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Court allows lawsuit against Ripple over CEO’s alleged violation of California securities laws

The court’s decision means that the case will be allowed to proceed, putting Ripple in a difficult legal position.

Date: 2024-06-21 Author: Łukasz Michałek
Court allows lawsuit against Ripple over CEO’s alleged violation of California securities laws

A US federal court judge has given the green light to a civil securities lawsuit against Ripple Labs, denying the company’s motion for summary judgment. The suit alleges that Ripple CEO Brad Garlinghouse violated California securities laws.

A recent ruling by California District Court Judge Phyllis Hamilton means that a jury will ultimately decide whether Garlinghouse made misleading statements in a 2017 interview.

Although the judge dismissed four charges related to Ripple’s failure to register XRP as a security, one claim remains regarding Garlinghouse’s alleged misrepresentations.

In an interview with Canada’s BNN Bloomberg, Garlinghouse admitted that he has been operating “for a very, very long time” on XRP. However, the lawsuit alleged that this statement was false, as he allegedly sold millions of XRP in the same year.

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Ripple’s legal director, Stu Alderoty, welcomed the court’s decision, saying that all class action lawsuits have been dismissed and the remaining individual claims under state law will be heard at trial.

Judge Hamilton’s order addressed Ripple’s argument that the misleading statement claim should be rejected because XRP does not qualify as a security under the Howey test.

The judge referred to a landmark ruling issued in July 2023 by Judge Analisa Torres in the Securities and Exchange Commission (SEC) lawsuit. However, Judge Hamilton disagreed, saying that XRP can be considered a security when sold to non-institutional investors.

She stressed that these investors expected to profit from Ripple’s efforts, a key factor in the Howey test. The court found that a reasonable investor could have anticipated a profit from Ripple’s efforts to facilitate the use of XRP in cross-border payments and other applications.

As a result, Judge Hamilton concluded that, as a matter of law, it could not be said that Ripple’s behavior would not have led a reasonable investor to expect a profit resulting from the efforts of others.

The cryptocurrency industry initially celebrated Judge Torres’ decision as a significant victory, expecting it to serve as a precedent in other cryptocurrency cases.

However, its impact was limited, as evidenced by Judge Jed Rakoff ‘s different perspective in the Terraform Labs case, in which he denied a motion to dismiss, ultimately leading to a $4.5 billion settlement with the SEC.

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Ripple’s victory with the SEC

Last May, a U.S. court ruled in favor of Ripple in a pending lawsuit brought by the SEC, maintaining that the sale of XRP on exchanges does not itself constitute an investment agreement.

The ruling, issued by the U.S. District Court for the Southern District of New York, said that “offering and selling XRP on digital asset exchanges is not the same as offering and selling investment contracts.”

However, the federal judge also ruled that XRP is a security when sold to institutional investors because it meets the Howey test.

XRP Ledger (XRPL) has seen an increase in transaction activity, with the number of transactions more than doubling from the fourth quarter of 2023 to the end of the first quarter of 2024.

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Łukasz Michałek
Łukasz Michałek
Founder of the rapidly developing cryptocurrency channel "Biblia Kryptowalut" on YouTube. He also co-creates the Arena Trading group with Marek. Łukasz is fascinated and passionate about blockchain technology and cryptocurrencies, which constitute the central element of his activity in the cryptocurrency industry.
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