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The Capital

Altcoin News: Investors Filed a New Lawsuit Against the Ripple

August 14, 2019, by Marko Vidrih on ALTCOIN MAGAZINE

Investors filed a new lawsuit against the Ripple cryptocurrency startup, which cites excerpts from industry executives from the US Securities and Exchange Commission (SEC)’s latest management.

An updated version of the lawsuit in the case, which has been ongoing for more than a year, was filed on August 5 and contains several new arguments designed to confirm that Ripple violated the provisions of the securities laws in the process of selling XRP cryptocurrency. This is the first lawsuit to which Ripple’s allegations must be answered directly. The company has time until September 19th to prepare an answer. Four previous claims in California were successfully consolidated by Ripple into one and submitted to federal court.

According to lawyer Jake Chervinsky, the latest lawsuit is “convincing” and is supported by Susman Godfrey — “one of the best plaintiff’s law firms in the US”. He also noted that the document clarifies why XRP should be considered security at the federal level and in the state of California:

“This is important because California uses the ‘risk capital test’ in addition to the [federal] Howey test to determine whether a transaction qualifies as a security,” he explained. “The risk capital test is broader than the Howey test, meaning the plaintiffs could lose their federal securities claims and still win their state securities claims.”

Plaintiffs are trying to prove the link between XRP Ledger, the distributed network that underlies XRP, and Ripple.

SEC Guide

Probably one of the most important differences between the new lawsuit and the previous ones is the reference to the regulatory guidance provided by the SEC to determine whether a particular digital asset is a security.

“Although the SEC’s Framework is technically only non-binding guidance, the Court will likely give it significant weight in deciding how to apply the Howey test to the facts of this case,” Chervinsky explained.

Non-litigation partner Fisher Broyles, Rebecca Rettig, said SEC guidelines for federal lawsuits are being applied for the first time.

“Although the framework on its own doesn’t have precedential value — meaning the court is not required to follow it — it will be very interesting to see how the court handles the utility of the framework in moving forward in determining whether XRP is a security,” she said.

“Lead Plaintiff and the Class invested fiat and other digital currencies, such as Bitcoin and Ethereum, to purchase XRP. As explained in the SEC Framework, investment of both fiat and digital currency meets the first prong of Howey,” the filing says and goes on to say: “Lead Plaintiff and the Class have entirely passive roles vis-à-vis the success of the XRP Ledger and XRP. Rather, as Defendants’ own marketing makes clear, the success of the XRP Ledger, and the profits the Class reasonably expected to derive from investing in XRP, are dependent on the essential technical, entrepreneurial, and managerial efforts of Defendants and their agents and employees.”

Rettig noted that “each of the [factors in the SEC Framework] are based on underlying federal case law, so the litigants will likely rely upon these underlying cases and not simply the framework [itself].”

Plaintiffs also mention statements made by Ripple CEO Brad Garlinghouse and CTO David Schwartz, which may reinforce their position. So, in 2017, in a conversation with CNBC, Garlinghouse said:

“People are looking at the success Ripple has been having as a company, and I think that’s increased the value of XRP.”

“The Complaint emphasizes Ripple’s own statements to prove that XRP investors had a reasonable expectation of profits flowing from Ripple’s managerial efforts,” Chervinsky noted. “This is similar to how the SEC framed its own Complaint against Kik,” the messaging app company that the SEC alleges violated securities laws when it raised $100 million during a 2017 token sale.

Tweets as proof

In addition, the document contains about 40 tweets, including messages from Ripple, executives and other employees of the company, which discuss listings on exchanges, Ripple reserves in XRP and other measures to promote cryptocurrency.

“I’ve never seen so many citations to Twitter in a complaint before,” Chervinsky said.

The plaintiffs did not stop there and stated that Ripple had misled the general public regarding the use of various products.

“On April 26, 2017, Ripple tweeted a link to an article on its own site, proclaiming: ‘#Ripple welcomes 10 additional customers to our #blockchain #payments network.’ Neither this tweet nor the article it linked to informed readers that the blockchain payments network did not refer to the XRP Ledger, but rather Ripple’s xCurrent enterprise solution,” the complaint said, adding in the next paragraph:

“Just days later, on May 3, 2017, with the price of XRP continuing to rise, Ripple tweeted: ‘#Ripple adoption is sparking interest in XRP ‘which has had an impressive rally in the last two months’ via @Nasdaq.’”

Not only about securities

Also in the new lawsuit, for the first time, some arguments not related to securities laws were included.

“For the first time, the plaintiffs now claim that Ripple violated California’s false advertising and unfair competition laws by making fraudulent statements about the genesis, circulating supply, and adoption of XRP,” Chervinsky said.

The plaintiffs demand compensation for the losses they incurred on investments in XRP. The main plaintiff lost $118,100. The losses of the remaining participants in the proceedings have not yet been calculated.

More importantly, plaintiffs want the court to recognize XRP as a security. This decision may directly affect the ability of Ripple to sell XRP, as well as limit the ability of investors to purchase cryptocurrencies.

Author: Marko Vidrih



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