The SEC wants to appeal two rulings by US District Judge Analisa Torres in the landmark case SEC v. Ripple. In her highly anticipated ruling, Torres agreed with the SEC that Ripple’s $728 million worth of institutional sales of XRP were illegal. However, Torres denied the SEC’s allegation that Ripple’s $1.3 billion of programmatic sales of XRP plus other distributions were illegal.
The SEC wants to appeal these two denials. Citing “controlling questions of law on which there is substantial ground for differences of opinion” that affect a litany of other lawsuits, commissioners have requested interlocutory review to a higher court, the US Second Circuit. The SEC wants a higher court to overrule Torres.
If Torres grants the commissioners’ request, she will pause litigation and not publish final judgments while interlocutory (and subsequent appellate) reviews of her rulings proceed.
In short, most XRP transactions might still be securities transactions.
In contrast to the oft-repeated claim that “XRP is not a security,” the question of whether most XRP transactions have been illegal securities transactions could soon be under formal appeal.
Were Ripple’s programmatic sales of XRP illegal?
To recap, Torres ruled on the legality of three types of XRP transactions by Ripple: institutional sales, programmatic sales, and other distributions.
- Torres agreed with the SEC that institutional sales were illegal.
- Torres reasoned that programmatic sales of XRP (i.e. periodic, algorithmic, blind, and routine sales of XRP to anonymous buyers on crypto exchanges) didn’t qualify as securities transactions. This was primarily the case because, in her view, buyers of programmatic sales had no way of knowing they were buying XRP from, nor entering into a contract with, Ripple.
- Finally, Torres reasoned that so-called other distributions of XRP (i.e. bonuses and labor-based compensation) didn’t involve an “investment of money” and, because of that critical attribute, were not technically investment contracts.
The SEC disagrees with Torres on these second and third points, but the most important and widely misinterpreted ruling was the second. Because Ripple’s programmatic sales of XRP closely resemble regular trades between retail customers of crypto exchanges, a federal ruling that these transactions were legal would be a boon for thousands of altcoins.
Indeed, the price of XRP immediately rallied on Torres’ initial ruling. Within hours, the market capitalization of XRP increased by $17 billion. However, as doubt over the permanence of Torres’ decision crept back into the market, XRP has retraced $9 billion of that rally as of publishing time.
Certainly, programmatic selling made it difficult to determine who was on the other side of any particular trade. If someone bought XRP on Coinbase and transferred it to their own wallet, they might have perceived it as buying it ‘from Coinbase’ or ‘from a Coinbase customer,’ without knowing that Ripple might have sold them that XRP.
However, the SEC takes the stance that this blindness doesn’t mean that Ripple didn’t offer those XRP as investment contracts. Commissioners sent a letter to Torres stating their intention to explain this to a 2nd Circuit judge.
SEC v. Ripple might appeal for another year… or three
The stakes in this case are enormous. The SEC believes that at least $1.3 billion of Ripple’s XRP sales violated the law — and perhaps much more. For example, in its request for interlocutory review, the SEC cites Ripple’s $3 billion worth of XRP in on-demand liquidity (ODL) transactions after the SEC’s original, December 2020 lawsuit. Ripple countered that it planned to limit liability for its ongoing ODL sales, saying they didn’t occur in the United States. The SEC notes this jurisdictional claim will require substantial legal discovery. Even Ripple co-founder Brad Garlinghouse acknowledged that the matter could “take years” to resolve.
The SEC also cites other judicial opinions as its basis for requesting interlocutory review. Commissioners cited a conflicting opinion by a more senior judge. In a similar case, SEC v. Terraform Labs, Judge Jed Rakoff ruled that programmatic sales do not disqualify a transaction from securities laws. The SEC noted Rakoff’s ‘intra-district split’ against Torres. Their disagreement indicated the need to resolve the matter through a formal appeals process.
The presiding judge in another class-action lawsuit, Zakinov v. Ripple Labs, rejected Ripple’s defense that the status of the investor could determine the investor’s ability to set a reasonable expectation of profit.
Dates and next steps
In any case, the SEC has recommended a new schedule to accommodate interlocutory review wherein commissioners would file an opening briefing by August 18, 2023. Ripple’s response to that letter to Judge Analisa Torres would then be due by August 20. Then Ripple’s formal response to the appeal would have to be filed by September 1. The SEC’s rebuttal would be due by September 8.
Before the SEC’s request for interlocutory review, Analisa Torres set a schedule calling for blackout dates by August 23 and submissions for motions in limine by December 4. Any opposition to those motions in limine would then have been due December 18. A jury trial could have started as early as Q2 2024. However, a ruling on interlocutory review may not arrive before 2024, and appeals could last into 2025 or beyond.
The case could ultimately escalate to the Supreme Court and remain unresolved through 2025.
To recap, altcoin promoters briefly celebrated when Judge Analisa Torres said that Ripple’s programmatic sales of XRP were not illegal. However, the SEC wants to appeal that decision to a higher court before Torres publishes her final judgment. If Torres grants the SEC’s request for interlocutory review, the suit will proceed immediately to the US Second Circuit. If Torres denies interlocutory review, the SEC may still appeal any final judgment rendered by Torres at a later date. A legal battle underway since 2020 is now likely to be finalized in 2024 or beyond.