The SEC alleges that Ripple executives misled investors and manipulated the price of XRP coins by creating a “information vacuum.”
The United States Securities and Exchange Commission charged that Bradley Garlinghouse and Christian Larsen, executives of Ripple Labs, manipulated the price of XRP by increasing or slowing down their sales of coins under market conditions.
In an amended lawsuit filed on 18 February, the plaintiff—the U.S. Securities and Exchange Commission—reiterated that Ripple Labs, Christian Larsen and Brad Garlinghouse had breached the securities laws by selling XRP coins beginning in 2013:
“From at least 2013 through the present, Defendants sold over 14.6 billion units of a digital asset security called ‘XRP,’ in return for cash or other consideration worth over $1.38 billion U.S. Dollars (‘USD’), to fund Ripple’s operations and enrich Larsen and Garlinghouse.”
The lawsuit argues that Ripple had received legal advice as early as 2012 that its coin could constitute a security offering and that it had chosen to disregard it. From a financial viewpoint, the lawsuit states, the plan succeeded, with Ripple collecting “at least $1.38 billion” in the years to come.
The filing charges that Larsen and Garlinghouse then made $600 million in income from their unregistered sales of XRP. The SEC states that these sales were made when Garlinghouse constantly reported that he was “very long” on XRP—suggesting that investors were fooled by Garlinghouse and Larsen’s cashing out:
“Ripple created an information vacuum such that Ripple and the two insiders with the most control over it—Larsen and Garlinghouse—could sell XRP into a market that possessed only the information Defendants chose to share about Ripple and XRP.”
The complaint describes an incident in 2015 where one of Ripple’s market makers, who also paid in XRP, briefly suspended the selling of Garlinghouse and Larsen’s XRP holdings because the price of the coin had already plummeted.
According to the filing, Larsen instructed the market maker to “keep [sales] down for now” and “wait until [the] market had recovered from this error.”
A similar incident in 2016 explained how the defendants were pressured to change their nett sales targets in the expectation that they could “stabilise and/or increase” the struggling price of XRP coins. Larsen and Garlinghouse decided to minimise the pace of their XRP sales, but Garlinghouse added that he was “marginally inclined to be more aggressive when we do this.”
The SEC states that the “information asymmetry” created by the defendants still exists, allowing them to continue selling XRP at a “substantial risk to investors.”
General counsel at Ripple Stuart Alderoty said he was disappointed by the SEC’s late attempt to bring action against Ripple Labs after years of inaction. On Feb. 18, Alderoty said the latest amended complaint raised nothing new, reiterating that only one legal question remains to be settled. Alderoty tweeted:
“As many of you have seen, the SEC filed an amended complaint today. The only legal claim remains: did certain distributions of XRP constitute an investment contract? Disappointing the SEC needed to try to ‘fix‘ their complaint after waiting years to bring it in the first place…”
In 2020, former Chairman of the Commodity Futures Trading Commission, Chris Giancarlo, argued that XRP could not be considered a security offering, claiming that it did not follow the requirements set out in the Howey test.
Giancarlo had previously claimed that neither Bitcoin (BTC) nor Ether (ETH) reflected security offerings, earning him the nickname “Crypto Dad” in the cryptosphere.
However, there could be a conflict of interest at stake. As Forbes said at the time, the law firm represented by Giancarlo—Wilkie Farr & Gallagher LLP—was also serving as legal counsel to Ripple. Giancarlo’s assessment that XRP is not a protection is also “related to certain factual information provided by Ripple,” stated the report.
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