Ripple CEO’s ‘Misleading Statement’ Sparks Securities Suit in California

A United States federal judge has authorized the continuation of a civil securities lawsuit against Ripple Labs, despite the company’s attempt to have the case dismissed. The suit alleges that the CEO, Brad Garlinghouse, violated California securities laws. On June 20, Judge Phyllis Hamilton of the U.S. District Court for the Northern District of California decreed that a jury will decide whether Garlinghouse made deceptive statements during a 2017 interview.

The judge dismissed four accusations related to Ripple’s failure to register XRP as a security. The allegations pertain to Garlinghouse’s comments in a 2017 interview with Canada’s BNN Bloomberg, where he claimed to be “very, very long” on XRP. The lawsuit asserts that this statement was misleading because Garlinghouse had sold millions of XRP during that year. Ripple’s Chief Legal Officer, Stu Alderoty, expressed satisfaction that all class action allegations were dismissed, stating that the remaining individual state law claim would be addressed at trial.

Judge Hamilton observed that Ripple argued the “misleading statement” allegation should be dismissed on the grounds that XRP is not classified as a security under the Howey test. This argument referenced a landmark decision made in July 2023 by Judge Analisa Torres in a separate lawsuit between Ripple and the U.S. Securities and Exchange Commission (SEC). Hamilton disagreed and determined that XRP might be a security when sold to non-institutional investors, who might expect profits from Ripple’s undertakings—one of the criteria in the Howey test.

Hamilton noted, “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.” She emphasized that Ripple’s actions could indeed lead a reasonable investor to expect profit due to the efforts of others, preventing the court from dismissing the claim outright.

Despite Ripple’s setback in this ruling, Alderoty highlighted that the ruling by Judge Torres in the SEC lawsuit remains unaffected. This verdict was seen as a significant victory for the U.S. cryptocurrency industry, with many anticipating that it would influence other judges in future crypto cases. The outcome had raised hopes within the crypto sector that the judicial perspective on such matters might be shifting favorably.

This optimism may have been premature. In the SEC’s case against Terraform Labs, Judge Jed Rakoff, operating from the same courthouse as Judge Torres, did not concur with the Ripple precedent. Judge Rakoff rejected Terraform’s motion to dismiss in August, signaling a different judicial interpretation of the issues at hand.

Terraform Labs lost its legal battle and was required to pay a $4.5 billion settlement to the SEC. This differing judicial stance suggests that the influence of Judge Torres’ ruling might be limited, underscoring the unpredictable nature of regulatory and legal outcomes within the crypto industry.

The differing rulings in the Ripple and Terraform Labs cases illustrate the complexity and evolving nature of legal interpretations in the cryptocurrency space. While Ripple managed to secure a partial victory by having several class action claims dismissed, the decision to proceed with the trial on the remaining individual claim signifies ongoing challenges for the company.

As the legal landscape continues to develop, these cases highlight the nuanced and case-specific determinations that courts may make regarding the classification of digital assets like XRP. The ongoing litigation will likely contribute to the broader discourse on how cryptocurrencies are regulated and perceived under existing securities laws.