Ripple CLO Analyzes Judge Rakoff's Remarks on Judge Torres' Ruling
Judge Torres’ Ruling on 13 July 2023 in SEC v. Ripple Case
On 13 July 2023, a significant ruling was delivered in the ongoing SEC vs Ripple Labs lawsuit. The U.S. Securities and Exchange Commission (SEC) had accused Ripple Labs and its two senior executives, Bradley Garlinghouse and Christian A. Larsen, of unlawfully offering and selling securities. The case was presided over by Hon. Analisa Torres, a district judge at the United States District Court for the Southern District of New York.
The court’s decision was a mixed bag, granting and denying summary judgment motions from the SEC and Ripple. The SEC’s motion for summary judgment concerning the Institutional Sales was given but denied for other matters. Conversely, Ripple’s motion for summary judgment regarding the Programmatic Sales, the Other Distributions, and the sales made by Larsen and Garlinghouse was granted but denied concerning the Institutional Sales. The SEC’s motion for summary judgment on the aiding and abetting claim against Larsen and Garlinghouse was also denied.
A key takeaway from the ruling was the judge’s statement that XRP, as a digital token, does not in and of itself embody the Howey requirements of an investment contract, suggesting that the court does not view XRP as a security.
Judge Rakoff’s Ruling on 31 July 2023 in SEC v. Terraform Labs Case
On 31 July 2023, Judge Jed S. Rakoff of the U.S. District Court for the Southern District of New York made a significant ruling in the case “SEC v. Terraform Labs Pte. Ltd. and Do Hyeong Kwon” that could have much broader implications for the crypto space.
According to an article by The Block, in their defense, Terraform argued that the recent split decision in the SEC’s case against Ripple Labs invalidated the agency’s case against them. However, Judge Rakoff rejected this argument, allowing the civil case against Terraform and Kwon to proceed.
Judge Rakoff dismissed the notion of drawing a distinction between coins based on their manner of sale, a stance that directly contradicts the approach adopted by another judge in the Ripple case. He emphasized that the law does not support the idea that a coin sold directly to institutional investors is considered a security, while the same coin sold through secondary market transactions to retail investors is not.
Judge Rakoff wrote:
“It may also be mentioned that the Court declines to draw a distinction between these coins based on their manner of sale, such that coins sold directly to institutional investors are considered securities and those sold through secondary market transactions to retail investors are not. In doing so, the Court rejects the approach recently adopted by another judge of this District in a similar case.“
Ripple’s Chief Legal Officer’s Take on Judge Rakoff’s Comments About Judge Torres’ Decision
Yesterday, Ripple’s Chief Legal Officer, Stuart Alderoty, took to Twitter to share his insights on Judge Rakoff’s comments about Judge Torres’ decision in the SEC vs Ripple case.
Alderoty begins by pointing out that Judge Rakoff, in his ruling, agrees with the fundamental premise that the mere existence of a product or asset, such as orange groves or digital tokens, does not automatically make them securities. This agreement is contingent on the absence of promises to cultivate the asset and share the profits, a principle that aligns with the Howey Test used to determine whether an asset is a security.
Furthermore, Alderoty highlights that Judge Rakoff acknowledges the necessity of an agreement between contracting parties for an investment contract to exist. This point is crucial in the context of the Ripple case, where the SEC alleges that XRP constitutes an investment contract and thus should be classified as a security.
Alderoty also notes that Judge Rakoff concurs that tokens alone, without being intertwined with other rights and promises, are not securities themselves.
However, Alderoty expresses concern about Judge Rakoff’s comments on Judge Torres’ ruling in the Ripple case. He suggests that these comments are unnecessary, confusing, and non-binding. He also implies that Judge Rakoff may have misinterpreted Judge Torres’ reasoning, particularly regarding the role of secondary market traders in the investment process.
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