Three strikes. But is the SEC out?
Yesterday, the U.S. Securities and Exchange Commission (SEC) dismissed its own case against Ripple Labs CEO Brad Garlinghouse and Executive Chairman Christian Larsen. This is the third recent win for Ripple, the firm closely associated with XRP, in its multi-year legal battle with the securities watchdog.
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Garlinghouse and Larsen were called “significant security holders” in the SEC’s original lawsuit, filed in 2020 (before Gary Genlser was in his seat as Chairman), which accused the company and principal executives of selling over $1.3 billion in an “unregistered, ongoing digital asset securities offering” of XRP. Further, Garlinghouse and Larsen personally “effected” about $600 million in illicit securities sales, it said.
To say the SEC suit has been a stain on Ripple is an understatement. In the immediate weeks after the suit was filed, nearly all U.S. exchanges delisted XRP. Ripple’s relationships with service providers seemed to suffer, and CEO Garlinghouse began to intimate the firm, founded in 2013 in San Francisco, would relocate abroad.
For a while, it seemed like Ripple may not even survive. The firm was flush enough (thank you programmatic sales, bay-bee), but no one knew what would result from what is still, arguably, the most significant regulatory action taken against a crypto company to date. Firms like Telegram and EOS were sued, they settled and were given “slaps on the wrist” (relative to amount of money involved).
But Ripple decided to fight the civil charges, which could have meant a big win or devastating loss. And it’s likely thankful it did take matters to court, at least at the moment amid a bit of a winning streak.
The first and most significant legal victory for Ripple was tremendous, even if it was partial: Judge Analisa Torres found that Ripple had not violated existing securities laws by selling XRP to exchanges and giving retail buyers a chance to invest, but it did break the law when selling tokens directly to institutional investors.
Ripple also won recently when Judge Torres blocked the SEC’s requests for an “interlocutory appeal” — a way to speed up the trial process by appealing a particular court decision while other aspects of the case are ongoing — and stay of the trial.
It’s likely this most recent win, in the SEC dropping its case against Garlinghouse and Larsen, is meant also to speed up the judicial process. The two were set to go to trial in the spring, which reportedly would have locked up the SEC’s ability to appeal Judge Torres’ decision about institutional investors.
So, rather than wait for the conclusion of that trial, the SEC decided to throw in the towel. That’s the theory, at least — the SEC’s press release didn’t provide much of an explanation and the office hasn’t responded to a request from CoinDesk for comment.
However, the SEC also voluntarily dismissed the case with prejudice, meaning it cannot be filed again. For some, these two words signal a lot. Not only is the executives’ trial completely and permanently over, but “prejudice” tends to come up only when a judge sees the case as frivolous or a matter that could be resolved outside of court.
In either case, whether the SEC dismissed its lawsuit to appeal a different legal matter quicker, or because it knew it didn’t have a case against Ripple’s executives, the recent trial updates don’t look good for the SEC. Just optically-speaking, the once fierce and feared watchdog that sought to patrol all of crypto under its purview is now getting its nose swatted in court.
And this is exactly what the judicial system was designed for. While legislators in Congress pass laws (or in the case of crypto, delay passing anything) and executive agencies enforce them, the judicial system is meant to act as a check on both. So far, Judge Torres seems to suggest existing securities laws are sufficient to rule on crypto, and the SEC has been overzealous.
Of course, the legal battle isn’t exactly over, and decisions helpful to Ripple are still a matter that can be appealed. What happens next is Ripple and the SEC will fight over how much the crypto startup needs to pay in restitution for its $700-plus million in illicit XRP sales. While almost certainly a weight off Garlinghouse's shoulders, pretending that the SEC somehow capitulated or threw in the game is false.
It’s three strikes in a game with infinite innings.