XRP Suffers Major Setback As Legal Expert Says Coin Set To Be Labeled A Security In California

Ripple is facing yet another legal battle as a California judge has declared that a civil securities lawsuit against CEO Bradley Garlinghouse can head to trial, rejecting the blockchain company’s motion for summary judgment in a case alleging that Garlinghouse broke state securities laws back in 2017.

Ripple CEO Faces Trial Over “Misleading Statements” In 2017

According to attorney Fred Rispoli, Ripple-promoted XRP is on course to be classified as a security in California.

Rispoli noted in his post on X that Judge Phyllis Hamilton of the U.S. District Court for the Northern District of California on June 13 granted Ripple’s summary judgment motion on failure to register XRP as a security claims as well as the state law securities claims.

However, Judge Hamilton ruled that a jury would decide if Ripple CEO Brad Garlinghouse had made “misleading statements” during a 2017 televised interview. The suit alleges that during the appearance at Canada’s BNN Bloomberg, Garlinghouse broke California’s securities laws after asserting he was “very, very long” on XRP while simultaneously selling “millions of XRP” on multiple crypto exchanges throughout that year.

“We are pleased that the California court dismissed all class action claims. The one individual state law claim that survived will be dealt with at trial,” Ripple’s chief legal head, Stuart Alderoty, postulated in a statement.

Court documents show that Ripple’s legal team had asked the judge to toss out the “misleading statement” claim as XRP is not a security under the infamous Howey test and “thus cannot give rise to a claim for misleading statements in connection with a security.”

Navigating Uncertainties

In the June 20 ruling, Judge Hamilton revealed that Ripple’s attorneys nudged her to “follow the reasoning” of U.S. District Court Judge Analisa Torres who, in a similar case in the Southern District of New York, declared in July 2023 that XRP did not qualify as a security when sold to non-institutional investors.

Torres’ ruling was considered a landmark victory for Ripple and was hailed by many crypto pundits as a step in the right direction for much-needed regulatory clarity. Some believed other judges would use the ruling as a precedent when deciding on other crypto-related securities lawsuits. 

Hamilton, however, disagreed and instead ruled that XRP could be a security when sold directly to retail customers via exchanges. She said these investors would have anticipated profits from Ripple’s efforts, which is one of the hallmarks of an investment contract as per the Howey test:

“The court declines to find as a matter of law that a reasonable investor would have derived any expectation of profit from general cryptocurrency market trends, as opposed to Ripple’s efforts to facilitate XRP’s use in cross-border payments, among other things.”

It’s worth mentioning that Judge Jed Rakoff of the U.S. District Court for the Southern District of New York also emphatically rejected Torres’ historic distinction between institutional sales and sales to retail investors on crypto exchanges in a separate suit lodged by the U.S. Securities and Exchange Commission (SEC) against Do Kwon and his company Terraform Labs.

What Next?

Bewilderingly, XRP might end up being classed as a security in California despite not being a security in New York. A conclusion that XRP is indeed a security could subject Ripple to strict regulatory laws, potentially affecting its operations and market dynamics.

Rispoli urged the cryptocurrency industry to keep pressure on getting federal legislation owing to such legal inconsistencies.

Meanwhile, the SEC recently reduced its proposed penalties for Ripple from $2 billion to $102.6 million. The pair have been battling it out in court since December 2020 when the SEC claimed Ripple sold unregistered securities. Judge Torres is expected to rule on suitable remedies in the Ripple vs. SEC case in the course of this year.

At press time, XRP traded at $0.4893.