Securities and Exchange Commission v. Ripple Labs Inc.

Background

The Securities and Exchange Commission (SEC) sued Ripple Labs, Inc. under Section 5 of the Securities Act of 1933, alleging that Ripple offered and sold XRP without the required registration. In an earlier summary-judgment ruling, the court held that Ripple’s Institutional Sales—sales made under written contracts to institutional buyers—were offers or sales of investment contracts. The court held that Ripple’s Programmatic Sales on digital-asset exchanges and Other Distributions did not qualify as offers or sales of investment contracts under the circumstances presented. The SEC later dismissed its claims against Bradley Garlinghouse and Christian A. Larsen, so no trial was required on those claims.

The SEC then moved for remedies and entry of final judgment concerning Ripple’s Section 5 violations involving the Institutional Sales. It requested a permanent injunction, $876,308,712 in disgorgement, $198,150,940 in prejudgment interest, and an $876,308,712 civil penalty. Ripple argued that an injunction and disgorgement were unwarranted and that any civil penalty should not exceed $10 million.

Injunctive Relief

The court held that an injunction is appropriate when there is a reasonable likelihood of future securities-law violations. In assessing that likelihood, the court considered Ripple’s liability, the degree of intent or recklessness involved, whether the violations were isolated, whether Ripple accepted responsibility, and whether its business created a risk of future violations.

The court found that the Institutional Sales violations were not isolated: they continued for eight years and involved 41 counterparties. It found Ripple’s state of mind inconclusive because the SEC had presented no new facts establishing recklessness at the remedies stage. The court also found that Ripple had acknowledged the earlier ruling in its public statements and had not engaged in the kind of continuing blame-shifting that, by itself, would support an injunction.

The court nevertheless found a reasonable probability of future violations because Ripple admitted that it continued selling XRP in on-demand-liquidity transactions after the earlier ruling. The court emphasized that it was not deciding whether those post-complaint sales violated Section 5. Instead, it found that Ripple’s willingness to test the boundaries of the earlier order showed a risk that it would eventually cross the line.

The court therefore granted the SEC’s request for injunctive relief and ordered a permanent injunction consistent with the portion of the SEC’s proposed judgment barring future Section 5 violations. The court omitted the proposed provision specifically barring an unregistered offering of Institutional Sales because it was too categorical and duplicated the broader injunction. The court also did not find Ripple’s request for a judicial waiver of certain “bad actor” disqualification provisions necessary or appropriate on the authority presented.

Disgorgement and Prejudgment Interest

Disgorgement is an equitable remedy intended to deprive a violator of profits from unlawful conduct. Under the governing precedent discussed by the court, disgorgement cannot exceed net profits and must be awarded for victims who suffered financial harm. The court held that a person’s lost opportunity to make an informed investment decision, without financial harm, is not enough.

The SEC argued that Ripple’s failure to disclose different prices and discounts caused financial harm to institutional buyers who might have obtained better prices, and that the discounted sales put downward pressure on XRP’s market price. The court found those theories speculative. The SEC had not shown that Ripple would actually have offered additional discounts if it had registered the sales, or that the buyers suffered financial harm merely because they paid the stated prices.

The court held that binding appellate precedent barred disgorgement on the record before it. The SEC’s request for disgorgement and prejudgment interest was therefore denied. Ripple’s separate motion to strike the SEC accountant’s declaration and related exhibits was denied as moot because the court had found that disgorgement was unavailable.

Civil Penalty

Civil penalties serve punitive and deterrent purposes. The court explained that the securities laws establish three penalty tiers. The first tier applies to any violation; the second requires fraud, deceit, manipulation, or deliberate or reckless disregard of a regulatory requirement; and the third requires those conditions plus substantial losses or a significant risk of substantial losses to others.

The court found that a first-tier penalty was appropriate. It found no allegations of fraud, deceit, or manipulation and no conclusively established deliberate or reckless disregard of a regulatory requirement. Although Ripple’s conduct was recurrent, highly lucrative, and serious, the court also found no established substantial investor losses or risk of such losses. Because the court was not ordering disgorgement, it concluded that a larger civil penalty was needed to achieve the intended punitive effect.

The court treated each unregistered transaction as a separate violation because Section 5’s registration requirement is transaction-specific. After reviewing the record, it counted 1,278 violating transactions. Applying the applicable per-transaction penalty amounts, the court calculated a total civil penalty of $125,035,150. The SEC’s request for a civil monetary penalty was granted in part, and the court imposed that amount.

Disposition

The SEC’s motion for remedies and entry of final judgment was granted in part and denied in part. The court ordered entry of final judgment permanently enjoining Ripple from further securities-law violations and imposing a $125,035,150 civil penalty. It denied the requests for disgorgement and prejudgment interest.