP’s legal status to others.
“Rather than acknowledge its own obligation to follow the law, Ripple instead posits that the SEC staff has an obligation to affirmatively warn industry participants about violations of other participants — even if the staff is in the process of conducting a non-public investigation — a requirement that does not exist in our legal system,” the SEC stated.
See related article: SEC Sues Kik for $100M ICO Raise — Why This Could Change Everything
Ripple wins lawsuit against Tetragon
Despite the legal clouds over XRP, Ripple won a reprieve last week when a Delaware court rejected a request by Tetragon, an investment group headquartered in Guernsey, to redeem its Series C preferred stock in Ripple. Tetragon led Ripple’s US$200 million Series C funding round in December 2019, and in January this year sued Ripple to reclaim its stock after the SEC filed its enforcement action.
“XRP is no more a security after the SEC filed the enforcement action than it was before it,” said Vice Chancellor Morgan T. Zurn, who presided over Tetragon’s lawsuit against Ripple in the Delaware Court of Chancery. “A determination under Section 5.4 resolves the question of whether XRP is a security. The enforcement action, by contrast, asks that question. The question is not yet resolved, so a determination has not yet been made. And when it is made, it will be made by the District Court.”
In a blog post on the ruling, Ripple said “Let’s call Tetragon’s lawsuit what it is — an opportunistic move to take advantage of the SEC’s allegations. What has always been clear (and made so even more today) is that the SEC still has to try to prove their case in Court; which we do not believe they will be able to do. As our lawyers have said publicly, the SEC is “dead wrong!”
Update on Tetragon’s Series C shareholder suit: the Judge ruled that since there has been no official determination regarding XRP’s status, Tetragon’s claim that a securities default occurred is wrong. Our full statement: https://t.co/OybrPmB2Pa— Stuart Alderoty (@s_alderoty) March 6, 2021
See related article: SEC commissioner Hester Peirce says enforcement is never good way to provide clarity
Ripple obtains settlement with YouTube
Separately, Garlinghouse — Ripple’s CEO — tweeted yesterday that he and Ripple had reached a settlement with YouTube over a lawsuit they filed last year arising from fake accounts and scam videos on the video-sharing platform that impersonated Garlinghouse and Ripple conducting XRP giveaways.
The lawsuit alleged that not only did YouTube refuse to take action to stop the scams, YouTube profited from the fraud by “aiding and abetting the scammers” and falsely validated the scams as legitimate by awarding a verification badge to the hacked channel behind the video impersonations.
Social platforms are starting to acknowledge their role in allowing crypto scams to persist and recognize the need to be part of the solution. Some like @xrpforensics are helping detect/track stolen funds, but platforms need to lead the charge or it’s still just whack-a-mole. 2/3— Brad Garlinghouse (@bgarlinghouse) March 9, 2021
In a series of tweets, Garlinghouse said “We’ve now come to a resolution to work together to prevent, detect and take down these scams.”
“Social platforms are starting to acknowledge their role in allowing crypto scams to persist and recognize the need to be part of the solution. Some like @xrpforensics are helping detect/track stolen funds, but platforms need to lead the charge or it’s still just whack-a-mole,” he added.
The legal settlement, the dollar amount of which was not disclosed, will involve YouTube and Ripple jointly creating a non-profit dedicated to helping cybercrime victims, Decrypt reported.
“While specific settlement terms are confidential here, it’s clear to all that without accountability and action, trust erodes in this industry, at a crucial time when govts around the world are looking closely at crypto,” Garlinghouse tweeted.