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On the back of twin legal victories last week as part of pre-trial discovery, Ripple CEO Brad Garlinghouse and chairman Chris Larsen are asking a judge to dismiss the U.S. Securities and Exchange Commission’s lawsuit against them permanently.
According to legal filings on April 12, Garlinghouse and Larsen have submitted motions to U.S. District Court Judge Analisa Torres to dismiss the SEC’s first amended complaint against them with prejudice. If granted, it would end the lawsuit against them and prevent the SEC from refiling the same charges in the future.
“The SEC is straining to invoke a World War II-era precedent about orange groves to the nascent technology around digital assets and blockchain. It does not work in this case, and this effort to destroy Ripple Labs Inc. (“Ripple”), a vibrant U.S. company that has spent years working to develop technology to make cross-border payments faster, cheaper, and more reliable, will be dealt with on summary judgment,” stated Garlinghouse’s attorneys in their preliminary statement, which called the lawsuit “the SEC’s extraordinary decision to sue individuals in the face of years of regulatory uncertainty about how it would try to regulate this new technology.”
In their statement, Larsen’s attorneys said: “The SEC seeks to regulate a novel and innovative financial asset by bringing an ill-conceived enforcement action in an undeveloped and highly uncertain area of the law.”
The new legal filings follow last week’s court ruling by U.S. Magistrate Judge Sarah Netburn, who rejected the SEC’s demand for up to eight years of Garlinghouse and Larsen’s personal financial information.
“The SEC’s requests for the Individual Defendants’ personal financial records, apart from those records of XRP transactions that are already promised, are not relevant or proportional to the needs of the case,” Netburn said, in her ruling.
Last December, the SEC filed a lawsuit against Ripple, Garlinghouse and Larsen for allegedly engaging in the unlawful sales of XRP in violation of Sections 5(a) and 5(c) of the U.S. Securities Act of 1933, which relates to the registration of securities with the SEC. The SEC also alleged that Garlinghouse and Larsen aided and abetted Ripple’s violations.
According to the SEC’s first amended complaint filed in February, Larsen and Garlinghouse “orchestrated these unlawful sales and personally profited by approximately $600 million from their unregistered sales of XRP.” The complaint also stated that the defendants held substantial amounts of XRP and could “continue to monetize their XRP while using the information asymmetry they created in the market for their own gain, creating substantial risk to investors.”
“SEC still fails to adequately allege aiding and abetting”
In separate memorandums of law filed in support of the motions to dismiss, the defense attorneys for the Ripple executives argued that the SEC “still fails” to adequately allege aiding and abetting — that Garlinghouse and Larsen knew or recklessly disregarded that XRP was an “investment contract” or security, and that Ripple was acting improperly in selling XRP.
“The SEC alleges that Mr. Garlinghouse’s personal sales of XRP — XRP that he earned as compensation for his ordinary course duties at Ripple — likewise should have been registered as securities offerings. But even if XRP were a security, which it is not, the Supreme Court and the Second Circuit clarified years ago that sales conducted abroad — such as Mr. Garlinghouse’s sales on foreign exchanges here — are not subject to the U.S. securities laws,” stated the memorandum of law filed on Garlinghouse’s behalf.
Garlinghouse’s defense also took aim at a key issue in the lawsuit — whether XRP is a security. “The SEC has issued no regulations concerning whether digital assets are securities, and the most timely and recent guidance that it issued concerning the other two largest digital assets most akin to XRP established that sales of bitcoin and ether were not securities offerings,” the document stated.
“Even though the existence of XRP and Ripple’s activities was publicly known throughout the entire eight years addressed in the Amended Complaint, the SEC never once publicly stated or even suggested that XRP transactions were securities,” Larsen’s attorneys wrote. Larsen was Ripple’s chief executive officer from 2012 to 2016.
“The best the SEC can do is to allege that Mr. Garlinghouse was conscious of taking steps to avoid XRP being ‘classified as a security,’ so as to comply with the law… and that he was focused on ensuring that XRP did not even appear to have the features of a security,” Garlinghouse’s attorneys wrote. “But recognizing and seeking to avoid a risk is not reckless — it is prudent.”
“Importantly, the SEC does not accuse Mr. Garlinghouse of fraud and points to no evidence that he was seeking to mislead the market by, for example, saying one thing publicly and something different in private,” Garlinghouse’s attorneys wrote. “If anything, the SEC’s allegations that Mr. Garlinghouse spoke often in public, and in detail, about the reasons that XRP sales should not be treated like ICOs or regulated as securities offerings undermines any suggestion that he knew or was reckless as to whether they were.”
“Offers and sales of XRP fall outside the territorial scope of the Securities Act”
The attorneys argued that the SEC failed to allege that any of the offers and sales of XRP by Garlinghouse and Larsen — which occurred on foreign exchanges — fall within the territorial scope of the Securities Act.
“Congress did not intend the federal securities laws to reach extraterritorial conduct,” wrote Larsen’s attorneys, adding that under the Morrison test based on the Supreme Court’s decision in Morrison v. National Australia Bank Ltd., “the SEC has the burden of pleading and proving the domesticity of each contested transaction.”
“In an attempt to distract from the deficiency of its allegations and the mandate of Morrison, the SEC relies on Regulation S — a regulation promulgated by the SEC prior to Morrison to exempt certain foreign securities offerings from registration,” Larsen’s attorneys wrote.
“The SEC’s suggested approach — which would open foreign exchanges to U.S. regulation and moot foreign regulators’ authorities over their own markets — is directly contrary to Morrison’s admonition that the U.S. securities laws were not “intended to ‘regulat[e]’ foreign securities exchanges.”
The SEC is due to file its response to the motions to dismiss submitted by Garlinghouse and Larsen by May 14.
Separately, XRP holders are seeking to intervene in the SEC’s lawsuit as a third party to protect their interests, and are due to file their motion to intervene by April 19.
Although many cryptocurrency exchanges in the U.S. — including Coinbase and Kraken — have suspended the trading of XRP following the SEC’s lawsuit, XRP is still traded on exchanges outside the U.S. The XRP/USD pair saw US$2.3 billion in 24-hour spot trading volume as of publishing time, and ranked the third most traded spot pair after Binance Coin and Bitcoin on cryptocurrency exchange Binance, according to CoinGecko data.
The price of XRP has been skyrocketing this month and rose 20% in the last 24 hours. XRP is now trading above US$1.60 as of publishing time. XRP’s total market cap crossed US$73 billion today, more than the total market cap of Nintendo, which has a market cap of US$70 billion.
