Securities and Exchange Commission v. Ripple Labs Inc.

Background

The SEC sued Ripple Labs Inc., Bradley Garlinghouse, and Christian A. Larsen under Section 5 of the Securities Act of 1933. The SEC alleged that Ripple offered and sold XRP without filing a registration statement, even though XRP was an investment contract requiring registration. It also alleged that Garlinghouse and Larsen aided and abetted Ripple’s Section 5 violations.

Garlinghouse and Larsen separately moved under Federal Rule of Civil Procedure 12(b)(6), which allows dismissal when a complaint does not state a legally sufficient claim. On such a motion, the court generally accepts the complaint’s factual allegations as true and asks whether they plausibly support liability. The defendants did not contest, for purposes of these motions, that the SEC’s allegations plausibly showed Ripple violated Section 5.

Aiding-and-Abetting Claims

The court held that the SEC plausibly alleged the elements of aiding-and-abetting liability: a primary securities-law violation, the defendants’ knowledge of or reckless disregard for the relevant facts, and substantial assistance in the violation.

The court rejected the defendants’ argument that the SEC had to allege they knew Ripple’s conduct was legally improper or unlawful. Under 15 U.S.C. § 77o(b), the court said, the SEC must allege that they knew or recklessly disregarded the facts that made Ripple’s conduct a Section 5 violation. The statute does not require proof that they understood the legal label attached to those facts or acted willfully.

As to Larsen, the court found plausible allegations that he oversaw XRP sales, participated in strategies concerning XRP’s price, served on Ripple’s XRP Sales Committee, pursued institutional sales, and personally sold XRP in a way allegedly intended to assist Ripple’s distribution and create a market for XRP investment. The court also found plausible allegations that Larsen understood XRP was sold to investors and speculators, that sales funded Ripple’s operations, and that XRP could be viewed as an investment contract.

As to Garlinghouse, the court found plausible allegations that, as Ripple’s chief operating officer and later chief executive officer, he knew Ripple was making unregistered XRP offers and sales. The court also found plausible allegations that he viewed XRP as an investment, promoted the idea that XRP purchases were investments in a common enterprise expected to produce profits through Ripple’s efforts, and received warnings that XRP could be classified as a security. Garlinghouse did not challenge the SEC’s allegations that he provided substantial assistance.

The court therefore denied the individual defendants’ motions to dismiss the SEC’s aiding-and-abetting claims.

Individual XRP Sales and Domesticity

The defendants separately argued that the SEC had not adequately alleged that their personal XRP offers and sales were domestic, as required for Section 5 to apply. They also argued that the transactions were predominantly foreign even if some were domestic.

The court held that the domesticity analysis for XRP sales uses the transactional test described in Morrison v. National Australia Bank Ltd. and clarified by Absolute Activist Value Master Fund Ltd. v. Ficeto. Under that approach, a sale may be domestic when irrevocable liability attached or title transferred in the United States. The court declined to use the SEC’s proposed Regulation S analysis for this purpose. For offers, the court adopted a test asking whether the defendant attempted or offered to dispose of securities in the United States or solicited an offer to buy securities there.

The court found the SEC’s allegations sufficient. The complaint alleged that some sales occurred on U.S.-incorporated or U.S.-based digital-asset trading platforms, that XRP could be allocated to investor accounts in the platforms’ records, and that the defendants used accounts based in the United States. It also alleged that Larsen and Garlinghouse directed offers and sales from within the United States, including through a global digital-asset trading firm with a U.S. office.

The court rejected the argument that the transactions were predominantly foreign. It relied on allegations that the individual defendants were U.S. residents, the alleged securities were issued by a U.S. company, at least some transactions occurred on U.S.-based platforms, and at least some offers and sales were made to U.S. purchasers. The court therefore denied the motions to dismiss the SEC’s claims based on the defendants’ individual offers and sales of XRP.

Timeliness

Larsen argued that the SEC’s claims for monetary civil penalties were barred by the five-year limitations period in 28 U.S.C. § 2462 because the alleged unregistered offering began in 2013. The SEC and Larsen had entered into a tolling agreement on September 1, 2020.

The court rejected Larsen’s argument. It reasoned that Section 5’s registration requirement is transaction-specific, so each unregistered offer or sale constitutes a separate violation and starts the limitations period when that transaction occurs. Because the SEC alleged that Ripple and Larsen continued making offers and sales during the limitations period, the court denied Larsen’s motion to dismiss the SEC’s claims for monetary civil penalties.

Disposition

Judge Analisa Torres concluded that the individual defendants’ motions were denied. The clerk was directed to terminate the motions at ECF Nos. 105 and 110. This was a ruling on motions to dismiss: the court found the SEC’s allegations sufficient to proceed and did not enter a final determination of ultimate liability.