On August 7, 2024, nearly four years after the SEC filed its complaint alleging Ripple sold XRP in unregistered securities transactions in violation of Section 5 of the Securities Act, the district court issued its final judgment and remedies order, marking what will end this litigation unless one of the parties appeals this order and/or the prior summary judgment order. See Final Judgment Order, SEC v. Ripple Labs, Inc., No. 20-cv-10832 (S.D.N.Y. Aug. 7, 2024), ECF No. 973 (the “Order”). An appeal by either party will be due on October 7, 2024.
In a final order resolving years-long litigation at the district court level, the court:
The final judgment and remedies order follows the court’s summary judgment order last year, which analyzed whether three categories of Ripple’s XRP sales were unregistered securities transactions: (1) Institutional Sales—sales to “sophisticated individuals and entities”; (2) Programmatic Sales—sales to “public buyers . . . on digital asset exchanges”; and (3) Other Distributions—“distributions to employees as compensation and to third parties as part of Ripple’s Xpring initiative to develop new applications for XRP and the XRP Ledger.” SEC v. Ripple Labs, Inc., 682 F. Supp. 3d 308, 324-330 (S.D.N.Y.), motion to certify appeal denied, 697 F. Supp. 3d 126 (S.D.N.Y. 2023). In the summary judgment order, the court determined that only Ripple’s Institutional Sales were unregistered securities transactions that violated Section 5 of the Securities Act. Id.1
In the final judgment order, the court granted the SEC’s request for a permanent injunction barring Ripple from further violations of Section 5 of the Securities Act. The court granted the injunction based on its findings that Ripple’s Institutional Sales were not isolated events and that Ripple continued to sell XRP in similar transactions thereafter. The court did not conclude that Ripple acted with a reckless disregard of the law. The court also did not find that Ripple’s post-summary judgment statements announcing its partial victory reflected “blame-shifting.” Order at 5-6. However, the court still found that Ripple’s argument in briefing on the remedies motion that these ongoing transactions did not violate the securities laws, notwithstanding the court never having expressly endorsed that view, bolstered the court’s conclusion that “Ripple’s willingness to push the boundaries of the [Summary Judgment] Order evinces a likelihood that it will eventually (if it has not already) cross the line.” Id. at 4-7. However, the court noted that it “d[id] not today hold that Ripple’s post-Complaint sales have violated Section 5.” Id. at 7.
The court declined to exercise its discretion to waive Ripple’s “bad actor disqualification” for Regulation D exemptions for future sales in the injunction, which bars Ripple from future token sales to accredited investors in the United States who would ordinarily qualify for a registration exemption under Regulation D. Id. at 8.
Next, the court rejected entirely the SEC’s request for $867,308,712 in disgorgement and $198,150,940 in prejudgment interest, finding that the SEC had failed to show investor harm. The court rejected the SEC’s arguments that certain institutional purchasers of XRP were harmed by Ripple’s failure to disclose discounted pricing offered to other institutional buyers. Id. at 10-12. The court held the SEC’s arguments were precluded under Second Circuit caselaw, which holds that an award of disgorgement requires proof that defrauded investors suffered pecuniary harm. Id. at 10-12 (discussing SEC v. Govil, 86 F. 4th 89 (2d Cir. 2023)).
Finally, the court assessed a civil monetary penalty of $125,035,150, considerably less than the $876 million sought by the SEC. In its briefing, the SEC argued that an extraordinary civil penalty was warranted as a deterrence mechanism, to discourage other actors from launching tokens and violating the securities laws:
If companies can raise money with the ease that Ripple did—by simply receiving billions of units of computer code that cost little to nothing to create and then turning it into billions of dollars, without registering these transactions with the SEC and providing the requisite disclosures—the legal structure underpinning our financial markets will be jeopardized. The SEC asks the Court to consider how easily actors, particularly in the crypto asset space, can today engage in the same sort of conduct as Ripple’s, and send a strong message that such abuses will not be tolerated.
Memorandum in Support of Motion for Remedies and Entry of Final Judgment, SEC v. Ripple Labs Inc., No. 20-cv-10832 (S.D.N.Y. Mar. 25, 2024), ECF No. 949 at 25.
The court disagreed. Although it found that Ripple’s numerous sales contracts with Institutional Buyers were egregious, that “the recurrent, highly lucrative violation of Section 5 is a serious offense,” and that Ripple’s financial condition did not merit a reduced penalty, the court reiterated its prior conclusion that the case did not involve “allegations of fraud, misappropriation, or more culpable conduct.” Order at 14-15. After concluding a civil penalty was appropriate, the court applied a transaction-by-transaction tiered approach in assessing penalties in connection with 1,278 transactions. Id. at 15-16.2
Prior to Ripple, only one fully litigated SEC enforcement action against a token issuer resulted in a remedies order: SEC v. LBRY, Inc., 2023 WL 4459290, at *4 (D.N.H. July 11, 2023). In that case, the SEC sought a significantly smaller civil penalty ($111,614.00) and an injunction but did not seek disgorgement. The LBRY court granted the SEC’s civil penalty request and ordered an injunction barring LBRY from future Section 5 violations “and from participating in unregistered offerings of crypto asset securities.” Id. at 4-5. It is likely that courts will look to these two cases for guidance when assessing possible remedies in other SEC digital asset enforcement cases.
Footnotes
1 The court also found disputed issues of fact that prevented summary judgment on the claims against two of Ripple’s senior leaders and set those claims for trial. Id. The parties subsequently settled the claims against those individuals. SEC v. Ripple Labs, Inc., No. 20-cv-10832 (S.D.N.Y. Oct. 19, 2023), ECF No. 917.
2 After excluding Programmatic Sales and Other Distributions, the court determined there were 1,278 violations of Section 5. Id. at 16 n.10. The court assigned dollar values to each transaction within a date range (i.e., $115,231 per contract entered into on or before November 2, 2025; $80,000 per contract entered into between March 6, 2023, and November 2, 2015; and $75,000 per contract entered into between March 4, 2009, and March 5, 2013) and then added up the total value to arrive at a civil penalty of $125,035,150. Id.