On August 7, 2024, a digital asset infrastructure company (the “Company”) was ordered to pay a $125 million civil penalty for its failure to register institutional sales of its XRP token with the Securities and Exchange Commission (the “SEC”).  SEC v. Ripple Labs, Inc., 20-cv-10832-AT (S.D.N.Y. Aug. 7, 2024).  As previously reported[1], Southern District of New York Judge Analisa Torres issued a summary judgment decision on July 13, 2023, that found the Company’s sale of its XRP token amounted to the sale of an unregistered security in violation of the Securities Act when sold to certain institutional buyers, while at the same time holding that XRP was not a security within the meaning of the Securities Act when sold on digital asset exchanges given the different circumstances and expectations of buyers in those transactions. 

Following the Court’s split finding of liability, the SEC requested nearly $2 billion in remedies, consisting of $876 million in disgorgement, $876 million in civil penalties, and approximately $200 million in prejudgment interest.  The SEC further requested that the Court enjoin the Company from making any further institutional sales of the XRP token.  The Company requested that the Court impose a fine of closer to $10 million.  While the Court’s order fell far short of the monetary penalties sought by the SEC, Judge Torres did enjoin the Company’s sale of the XRP token to institutional investors. 

In ordering the civil penalty and injunction, the Court noted that it sought to balance the Company’s “recurrent, highly lucrative [sale of unregistered securities]” with the lack of “allegations of fraud, misappropriation, or other more culpable conduct.”  Moreover, the Court conducted an independent analysis of the Company’s expert report and found that only 1,278 transactions violated the Securities Act as opposed to the 1,700 transactions highlighted by the SEC.  Further, the Court found that the SEC had not conclusively established that the Company recklessly disregarded the securities laws.  In justifying the need for an injunction, the Court observed that the Company’s continued unregistered sales of XRP in “on-demand liquidity” transactions show the Company’s “willingness to push the boundaries . . . [and] evinces a likelihood that it will eventually (if it has not already) cross the line[.]”

Notably, the Court chose not to order disgorgement because disgorgement is only permissible where it “does not exceed a wrongdoer’s net profits and is awarded for victims” and under Second Circuit law, a victim is “one who suffers a pecuniary harm from the securities fraud.”  The SEC argued that the Company did not disclose the disparate prices and discounts offered to institutional buyers and only offered speculative evidence that investors did not receive the return on the investment contemplated.  In response, the Company argued that even if investors may have been dissuaded from investing, the investors received the return on investment contemplated at the outset.  Ultimately, the Court held that “‘the right to make an informed decision when considering whether to make [an] investment’ is not a property right that can be vindicated through disgorgement.”  Further, the Court found that the SEC did not establish that the Company would have offered additional discounts to investors if it complied with the Securities Act, nor did they establish “that [investors] suffered pecuniary harm by paying the sticker price.” 

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