Securities and Exchange Commission v. Ripple Labs Inc.

Background

The Securities and Exchange Commission alleged that Ripple Labs, Inc., Bradley Garlinghouse, and Christian A. Larsen unlawfully offered and sold XRP as securities without registration, violating Section 5 of the Securities Act of 1933. The SEC also alleged that Garlinghouse and Larsen aided and abetted Ripple’s violations.

In an earlier order, the court granted in part and denied in part the parties’ cross-motions for summary judgment. Applying the Supreme Court’s investment-contract test from SEC v. W.J. Howey Co. to the circumstances of the transactions, the court held that Ripple’s Institutional Sales were offers or sales of investment contracts, but that Ripple’s Programmatic Sales and Other Distributions were not. The court also held that Garlinghouse’s and Larsen’s individual XRP sales were not offers or sales of investment contracts. Those earlier rulings are described here as background; this order addressed only the SEC’s request for an immediate appeal.

The SEC’s Proposed Appeal

The SEC sought certification under 28 U.S.C. § 1292(b) of two issues: whether Ripple’s Programmatic Sales over crypto-asset trading platforms could lead investors to reasonably expect profits from the efforts of others, and whether Ripple’s Other Distributions of XRP as payment for services could satisfy the Howey test’s requirement of an investment of money.

Under Section 1292(b), certification requires a controlling question of law, a substantial ground for difference of opinion, and a finding that an immediate appeal may materially advance the end of the litigation. The court emphasized that interlocutory appeals—appeals before a final judgment—are strongly disfavored and generally limited to exceptional circumstances.

Controlling Question of Law

The court held that the SEC had not identified a pure question of law that an appellate court could decide quickly and cleanly without reviewing the record. The earlier rulings resulted from examining the totality of the circumstances surrounding different XRP transactions and schemes, including an extensive and heavily disputed factual record and expert reports. The SEC did not argue that the court applied the wrong legal standard; instead, it argued that the court misapplied the Howey test to the facts. The court concluded that this was not a pure legal question suitable for interlocutory appeal.

The court also rejected the SEC’s argument that the proposed issues had precedential value for many other cases. It explained that its conclusions were based on the unique facts and economic realities of Ripple’s transactions, not on a categorical rule that sales through crypto-asset trading platforms can never create an expectation of profits from others’ efforts. Similarly, the court said it had not created a categorical rule that distributing an asset in exchange for services can never constitute an investment of money. Instead, it found that the recipients of Ripple’s Other Distributions had not provided money or other tangible and definable consideration to Ripple on this record.

Substantial Ground for Difference of Opinion

The court found that the SEC had not shown a substantial ground for disagreement. Regarding the Programmatic Sales, the court determined that a different Southern District of New York case involving digital assets did not conflict with its ruling because that case arose at the motion-to-dismiss stage, when the court had to accept well-pleaded allegations as true and draw reasonable inferences for the SEC. The court’s decision in Ripple followed a detailed review of the evidence and economic circumstances, and the SEC did not contend that courts substantially disagreed about the proper Howey standard.

Regarding the Other Distributions, the SEC relied in part on an out-of-circuit digital-asset case in which the parties had not disputed Howey’s first requirement. The court concluded that this case did not establish conflicting authority on whether the recipients of Ripple’s distributions had provided tangible and definable consideration.

Whether an Appeal Would Advance the Litigation

The court also held that the SEC had not shown that an immediate appeal would materially advance the litigation. If an appellate court reversed and sent the case back, the district court would still need to address additional factual and legal issues, including other Howey requirements and certain fair-notice defenses. The court said that another interlocutory appeal could then be requested, potentially giving the parties multiple opportunities for appellate review and prolonging the case.

The court also noted that substantial proceedings remained, including remedies concerning possible injunctive relief, repayment of money, and civil monetary penalties; additional expert-evidence proceedings; pretrial motions; and trial. It concluded that proceeding to a final judgment and allowing a single appeal on a complete record would be more efficient.

Disposition

The court denied the SEC’s motion for certification of an interlocutory appeal. It denied the SEC’s request for a stay as moot and directed the clerk to terminate the motion. The court kept the existing pretrial schedule in effect and set trial to begin on April 23, 2024, with a final pretrial conference scheduled for April 16, 2024.