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Ripple Labs Co-Founder Cleared of All Allegations in Landmark SEC Crypto Enforcement Action
- Client News
- October 19, 2023
As reported in The Wall Street Journal, Fortune and various other outlets, Paul, Weiss and joint defense counsel won a complete victory for enterprise blockchain company Ripple Labs co-founder and Executive Chairman Chris Larsen and Ripple CEO Brad Garlinghouse, when the Securities and Exchange Commission filed for a rare voluntary dismissal of the remaining aiding and abetting claims against them.
In its December 2020 lawsuit, the SEC alleged Ripple, Larsen and Garlinghouse had altogether conducted over $2.6 billion in unregistered securities transactions through sales of digital asset XRP, further alleging that the two executives aided and abetted Ripple’s sales in violation of U.S. securities laws. The aiding-and-abetting charges represented the first time that the Commission has lodged such claims against individuals in a cryptocurrency enforcement action not alleging fraud or misappropriation. Unlike the claims against the company, the aiding-and-abetting claims require the SEC to show knowledge and intent.
The dismissal in what has been called the cryptocurrency industry’s “most closely watched case” marks our third consecutive win in the matter. In July, in a summary judgment ruling heralded as a win for the broader cryptocurrency industry, U.S. District Judge Analisa Torres in Manhattan found that about $2 billion in sales of XRP by Ripple, and nearly $600 million in sales by Larsen and Garlinghouse, were not investment contracts under the Howey test, which determines which transactions are considered securities, and therefore did not violate Section 5 of the Securities Act of 1933. In October she rejected a request by the SEC to appeal that ruling.
Judge Torres also found that “other distributions” of XRP by Ripple, including distributions to employees as compensation and to third parties as part of an initiative to develop new applications for XRP and the XRP Ledger, were not investment contracts, because investors did not “provide the capital” as required under the first prong of the Howey test.
Judge Torres separately held that Ripple’s sales of XRP to institutional investors—which were not made on public exchanges—were investment contracts under the Howey test and did violate Section 5 of the Securities Act.
Finally, she found that there was a genuine dispute of material fact as to whether Larsen and Garlinghouse aided and abetted Ripple’s sales of XRP to institutional investors; the case against the two was set to go to trial next year. The SEC has now agreed to dismiss with prejudice the aiding-and-abetting claim against the individual defendants, eliminating the need for a trial and resulting in a complete victory for Larsen and Garlinghouse.
The Paul, Weiss team includes litigation of counsel Marty Flumenbaum and partners Michael Gertzman and Meredith Dearborn.