In re Ripple Labs Inc. Litigation

Background

This order addressed defendants’ second motion to dismiss in a consolidated putative class action concerning the creation, distribution, circulation, and sale of XRP. The moving defendants were Ripple Labs, Inc., XRP II, LLC, and Ripple’s Chief Executive Officer, Bradley Garlinghouse. The plaintiff identified in the opinion was Bradley Sostack; the caption listed Vladi Zakinov and others as plaintiffs.

In an earlier order, the court dismissed three fraud-related causes of action based on failure to meet Federal Rule of Civil Procedure 9(b), which requires fraud to be pleaded with particular detail. The court generally allowed amendment, but barred the California Business and Professions Code claims to the extent they relied on the theory that XRP was a security. Sostack then filed a consolidated first amended complaint identifying 17 alleged misstatements in four categories: XRP’s utility; the relationship between Ripple’s enterprise-solutions software and XRP; Ripple’s XRP sales; and Garlinghouse’s XRP holdings.

Court’s Analysis

The defendants moved to dismiss only the fraud claims. The court considered whether the amended complaint adequately explained what was false or misleading about each statement and why it was false, as Rule 9(b) requires.

The court held that the allegations about XRP’s utility did not adequately identify falsity. Some statements were conditional, expressed opinions, addressed what XRP was designed to do rather than how it was being used, or were not contradicted by the complaint’s allegation that at least some XRP had been used for liquidity or international transactions.

The court also rejected the allegations concerning Ripple’s enterprise-solutions software. It found that the challenged statements were vague, did not necessarily refer to XRP, did not necessarily equate software customers with XRP users, or otherwise did not show why the statements were false or misleading. The court likewise rejected the allegation that a statement about Ripple not cashing out $100 million per month was false. Based on the sales figures alleged in the complaint, the court calculated average monthly XRP sales of approximately $43 million during the relevant six-month period, below $100 million.

The court reached a different conclusion about Garlinghouse’s statement that he was “long XRP,” meaning that he held a substantial continuing position in XRP. The complaint alleged that he sold at least 67 million XRP during 2017 and sold XRP received from Ripple within days. The court found that the volume and timing of those alleged sales supported an inference that the statement was false. It also concluded that information about Garlinghouse’s personal holdings was in his exclusive possession and that the complaint gave him enough notice of the alleged misconduct. The court stated that discovery and a later summary-judgment motion, rather than a motion to dismiss, would be the proper means to test whether he sold XRP while still maintaining a substantial XRP position.

Disposition

The court granted in part and denied in part the motion to dismiss. It granted the motion to dismiss the sixth and seventh causes of action—claims under California Business and Professions Code sections 17200 and 17500—with prejudice as to all defendants.

It denied the motion to dismiss the fourth cause of action for the predicate violation of California Corporations Code section 25401. However, because the plaintiff failed to plead the other three categories of alleged fraud with the required specificity, that cause of action could proceed only on the basis of Garlinghouse’s alleged misrepresentations about the scope and character of his XRP holdings. The court also stated that, as decided in the earlier order, the plaintiff could continue pursuing the first, second, third, and fifth causes of action concerning alleged offers or sales of unregistered securities under federal and California law.

Judge Phyllis J. Hamilton signed the order on October 2, 2020.