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SEC rejects lawsuit dismissals by Ripple chiefs based on ‘scienter liability’

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  • According to the SEC, Ripple executives Garlinghouse and Larsen “avoided knowing that XRP could be found to be a security” in order to profit financially.
  • Both had a “strong financial motive” to intentionally ignore the risk.

In the U.S. Securities and Exchange Commission’s (SEC) legal battle against Ripple, both parties continue to engage in heated exchanges. After the SEC sent a letter to the court only the day before yesterday, on March 9, discrediting two key defense strategies of Ripple, “Due Process” and “Fair Notice”, as “legally improper”, the SEC has now followed up yesterday with regard to the individual claims against Brad Garlinghouse and Chris Larsen.

As CNF reported, Garlinghouse and Larsen had each filed a letter on March 03 indicating their intent to file a motion to dismiss the SEC’s amended complaint. Yesterday’s letter is now a response to that and provides reasons why the dismissal of the individual claims is not warranted, according to the regulator. In its response to Garlinghouse’s letter, the SEC comments:

The Letter makes clear that, rather than move to dismiss based on a sound legal theory, Garlinghouse plans to use the motion to air his grievances against the SEC, an effort that will waste considerable litigant and judicial time and resources.

Ripple chiefs have “recklessly disregarded” it

Essentially, the SEC points to two critical facts to prevent dismissal of the lawsuits: knowledge, or at least gross disregard, of XRP’s status by Garlinghouse and Larsen, and dismissal of the lack of territoriality. With respect to the first argument, the SEC writes

[…] he knew, recklessly disregarded, or consciously avoided knowing that XRP could be found to be a security. […]

In fact, Garlinghouse knew that XRP was under SEC scrutiny and took a risk as to whether the SEC would file an enforcement action seeking to hold him accountable. Having lost that gamble, Garlinghouse now seeks to blame the SEC for his own misconduct. The complaint adequately pleads Garlinghouse’s aiding and abetting.

The linchpin is thus the “scienter” argument. To support this, the SEC sets forth that Ripple’s Chief Compliance Officer told Garlinghouse that XRP has “securities-like” characteristics. Moreover, Ripple’s CEO had expressed to investors that he “that he could ‘not guarantee’ that the SEC would not conclude XRP was a security”. Further, Garlinghouse had also had a “strong financial motive”  to intentionally ignore this risk:

[…] he stood to profit by hundreds of millions of dollars from his unregistered sales of XRP and understood that, if Ripple could not sell XRP to fund its operations, it would essentially cease to exist. This allegation permits a reasonable jury to conclude that Garlinghouse acted with the requisite scienter.

SEC rejects lack of territoriality

As a second key argument to prevent dismissal of the claims, the SEC posits that the complaint relates to “a domestic offering of securities” to a “sufficient extent.”

The Complaint sufficiently alleges that Garlinghouse’s offers and sales of XRP occurred “within the United States” under Regulation S for various reasons, including because he offered and sold XRP to persons in the U.S., made directed selling efforts with respect to XRP to U.S. investors, and made no efforts to stop any XRP purchased by non-U.S. investors from being resold to U.S. investors.

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