On Friday night, a major ruling in the class-action suit against Ripple came out and it was a clear victory for the San Francisco-based blockchain payments firm—a clean win on two of the three issues before the judge, plus a near-win on the third.
The story didn’t get much play. But the news has got to be a very welcome development at a company hoping to innovate without being slowed by legal woes.
The class action suit—brought on behalf of investors who purchased XRP tokens sold by Ripple, with former XRP investor Bradley Sostack as lead plaintiff—originally made several claims, all based on two main allegations.
First, that XRP is an unregistered security. And second that the company and its CEO, Brad Garlinghouse, had used unfair or fraudulent business practices, including false advertising. In late March, with it looking increasingly like courts were going to rule that XRP was not a security, the plaintiffs amended their claim to add an additional claim “under the alternative theory that XRP is not a security.”
Security claim insecure
The judge’s reaction to the first of those allegations certainly will be of special interest to those who are looking for any signs of exactly how the United States legal system views XRP.
It’s a vital one because if XRP is found to be a security and Ripple is found to be selling an unregistered security, it could pose an existential threat to the company.
So, having a federal judge refer very plainly to her prior order in which “claims may not proceed ‘on the theory that XRP is a security’” will cheer those who have been hoping XRP would be found not to be a security.
Dismissed with predjudice
These claims have essentially been consolidated into three main causes of actions: 1) False advertising; 2) Unfair competition; 3) Statements by Ripple and Garlinghouse violated California security law.
On Friday, United States District Judge Phyllis J. Hamilton granted Ripple’s motion to dismiss the first two totally. They were dismissed with prejudice, meaning the plaintiff cannot refile them.
With regard to the final cause, Judge Hamilton allowed the claim to stand, but severely restricted its scope. The original complaint cited 17 statements by Garlinghouse or the company that the suit claimed were false.
Judge Hamilton dismissed 16 of those, allowing only a single statement to remain. And then took the time to point out that even the sole remaining statement wasn’t a slam dunk.
The sole survivor
Ultimately, the only claim that was allowed to proceed had to do with a single interview Garlinghouse gave in which he is quoted as saying “I’m long XRP, I’m very, very long XRP as a percentage of my personal balance sheet.”
The plaintiff alleges this statement to be false when made because “throughout 2017 Garlinghouse sold millions of XRP on various cryptocurrency exchanges.”
The judge essentially sided with the plaintiff in permitting the claim to move forward. But even here, she allowed for the possibility that the Garlinghouse sales would turn out to “not necessarily contradict the accuracy of the subject statement.”
In other words, if Garlinghouse’s sales of XRP left a balance sheet that still reflected an essentially long position on XRP, then even that lone remaining line of attack will likely be thwarted.
While a Ripple executive declined to comment on the suit, Garlinghouse addressed this issue in an August interview with Modern Consensus.
“Ripple the company owns somewhere around 55 billion XRP,” Garlinghouse said. “I own a significant percentage of Ripple. I am, by extension, very, very long XRP right now. That has not changed.”
As for the part about selling XRP, Garlinghouse said, “I don’t know where they’re getting that data. I’ve never commented about that specifically. I’m not going to lie, I have sold some XRP—largely for tax reasons because I have to pay taxes. Our friends in the U.S. government want to get paid.”
It’s worth going into a bit of detail to demonstrate just how sweeping the judge’s ruling was.
For example, she wrote, “the court dismissed these three causes of action (collectively, the “fraud claims”) because plaintiff failed to satisfy Rule 9(b)’s heightened pleading requirements as they pertain to the alleged misstatements underlying such claims. At core, the court reasoned that plaintiff failed to explain how and why the subject statements were false.”
One fun note for fans of either legal trivia or ‘70s awesomeness is that one of the judge’s citations was Knievel v. ESPN, a beef in which the white leather clad motorcycle daredevil unsuccessfully sued the TV network for running a photo of him with the caption “Evel Knievel proves that you’re never too old to be a pimp.”
It’s also worth noting why some of the specific fraud claims were dismissed. For example, one claim by the plaintiffs cited an October 23, 2017 interview in which Garlinghouse was asked why banks need XRP.
He replied, “It’s about liquidity. If you have a utility token like XRP that has a real value proposition.”
According to Judge Hamilton, “Plaintiff failed to explain why any part of this statement is false. With respect to the first part of this statement, plaintiff’s theory does not contest that XRP could help banks source liquidity.”
Over and over, the judge went back to that line: “Plaintiff failed to explain why this statement is false.” And “Again, plaintiff’s own allegations undermine his argument that this statement is false. And “Again, plaintiff’s theory of falsity does not explain why this statement is false.”
Elsewhere she wrote, “Plaintiff’s theory of falsity does not challenge the veracity of its if-then proposition. … Contrary to plaintiff’s mischaracterization, the second part of this statement does not assert that Garlinghouse stated that “he had seen that XRP is required to solve a real multi-trillion-dollar problem.”
Going further still, the Judge recognized Garlinghouse’s right to communicate: “Moreover, Garlinghouse’s “I think” qualifier turns this part into an opinion, which, generally, is not actionable.”
The judge also took the plaintiff to task for stretching the plain meaning of what Ripple and its principals had said. Regarding an issue the plaintiff had raised about how Ripple’s Chief Compliance Officer, Karen Gifford, had characterized XRP’s use case, the judge wrote, “Plaintiff distorts Gifford’s statement when arguing its falsity.”
In dismissing with prejudice the overwhelming majority of the claims, Judge Hamilton referenced the “plaintiff’s repeated failure to explain why or how the subject statements were false” and maintained, “Those same defects endure in plaintiff’s amended pleading.”
Judge Hamilton summarized, “The court concludes that further amendment would not salvage plaintiff’s claims to the extent they rest on the subject statements.”
Disclosure: Modern Consensus founder Ken Kurson sits on the board of Ripple.
Updated Oct. 6 at 12:47 p.m. to remove layout note from text.
Updated Oct. 6 at 4:50 p.m. to add disclosure.