The Security and Exchange Commission (SEC) formally filed a lawsuit against Ripple on 23 rd December for a $1.3 billion sales of an unregistered security. What separates this security lawsuit from similar other ones like that of Block.One and Telegram in the crypto space is the fact that SEC has formally named the founder Chris Larsen and CEO Brad Garlinghouse in their individual capacity.
The primary reason behind that is being attributed to the public sale of $1.3 billion XRP, out of which nearly $700 million returned to the private hands of the founder and COO, another bizarre and never seen before phenomenon in any of the fundraising events.
The lawsuit has already started to take a toll on Ripple’s market exposure and the price of XRP token which is on a free fall ever since the announcement, falling from above $0.50 to $0.25. With an uncertain future ahead, Ripple fears losing its remittance market it established over the years with hundreds of national as well as private banks and key strategic partners.
Until now, Fidelity backed OSL, Chicago-based Beaxy exchange has suspended all XRP trading services while Bitwise has liquidated its XRP funds owing to security woes.
SEC Lawsuit: Key Takeaways and Facts
The SEC lawsuit is 71 pages long with detailed info on why XRP qualifies as a security and how both Larsen and Garlinhouse were well aware of the fact as early as 2012, but failed to act upon it and proceeded with the offering without registering it with the concerned authorities. The SEC lawsuit holds both the Ripple executives liable for the violation of federal security laws which means they cannot claim ignorance or put the blame on anyone else.
reading between the lines here (as you must with these things) and ohhhhh boy this is a savage complaint RIP https://t.co/yRBfqTZx2s
— Katherine Wu (@katherineykwu) December 22, 2020
The Lawsuit accuses Larsen and Garlinghouse of aid & abet and went onto claim that people who created XRP were the same people who created Ripple, citing the statement of one of their own spokesperson. A major statement considering Ripple has spent quite an amount on civil lawsuits against those who have claimed the same.
As Cryptographer-1—a well-respected and known Ripple spokesperson—stated in a recent tweet (on Twitter): “The people who created XRP are pretty much the same as the people who created Ripple and they created Ripple originally too, among other things, distribute XRP.”
Further, the lawsuit established that XRP is indeed unregistered security which was a known fact to the creators of the token before its market debut. The lawsuit read,
The Legal Memos warned that there was some risk that XRP would be considered an “investment contract” (and thus security) under the federal securities laws depending on various factors. These included, among other things, how Ripple promoted and marketed XRP to potential purchasers, the motivation of such purchasers, and Ripple’s other activities with respect to XRP.
SEC Claims Ripple Managed the Price and Liquidity in XRP Market
A traditional asset class is driven by the supply-demand hierarchy, however, XRP with no use case of its own was largely pumped and dumped on the market by Ripple to keep its price afloat. The lawsuit claimed that both Larsen and Garlinghouse indulged in activities to promote the token through speculations and positive media outreach.
This section on Ripple's effective "open market operations" via "primary dealers" to control and support XRP's price to protect investors is simply amazing. It's literally equivalent to a cbank plunge protection/confidence operation. pic.twitter.com/zvAYno3TDO
— Izabella Kaminska (@izakaminska) December 23, 2020
The lawsuit noted,
Throughout the Offering, Ripple—as Garlinghouse and Larsen directed at various times—undertook significant efforts to monitor, manage, and impact the XRP trading markets, including the trading price and volume of XRP.
As described in Section II, these efforts included: (1) using algorithms to time the amount and price of Defendants’ XRP sales into the market; (2) paying incentives to certain market makers—some of which Ripple engaged to effect the Market Sales—if the sales reached certainl trading volume levels on XRP; and (3) paying digital asset trading platforms to permit XRP trading.
Did Chris Larsen and Brad Garlinghouse Ignore Red Flags?
The detailed lawsuit further establishes the two Ripple executive’s intentions to profit from XRP markets despite numerous red flags raised by employees before and after the public offering of XRP. The lawsuit cited an incident of 2015 where Ripple has warned the fund issuer about XRP could be deemed as security. The lawsuit further noted
Defendants Promised to Undertake Significant Efforts to Build Value for XRP, and Promised to Undertake Significant Efforts to Develop and Maintain a Public Market for XRP Investors to Resell XRP
Ripple and Garlinghouse Assured Investors Ripple Would Protect the Trading Markets for XRP
Ripple and Garlinghouse also encouraged reasonable investors to view the purchase
of XRP as something from which they could profit by persistently touting increases in XRP’s price.
The Lawsuit Was Filed Yesterday But SEC Was Preparing for it From Early 2019
The lawsuit by SEC against Ripple looks pretty strong with key facts and statements verifying that XRP is not just security, but both the defendants were well aware of the fact throughout the sale of the token and even before the public sale began. It also revealed an interesting fact that SEC signed a tolling agreement with Ripple starting from April 1 2019 which was renewed up until 24 December 2020.
A tolling agreement is a pact between two parties SEC & Ripple, in this case, agreeing to the statute of limitations. This fact makes it clear that even though SEC filed the lawsuit only yesterday, they have been working on the case at least as early as April 2019. The tolling agreement followed by the lawsuit also means that all negotiations and settlement deals failed.
Another thing to note here is that the lawsuit is only for the unregistered sale of the security and no criminal charges, which means both the Ripple executives won’t face any jail time. However, as a punishment, they might be forced
- permanently disassociate themselves from offering XRP
- give up all their profits and gains (approximately $600 million combined)
- a permanent ban from any kind of digital asset offering
- civil penalties
The lawsuit reveals a lot of details about the case that the SEC has been building since early 2019 and looking at the evidence statements provided by the SEC, it seems highly unlikely that Ripple stands any chance to win the lawsuit. More importantly, the two executives might face civil lawsuits as well as the case unfolds further in the court of law.
However, it is almost certain that XRP is security, and both the executives who were primarily responsible for overseeing the functionary of Ripple were aware of it, and still continued to dump XRP for personal gains.