Ripple Labs CEO Calls for XRP to Fight Lawsuit, Could XRP Now Fit the Definition of a Security?

Yesterday, payment company Ripple Labs and its CEO Brad Garlinghouse were accused of violating securities laws for their "bullish XRP" comments during an interview in 2017. They will face a civil lawsuit in California. Judge Hamilton also raised one reason why XRP could be considered a security.

Ripple CEO Calls Lawsuit a "Buy Order": "I'm Very Bullish on XRP"

Documents from the court on June 20th reveal that Judge Phyllis Hamilton of the U.S. Federal District Court in California dismissed four of the class-action claims against Ripple but allowed another civil lawsuit against Ripple Labs and its CEO Brad Garlinghouse to proceed to trial.

It is alleged that during a 2017 interview with Canadian BNN Bloomberg, Garlinghouse made "misleading statements," claiming he was "very bullish on XRP":

I'm very bullish on XRP, and I own a lot of XRP in my personal balance sheet. In this industry, there's a saying called HODL, and I'm on that side.

However, it was later revealed that he had sold millions of XRP through exchanges that year.

At the time, Ripple's lawyers filed a motion for summary judgment, arguing that the claim should be dismissed:

Since XRP does not meet the definition of a security under the Howey test, claims based on misleading statements related to securities should be dismissed.

Judge: Investors Expect Profit Through Ripple, Meeting Howey Test

In response, Judge Hamilton ruled yesterday that, based on the Howey Test evaluating whether a crypto asset is a security, XRP may be considered a security when sold to non-institutional investors:

The court declines to find, as a matter of law, that a reasonable investor would not have an expectation of profit from the general trend of the cryptocurrency market, as opposed to the efforts of Ripple in promoting XRP for use in cross-border payments.

In other words, the judge believes that "investors' expectation of profit from XRP is not solely due to the overall trend of the crypto market but also stems from Ripple's specific efforts to promote the use of XRP:

Therefore, even though Judge Torres made a widely regarded decision last July considered a major victory for the crypto industry, it cannot be simply concluded legally that Ripple's statements will not lead investors to expect profits based on these efforts.

Ripple Wins? SEC Hits a Wall! XRP Not a Security, Not an Investment Contract, Crypto Sector Gets First Regulatory Victory?

Ripple Responds: Previous Ruling Stands

Ripple's General Counsel Stu Alderoty first expressed gratitude for the dismissal of all class-action lawsuits by the court and claimed that the thoughts of the two judges are independent:

Judge Torres' previous ruling in the SEC case remains in effect, and this ruling does not undermine that decision.

Previously, in-depth analysis of the Ripple case has pointed out that the company did not win entirely in this preliminary victory, as most issuers in the crypto space engage in similar institutional sales of tokens like XRP and marketing activities with profit expectations:

The court determines whether the sales context of XRP meets the definition of an investment contract, regardless of whether the nature of XRP possesses characteristics of a commodity or currency.

After Reading the XRP Court Documents, Understanding Why XRP and the Crypto Sector Are Still Exposed to Securities Risks

Disagreement Between Ripple Case Judge and TFL Case Judge

In July of last year, Judge Torres' favorable ruling for Ripple was seen as a significant milestone for the U.S. crypto industry and led to other companies embroiled in litigation with the SEC citing it. However, the impact may not have been as significant as anticipated.

In a previous case involving the SEC and Terraform Labs TFL, TFL also referenced the above ruling to seek dismissal of the SEC's lawsuit against them.

Judge Jed Rakoff of that case promptly rejected the motion, resulting in TFL ultimately losing the case. At that time, Rakoff even questioned the legitimacy of the Ripple case judge's ruling:

The judge in that case defines whether tokens violate securities laws based on whether they are sold through secondary markets. However, according to the Howey Test, this "distinction between purchasers" is not applicable, and it does not make such differentiation.

Looking to Ride on Ripple's Coattails? U.S. Judge Rejects Terraform Labs' Motion to Dismiss