A United States federal judge has allowed a civil securities lawsuit against Ripple Labs to proceed, denying the company’s bid for summary judgment. The lawsuit alleges that Ripple’s CEO, Brad Garlinghouse, violated California securities laws by making misleading statements.
Court Decision and Allegations
On June 20, California District Court Judge Phyllis Hamilton ruled that a jury must decide if Garlinghouse made misleading statements in a 2017 interview. The order dismissed four allegations related to Ripple’s failure to register XRP as a security but allowed the claim regarding Garlinghouse’s statements to proceed.
In the 2017 interview on Canada’s BNN Bloomberg, Garlinghouse claimed to be “very, very long” on XRP. However, the lawsuit alleges this statement was false, as Garlinghouse reportedly sold millions of XRP throughout that year.
Judge Hamilton’s Findings
Judge Hamilton noted that Ripple argued the misleading statement claim should be dismissed because XRP is not a security under the Howey test. This test determines if a transaction qualifies as an investment contract. Ripple referenced a landmark ruling by Judge Analisa Torres in a Securities and Exchange Commission (SEC) lawsuit from July 2023, which found that XRP was not a security.
However, Judge Hamilton disagreed, stating that XRP could be considered a security when sold to non-institutional investors. She noted that these investors would have expected profits primarily from Ripple’s efforts, a key factor in the Howey test.
“The court declines to find as a matter of law that a reasonable investor would have derived any expectation of profit from general cryptocurrency market trends, as opposed to Ripple’s efforts to facilitate XRP’s use in cross-border payments, among other things,” Judge Hamilton wrote.
Ripple’s Response
Stuart Alderoty, Ripple’s Chief Legal Officer, emphasized that Judge Torres’ ruling in the SEC case remains unaffected. He stated, “The ruling from Judge Torres in the SEC case still stands and nothing here disturbs that decision.”
Broader Implications
The ruling has significant implications for the U.S. crypto industry. Many hailed Judge Torres’ 2023 ruling as a victory, believing it would set a precedent for future crypto cases. However, its influence has been mixed.
In the SEC’s case against Terraform Labs, Judge Jed Rakoff, from the same courthouse as Judge Torres, disagreed with the Ripple ruling and rejected Terraform’s dismissal motion in August 2023. Terraform eventually lost the case and had to pay a $4.5 billion settlement with the SEC.
The decision to proceed with the lawsuit against Ripple highlights ongoing legal uncertainties in the cryptocurrency sector. As the case moves to trial, the outcome will likely have significant ramifications for Ripple and the broader crypto market, especially concerning the classification of digital assets as securities.
