SEC Sought $1.9 Billion From Ripple; Got $125 Million
Commentary by Steven Lofchie
The US District Court for the Southern District of New York ordered cryptocurrency firm Ripple Labs to pay a civil penalty of $125 million for selling unregistered securities to institutional investors.
In the 2020 Complaint, the SEC alleged that Ripple engaged in three categories of unregistered XRP offers and sales: (i) "Institutional Sales under written contracts for which it received $728 million;" (ii) "Programmatic Sales on digital asset exchanges for which it received $757 million;" and (iii) "Other Distributions under written contracts for which it recorded $609 million in 'consideration other than cash.'" Further, two senior executives of Ripple received between them another $600 million for sales of XRP tokens. The Court determined that only Ripple's institutional sales constituted the improper unregistered sale of investment contracts.
The SEC sought final judgment against Ripple (i) permanently enjoining it from future violations of SA Section 5 ("Prohibitions relating to interstate commerce and the mails") and from conducting an unregistered offering of XRP in Institutional Sales; (ii) ordering Ripple to pay $876,308,712 in disgorgement and $198,150,940 in prejudgment interest; and (iii) ordering Ripple to pay an $876,308,712 civil penalty.
Ripple contended that an injunction and disgorgement were unwarranted, and that any civil penalty should not exceed $10 million, according to the ruling.
In granting the limited award against Ripple, the Judge did not accept the SEC's assertion that Ripple had recklessly disregarded the securities laws or that Ripple had refused to accept responsibility for its conduct. The judge found that Ripple had taken "steps to ensure compliance" with legal advice and that Ripple had "acknowledged the Court's [prior] holding" as to the illegality of certain of its sales even as it "largely emphasized the favorable aspects" of the decision. Further, the Court rejected any claim of disgorgement saying the investors had received the return contemplated. The Court also found that there was an ongoing risk that Ripple could continue to "push the boundaries" of the law, and that an injunction against future violations was appropriate.
The Court denied the SEC's requests for disgorgement and prejudgment interest, and partially granted its request for a civil penalty. The final judgment enjoined Ripple from further violations of the securities laws and imposed a civil penalty of $125 million.
Commentary
A penalty of $125 million is substantial, but is a small fraction of what the SEC asked for. Further, the two principals were not required to forfeit the $600 million that they personally received. One would think Ripple and its executives are happy with the outcome. That said, this result and the SEC's decision to allow Ether ETFs to be listed on exchanges (effectively conceding that Ether is not a security, but failing to explain why it is not) raises further uncertainty as to the state of the law.
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