Ripple
In 2020, the Securities ExchangeCommission (the “SEC”) filed a complaint against Ripple Labs, Inc. (“Ripple”)alleging that XRP, the native token of Ripple’s XRP Ledger, is a security, andthat Ripple’s sales of XRP constituted unregistered sales of securities inviolation of the Securities Act of 1933 (the “Act”). In July of 2023, theDistrict Court determined that XRP tokens themselves are not investmentcontracts under the Howey test.[1]However, the District Court did find that Ripple’s offers and sales of XRP toinstitutional investors (the “Institutional Sales”) (i.e. – contractsthrough which Ripple sold XRP directly to certain counterparties such asinstitutional buyers, hedge funds, and ODL customers”),[2]were investment contracts under the Howey Test, and thus constitutedunregistered sales of securities under the Act.[3]Based on the District Court’s findings, the SEC argued that Ripple should beliable for: (i) a civil penalty equal to Ripple’s net profits from theseinvestment contracts, (ii) disgorgement, and (iii) prejudgment interest, for atotal fine in the realm of $2 billion. Ripple argued that it should only beliable for $10 million, an amount equal to Ripple’s actual gross revenues fromthe Institutional Sales.[4]
On August 7, 2024, the District Courtissued an Order setting forth its findings with regard to the penalties forwhich Ripple would be liable in connection with the Institutional Sales (the “Order”).[5]The Order requires Ripple to pay $125,035,150.00 to the SEC as a civil penalty.[6]This amount, while much higher than the $10 million that Ripple asserted itshould pay, is drastically less than the $2 billion that the SEC asserted thatRipple should be liable for.
The District Court reasoned that a statutorypenalty per violation was appropriate, meaning that the civil penalty assessedto Ripple would be calculated based on the number of contracts it entered intoin violation of securities regulations.[7]The District Court determined that Ripple entered into 1,278 contracts whichviolated securities laws, far fewer than the 1,700 contracts alleged by theSEC.[8]The penalty per contract is set forth in 17 C.F.R. § 201.1001. Such penaltiesrange from $75,000 to $115,000, depending on the date of the agreement. TheDistrict Court then calculated the statutory penalty for each of Ripple’s 1,278Institutional Sales to arrive at the $125 million civil penalty.
The Order also imposed aninjunction against Ripple, permanently restraining it from: (a) sellingsecurities; (b) transporting a security for the purpose of sale or deliveryafter sale; and (c) offering to purchase or sell securities through the use ormedium of any prospectus.[9]The District Court determined that such an injunction was appropriate givenRipple’s willingness to “push the boundaries”.
Ripple’s representatives appear tobe satisfied with the outcome of the litigation, as the District Court imposed onlya small portion of the penalty sought by the SEC.[10]Furthermore, the District Court’s ruling that certain distributions of XRP werenot investment contracts is big news for the industry, and provides guidance tofuture token issuers who will otherwise be subject to the SEC’s jurisdiction.
FTX
In another significant lawsuit, afederal judge approved a settlement (the “Settlement”) between theCommodities Futures Trading Commission (“CFTC”) and Sam Bankman Fried,FTX Trading LTD (“FTX”), Alameda Research LLC (“Alameda”),Caroline Ellison, and Zixiao Wang (the “Defendants”).[11]Defendant’s admitted in the Settlement that they used FTX’s users’ assets topay Alameda’s debts.[12]Furthermore, the Settlement concluded that the Defendants violated theCommodity Exchange Act (the “CEA”) by “intentionally or recklessly, inconnection with swaps and contracts of sale of commodities in interstate commerce,employing a scheme or artifice to defraud; and engaging in acts, practices, anda course of business that operated as a fraud or deceit on FTX customers,digital asset lenders to Alameda, and other market participants.”[13]The Settlement called for FTX and Alameda to jointly pay $8.7 billion inrestitution to persons who sustained losses caused by violations of the CEA,and another $4 billion in disgorgement for gains received in connection withviolations of the CEA, for a total of $12.7 billion to be paid by FTX andAlameda.[14]
[1]Securities and Exchange Commission v. Ripple Labs, Inc., 682 F.Supp.3d 308, 324(S.D.N.Y. 2023).
[2]Id.
[3]Id. at 328.
[4]https://storage.courtlistener.com/recap/gov.uscourts.nysd.551082/gov.uscourts.nysd.551082.973.0.pdf
[5]Id.
[6]Id.
[7]Id. at 14.
[8]Id. at 15.
[9]https://storage.courtlistener.com/recap/gov.uscourts.nysd.551082/gov.uscourts.nysd.551082.974.0_1.pdf
[10]https://x.com/bgarlinghouse/status/1821289051191963861
[11]https://storage.courtlistener.com/recap/gov.uscourts.nysd.590934/gov.uscourts.nysd.590934.44.0.pdf
[12]Id. at 15.
[13]Id. at 17.
[14]Id. at 20-21.
