- The backlash against the Ripple v SEC ruling last week has begun in earnest
- Former SEC chiefs have weighed in to say that the ruling will be reversed
- The arguments are coming down to technical points of securities law that most don’t understand
Ripple fans had barely recovered from their partying following the verdict in its securities case against the Securities and Exchange Commission (SEC) last week when the bears showed up and started growling. Several prominent individuals, from securities lawyers to former SEC chiefs, have taken great pleasure this weekend in dissecting Ripple’s ‘win’ and pointing out that all may not be rosy in the crypto garden just yet.
Second Circuit “Will Overturn” Verdict
On Friday, John Reed Stark, a former chief at the SEC’s Office of Internet Enforcement, penned a LinkedIn blog post (boomer) in which he claimed that a reversal is likely in time. Stark Reed didn’t sugar coat the decision, which he called “definitely an SEC loss,” but added that the verdict “resides on shaky ground” and added that it will “likely be appealed at some point, will likely result in reversal and is not necessarily a cause for celebration.”
Stark analyzed the ruling and said that the court was “taking seriously the cryptoverse position that the SEC has sent mixed and inconsistent messages regarding the application of the Howey Test to tokens trading in the secondary market,” but pointed out Ripple’s failure to “reinvent the Howey test,” which the court didn’t buy.
“Troubling on Many Fronts”
He added that the ruling was “troubling on multiple fronts” and was “anathema to the SEC’s mission and authority” to protect investors, claiming that it protected institutional investors but not retail ones. He also argued that the court’s stance that tokens cease to be securities when sold on exchanges to retail traders without knowledge of the issuer seems inconsistent with basic investment principles and added that the awarding of XRP tokens to employees and third parties seems to “defy well established principles of contract law.”
Stark summarized his opinion thus:
Stock is always stock – it can’t transmogrify into “not stock.” So my take is that at some point, the SEC will appeal the Ripple decision to the 2nd Circuit and the 2nd Circuit will overturn the District Court’s rulings related to “programmatic” and “other sales.”
Others Pile In
Stark isn’t the only professional who doubts the legitimacy of the Ripple judgement. former SEC regional director and experienced attorney, Marc Fagel, a former partner with the law firm of Gibson, Dunn & Crutcher, where he served as co-chair of the firm’s national Securities Enforcement Practice Group, also doubts that elements of the case could also be reversed:
Howey is about economic reality, and there is no rational reason for the treatment to be so different. The conclusion that, as a matter of law, no reasonable investor expects profits from a third party because they buy the asset indirectly is…well, reversible error, I predict.
— Marc Fagel (@Marc_Fagel) July 16, 2023
Fagel added that he expected both sides to appeal the areas in which they lost and that the SEC will come out better.
Issue Comes Down to Interpretation of Securities Law
Fagel and Stark aren’t alone in their reading of the situation, which for onlookers has come down to a case of who you trust more; many of those criticizing the ruling would appear to have an anti-Ripple agenda, while those cheering it have ignored the negative elements of the decision.
It wasn’t just individuals that were confused by the decision, with the Financial Times calling it “rather curious” and asking tongue-in-cheek for clarifications from experts to help it understand. One of those who offered a take was pro-crypto lawyer Jake Chervinsky, who clarified the key areas of discussion:
This is a critical distinction that the industry has made, and the SEC has ignored, for years.
The fact that a federal district court has explicitly acknowledged its validity is a monumental shift in US crypto regulation, and a forceful rejection of the SEC’s theory of the law.
— Jake Chervinsky (@jchervinsky) July 15, 2023
Ripple CEO Brad Garlinghouse is under no illusions as to what the SEC will do next. He told Bloomberg that he fully expects an appeal from the SEC, but wasn’t too worried about the potential for a re-locking of horns:
As a matter of law, the law of the land right now is that XRP is not a security. Until there is an opportunity for the SEC to file an appeal, which would take years, frankly, we are very optimistic.
Garlinghouse dismissed the institutional sales aspect as “the smallest piece” of the lawsuit and said that if the SEC were to file an appeal against the secondary market ruling it would only further solidify the decision that Torres made. He also took the opportunity to call the SEC a “bully” and claimed a victory for the whole crypto space.
One thing’s for sure: we may have a verdict but we certainly haven’t heard the last of this case.
