- A California judge has ruled that a civil securities lawsuit against Ripple Labs will proceed to trial
- Judge Phyllis Hamilton has partially denied Ripple’s motion for summary judgment regarding claims against CEO Brad Garlinghouse
- The lawsuit has alleged Garlinghouse made misleading statements about the sale of securities during a 2017 interview
A California judge has ruled that a civil securities lawsuit against Ripple Labs will move forward to trial. The decision, announced by Judge Phyllis Hamilton of the US District Court for the Northern District of California, partially denies Ripple’s motion for summary judgment, specifically regarding claims against Ripple’s CEO, Brad Garlinghouse. The lawsuit centers on allegations that Garlinghouse made misleading statements about the sale of securities during a 2017 televised interview and threatens to clash with last year’s ruling that XRP is not a security.
“Very, Very Long XRP”
The plaintiffs in the case argue that, in his interview, Garlinghouse professed to be “very, very long XRP” while simultaneously selling millions of XRP tokens on various cryptocurrency exchanges. This action, they claim, violated California’s securities laws.
In total, the plaintiffs brought five claims in the case, with Judge Hamilton dismissing four of them, specifically an allegation of “failure to register claims.” Ripple’s Chief Legal Officer, Stu Alderoty, expressed satisfaction with this outcome through an emailed statement:
We are pleased that the California court dismissed all class action claims. The one individual state law claim that survived will be dealt with at trial.
Ripple’s defense hinges on the argument that XRP does not meet the definition of a security under the Howey Test, which assesses whether an asset qualifies as an investment contract. Ripple’s lawyers contended that because XRP is not a security, as Judge Torres found last year, the claims of misleading statements are unfounded.
Judicial Disagreement Could Spell Trouble
Judge Hamilton’s ruling diverges from Torres’ finding that XRP did not meet all the criteria of the Howey Test when sold directly to retail participants on crypto exchanges. This ruling was celebrated by many in the cryptocurrency sector as a step towards regulatory clarity, but the picture has since become more cloudy: Judge Jed Rakoff of the same New York court rejected Torres’ reasoning in a separate case involving the U.S. Securities and Exchange Commission (SEC) against Terraform Labs, and the SEC has appealed the ruling.
Judge Hamilton’s opinion also differed from that of Torres, specifically regarding sales to “programmatic” traders, who are non-institutional investors. Hamilton stated that it could not be determined as a matter of law that these traders did not have an expectation of profit due to Ripple’s efforts, thus not meeting one of the prongs of 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.
Alderoty remains optimistic, however, noting that Judge Torres’ decision in the SEC case remains unaffected, noting, “Nothing here disturbs that decision.”
