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US District Judge Denies Ripple's Summary Judgment Bid

The case hinges on whether XRP can be classified as a security and focuses on a TV interview with Brad Garlinghouse

June 21, 2024 08:09 AM

Reading time: 2 minutes, 36 seconds

TL;DR Ripple Labs faces a pivotal trial as the US District Court Judge denies their bid for summary judgment. CEO Brad Garlinghouse's statements in 2017 are at the center of this legal storm as they are being seen as misleading for investors.

A United States federal court judge has greenlit a civil securities lawsuit against Ripple Labs, denying its summary judgment bid in a suit alleging its CEO broke California securities laws. The case involves alleged misleading statements by CEO Brad Garlinghouse. The decision to continue with the case was made by US District Court Judge Phyllis Hamilton.

The Controversial Statements

The lawsuit centers on Garlinghouse's claims in a 2017 interview, where he stated he was 'very, very long' on XRP. The plaintiff, Bradley Sostack, contends that Garlinghouse's statements were misleading, as he sold millions of XRP in the same year.

In that 2017 television interview, Garlinghouse said, "I'm long XRP, I'm very, very long XRP as a percentage of my balance sheet. . . . [I am] not long on some of the other [digital] assets because it is not clear to me what's the real utility, what problem are they solving . . . if you're solving a real problem, if it's a scaled problem, then I think you have a huge opportunity to continue to grow that."

He then continued: "We have been fortunate. I remain very, very, very long on XRP; there is an expression in the industry: HODL. Instead of holding, it's HODL. I'm on the HODL side."

Legal Allegations and Charges

The case, filed in the California District Court, brings several severe allegations against Ripple Labs, its subsidiary XRP, and CEO Garlinghouse. These include the unregistered offer and sale of securities and misleading statements related to the sale of securities.

A vital issue in the lawsuit is whether XRP qualifies as a 'security' under US law, a determination that could significantly impact the regulatory obligations of digital currencies.

Ripple's defense primarily argues that XRP does not meet the security criteria based on the Howey test, a standard for defining investment contracts. However, Judge Hamilton focused her decision on moving the case forward to trial.

Court's Decision and Market Impact

"The Defendants made no other argument in favor of summary judgment on the plaintiff's fourth cause of action for misleading statements in connection with the offer or sale of a security, summary judgment on that cause of action is denied, and the claim will proceed to trial," the Court document mentioned.

Despite the Court's decision, the price of XRP has not significantly impacted it so far. As of writing, it is trading at $0.4901, down by around 1.12% in the past 24 hours.

Contrasting Legal Rulings

Moreover, this case contrasts with a previous ruling by Judge Analisa Torres of the Southern District of New York.

In that case, Torres found that Ripple's 'Programmatic Sales'* and other XRP distributions were not investment contracts, thus exempting them from certain securities regulations.

Nonetheless, she ruled that Ripple's Institutional Sales of $728.9 million in XRP were indeed unregistered investment contracts, violating Section 5 of the Securities Act.

Broader Implications

The upcoming trial could influence the broader regulatory environment for digital currencies in the US. It will test the boundaries of US securities law in the context of the crypto market.

The trial's outcome might also establish precedents that could affect how digital assets are marketed and regulated across the industry.

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