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Court Allows Lawsuit Against Ripple Over CEO’s Alleged Violation of California Securities Laws

Ruholamin Haqshanas
Last updated: | 2 min read
Court Allows Lawsuit Against Ripple Over CEO's Alleged Violation of California Securities Laws

A United States federal court judge has given the green light to a civil securities lawsuit against Ripple Labs, denying the company’s bid for summary judgment.

The lawsuit accuses Ripple CEO Brad Garlinghouse of violating California securities laws.

California District Court Judge Phyllis Hamilton’s recent order means that a jury will ultimately decide whether Garlinghouse made misleading statements in a 2017 interview.

While the judge dismissed four allegations related to Ripple’s failure to register XRP as a security, one claim regarding Garlinghouse’s alleged false statements remains.

Garlinghouse Sold XRP While Saying He Was Bullish on Token

In the interview on Canada’s BNN Bloomberg, Garlinghouse professed being “very, very long” on XRP.

However, the lawsuit alleges that this statement was false, as he purportedly sold millions of XRP throughout the same year.

Ripple’s Chief Legal Officer, Stu Alderoty, expressed satisfaction with the court’s decision, stating that all class action claims were dismissed, and the remaining individual state law claim would be addressed at trial.

Judge Hamilton’s order addressed Ripple’s argument that the misleading statement claim should be dismissed since XRP does not qualify as a security under the Howey test.

The judge referred to a landmark ruling in July 2023 by Judge Analisa Torres in a Securities and Exchange Commission (SEC) lawsuit.

However, Judge Hamilton disagreed, asserting that XRP could be considered a security when sold to non-institutional investors.

She emphasized that these investors would have expected profits from Ripple’s efforts, a key factor in the Howey test.

The court found that a reasonable investor might have anticipated profit due to Ripple’s endeavors to facilitate XRP’s use in cross-border payments and other applications.

Consequently, Judge Hamilton concluded that it could not be determined as a matter of law that Ripple’s conduct would not have led a reasonable investor to expect profit resulting from the efforts of others.

The crypto industry initially celebrated Judge Torres’ decision as a significant victory, expecting it to serve as a precedent in other crypto-related cases.

However, its impact has been limited, as demonstrated by Judge Jed Rakoff’s differing perspective in the Terraform Labs case, where he rejected the dismissal motion, ultimately leading to a $4.5 billion settlement with the SEC.

Ripple’s Win Against SEC

In May last year, a US court ruled in favor of Ripple in the ongoing lawsuit brought by the SEC, claiming that selling XRP on exchanges in itself does not constitute an investment contract.

The ruling, issued by the District Court for the Southern District of New York, stated that the “offer and sale of XRP on digital asset exchanges did not amount to offers and sales of investment contracts.”

However, the federal judge also ruled that XRP is a security when sold to institutional investors, as it met the conditions set in the Howey Test.

As reported, the XRP Ledger (XRPL) has experienced an increase in transaction activity, with the number of transactions more than doubling from the fourth quarter of 2023 to the end of the first quarter of 2024.