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A U.S. federal judge has hit Ripple Labs with a $125 million fine and permanently barred the company from future violations of U.S. securities law.
On August 7, U.S. District Judge Analisa Torres issued her ruling in the case that began way back in December 2020, when the Securities and Exchange Commission (SEC) filed its complaint against Ripple in the District Court for the Southern District of New York.
Torres gave Ripple 30 days to pay its $125 million penalty while permanently restraining and enjoining the company from violating Section 5 of the Securities Act of 1933. That section requires all issuers to register non-exempt securities with the SEC so investors have all the information they require before choosing whether or not to invest.
The SEC originally accused Ripple and its top executives, Brad Garlinghouse and Christian Larsen, of issuing over 14.6 billion XRP tokens to the public without registering them with the SEC as required under the Securities Act.
The SEC dropped the charges against the execs in October 2023 after a Torres ruling in July that found so-called ‘programmatic’ sales of XRP—those conducted on exchanges in blind bid/ask transactions—didn’t amount to securities offerings, while tokens sold directly to institutional investors did.
However, just a few weeks after that July ruling, a second judge in a different SEC suit (against Terraform Labs and Do Kwon) rejected Torres’ opinion, saying the Howey test for identifying securities “makes no such distinction between purchasers.”
There’s a five-point standard for a court granting injunctive relief that includes the defendant’s degree of culpability. The SEC cited legal opinions that Ripple received prior to its initial issuance of XRP, stating that “if sold to investors, XRP tokens are likely to be securities.” The lawyers further warned that the more Ripple promoted XRP as an investment, “the more likely it is that the SEC will take action.”
Torres found the SEC had proven some of the five points, but its argument that Ripple’s profit motive led the company to avoid registration and disclosure (somehow) failed to establish that Ripple “recklessly disregarded regulatory requirements in making its business decisions.”
Torres also hedged on whether Ripple and its execs had taken responsibility for their securities law violations. While Ripple and its execs acknowledged the July 2023 ruling (the Order) in its quarterly reports, they “largely emphasized the favorable aspects of the Order in their public statements.” However, Torres said these selective statements “do not rise to the level of blame-shifting required to justify injunctive relief.”
But Ripple continued to sell XRP to institutional investors in “direct [on-demand liquidity] transactions” after the ruling, arguing that these sales “do not have the key characteristics that this Court relied on in finding that Ripple’s Institutional Sales were sales of investment contracts.” To which Torres replied curtly: “Not so.”
Torres stated that she didn’t rule that Ripple had violated Section 5 of the Securities Act. But Ripple’s “willingness to push the boundaries of the Order evinces a likelihood that it will eventually (if it has not already) cross the line. On balance, the Court finds that there is a reasonable probability of future violations, meriting the issuance of an injunction.”
Ripple had objected to the SEC’s proposal to enjoin the company from “conducting an unregistered offering of Institutional Sales,” preferring this part of the judgment to read that “it does not bar [on-demand liquidity] sales, does not bar extraterritorial conduct, and does not bar sales that qualify for exemptions from registration.” Torres agreed that the SEC’s language was “too categorical” and thus omitted this section.
But Torres rejected Ripple’s bid to “waive the ‘bad actor disqualification’ provisions” of the Act prohibiting the company from using the exemption for “certain private securities offerings.”
Money talks
The SEC sought a $2 billion civil penalty—including $1 billion in disgorgement of profits—while Ripple suggested a mere $10 million was more appropriate. Torres found that given “the egregiousness of Ripple’s conduct, there is no question that the recurrent, highly lucrative violation of Section 5 is a serious offense.”
The SEC argued that Ripple sold XRP to certain institutional clients at “deep undisclosed discounts,” thus depriving “non-favored investors” of information they needed to determine whether they could obtain XRP at a better price. The total amount these non-favored investors might have saved was redacted in the ruling.
Torres rejected this argument, saying the SEC had provided only “speculative evidence” that institutional buyers who didn’t get the discount “actually suffered pecuniary harm.” Torres suggested that Ripple might have simply stopped offering additional discounts had it registered XRP as a security in advance. So, no disgorgement.
The SEC also alleged no “fraud, misappropriation or other more culpable conduct,” nor had the SEC proven that institutional investors suffered “substantial losses” via Ripple’s failure to register. As such, Torres rejected the SEC’s request for a penalty of $876.3 million representing the net profits of the institutional sales, instead imposing the $125 million fine for the 1,278 institutional transactions involved in this case.
Spiking the ball
As news of the ruling spread, XRP’s fiat price jumped by one-quarter, although it’s since surrendered some of those gains. Clearly, neither side got exactly what they wanted in Torres’ ruling, but Ripple appears more pleased than annoyed.
Ripple’s official PR spun the judgment hard, calling it “another monumental win for Ripple and the broader XRP community.” The release quoted CEO Garlinghouse taking shots at SEC Chair Gary Gensler, saying his agency “is detached from reality, ignores facts and operates outside the law.”
Garlinghouse tweeted that “the Court reduced [the SEC’s] demand by ~94% recognizing that they had overplayed their hand … This is a victory for Ripple, the industry and the rule of law. The SEC’s headwinds against the whole of the XRP community are gone.”
Ripple’s general counsel Stuart Alderoty was equally enthusiastic, telling Bloomberg that the company can pay the $125 million penalty “off our balance sheet with cash.” Alderoty added that the company was “glad to have this finally behind us.”
It speaks volumes about the level of impropriety in the digital asset sector that (a) a company would celebrate a $125 million fine as a victory and (b) that it can pay the fine in cash derived from its illicit activities.
An SEC spokesperson noted Torres’ comments regarding “the egregiousness of Ripple’s conduct,” adding that “as court after court has stated, the securities laws apply when firms offer and sell investment contracts, regardless of the technology or labels that they use.”
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