In re Ripple Labs Inc. Litigation

Background

This putative class action concerns the creation, distribution, circulation, and sale of XRP, a digital unit commonly called a cryptocurrency. The operative consolidated complaint asserted federal securities claims, California securities claims, and claims under California’s consumer-protection statutes. Plaintiff alleged that defendants sold XRP without required registration or qualification and made misleading statements about XRP, its value, usefulness, and legal status.

Defendants moved to dismiss under Federal Rule of Civil Procedure 12(b)(6), which tests whether a complaint states a legally sufficient claim. For purposes of this motion, defendants assumed—without conceding—that XRP qualified as a security. They instead challenged the claims based on the federal three-year statute of repose and alleged pleading deficiencies. The court also granted requests for judicial notice of three documents and denied a fourth request because it was unnecessary to resolve the motion.

Federal Securities Claims

The court rejected defendants’ argument that the federal securities claims were barred by the three-year statute of repose in 15 U.S.C. § 77m. The court adopted the “first-offered” rule, under which the period begins with the first genuine public offering, rather than the “last-offered” rule. Based on the complaint and judicially noticeable materials, the court could not conclude that defendants made a genuine public offer of XRP before August 5, 2016, three years before the federal claims were filed. The earlier transactions described in a 2015 settlement involved particular third parties or did not establish a public offering to the general public.

The court also held that the complaint adequately alleged a federal claim under 15 U.S.C. § 77l(a)(1) for offering or selling an unregistered security. It rejected defendants’ argument that plaintiff had to allege that he purchased XRP in an initial distribution rather than on a secondary market. The court further found that the allegations plausibly treated defendants as statutory “sellers” because they allegedly marketed XRP, provided purchasing information and exchange links, promoted its adoption, and financially benefited from sales.

The court likewise held that plaintiff adequately alleged control-person claims under 15 U.S.C. § 77o against Ripple and Garlinghouse. The complaint alleged that they controlled the primary violator, XRP II. The motion to dismiss the first and second causes of action was DENIED.

California Unqualified-Securities Claims

The court held that plaintiff adequately alleged claims under California Corporations Code §§ 25110 and 25503 concerning the sale of securities that had not been properly qualified. The court concluded that purchases on exchanges could qualify as part of an “issuer transaction” because defendants’ exchange listings depended on subsequent purchases by market participants. It also found that plaintiff plausibly alleged the required connection, or privity, with defendants, even though the complaint did not specify that every purchase was direct. Finally, Ripple’s website instructions and links explaining how to buy XRP plausibly alleged an offer of securities in California.

Because the primary claim was adequately alleged, the court also allowed the related California control-person claims under § 25504 against Ripple and Garlinghouse to proceed. The motion to dismiss the third and fifth causes of action was DENIED.

California Misrepresentation Claims

The court held that plaintiff did not satisfy Federal Rule of Civil Procedure 9(b), which requires fraud-based allegations to identify the specific circumstances of the alleged misconduct, including who made the statement, what was said, when and where it was said, and why it was false or misleading. The complaint did not provide enough detail for several alleged statements, did not adequately explain why others were false, and did not sufficiently distinguish the conduct attributed to each defendant.

The court rejected defendants’ argument that a statement had to be directed specifically to plaintiff to support a claim under California Corporations Code § 25401. But it nevertheless dismissed the § 25501 misrepresentation claim for failure to satisfy Rule 9(b). Because the complaint did not adequately allege the underlying § 25401 violation, the related material-assistance claim under § 25504.1 also failed. The motion to dismiss the fourth cause of action was GRANTED with leave to amend.

California Consumer-Protection Claims

The court held that California Business and Professions Code §§ 17200 and 17500 do not apply to claims based on securities transactions when the theory depends on XRP being a security. The court also held that the alleged misstatements failed Rule 9(b) for the same reasons discussed above.

The motion to dismiss the sixth and seventh causes of action was GRANTED with prejudice, except as narrowly provided by the court. The court allowed plaintiff to amend those claims under an alternative theory that XRP was not a security and based only on specified alleged misstatements, if those allegations could be pleaded with the required particularity.

Disposition

The court granted in part and denied in part defendants’ motion to dismiss. Plaintiff had 28 days from the date of the order to file an amended consolidated complaint addressing the deficiencies in claims dismissed without prejudice. The amended complaint had to specifically identify any alleged misrepresentation relied on, and no other amendment was allowed without court permission or defendants’ consent.