A United States federal judge has ordered Ripple Labs to pay a $125 million civil penalty for breaching US securities laws. The judgment, issued by Judge Analisa Torres of the US District Court for the Southern District of New York, also permanently restrains Ripple from violating US securities laws.
The ruling stems from a lawsuit filed by the Securities and Exchange Commission (SEC) in December 2020, alleging that Ripple raised funds through the sale of XRP tokens as unregistered securities. The SEC initially sought up to USD $2 billion in civil penalties and disgorgement, while Ripple argued for a maximum penalty of $10 million.
In July 2023, Judge Torres ruled that XRP is not a security in the context of programmatic sales on exchanges, but that institutional sales did amount to unregistered securities transactions under US law.
Judge Torres found that 1,278 transactions violated Section 5 of the Securities Act. This led to the imposition of a USD $125 million civil penalty, which Ripple is required to pay within 30 days. The judge found that it was not open as a matter of law to order disgorgement in the circumstances.
Despite the substantial fine, Ripple's leadership views the outcome as a positive development. CEO Brad Garlinghouse described the ruling as a "victory for Ripple, the industry, and the rule of law," noting that the penalty was significantly reduced from the SEC's initial demand.
Ripple's chief legal officer, Stuart Alderoty, echoed this sentiment, stating that the company respects the court's decision and is now better positioned to continue its growth.
The ruling also addressed future compliance, with Judge Torres suggesting a reasonable probability of future violations by Ripple. Nonetheless, her Honour noted that Ripple's sales after the SEC complaint may not have breached federal law.
The judgment brings this round of the protracted legal battle between Ripple and the SEC to an end. The SEC is expected to appeal the judge’s ruling with respect to the programmatic sales of XRP.
Following the announcement of the ruling, the price of XRP surged by approximately 24%, reflecting investor optimism about Ripple's future prospects.
Highlights of her Honour's reasoning to substantially reduce the civil penalty payable by Ripple are as follows:
although Ripple's conduct was egregious, the Court found that a first-tier penalty was appropriate for Ripple as there had been no allegations of "fraud, deceit, [or] manipulation," and no conclusively established "deliberate or reckless disregard of a regulatory requirement" [p 14];
the Court found that the SEC failed to establish that Ripple's failure to register the sales of XRP with the SEC caused substantial losses (or the risk thereof) to investors [p 15]; and
Ripple did not contest the SEC's contention that its current financial condition did not merit a reduced penalty [p 15].
The SEC contended that Ripple's actions were motivated by profits and to avoid the costs of registration. However, her Honour found that this did not support the corresponding inference that Ripple recklessly disregarded regulatory requirements in making its business decisions.
The Court considered evidence of two conflicting opinions obtained from a US law firm, the latter of which concluded that there was a compelling argument that XRP tokens are not securities. To that end, the case again emphasises the importance of obtaining legal advice before launching crypto asset offerings in an uncertain regulatory environment.
While the ruling imposes a significant penalty on Ripple, it also affirms the company's stance that the XRP token is not inherently a security. The ruling comes however at substantial cost to both sides with Ripple having reportedly spent in excess of $100 million defending the SEC action. Given these costs, and the fact that the action could still drag on to appeals, legislation seems like a relatively cheaper and more efficient means of bringing regulatory clarity to crypto-asset markets.
Written by Luke Higgins and Steven Pettigrove
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