Ripple faces securities suit in California over CEO’s misleading statement

A U.S. federal court judge has allowed a civil securities lawsuit against Ripple Labs to proceed, rejecting the company’s request for summary judgment. This lawsuit alleges that Ripple CEO Brad Garlinghouse violated California securities laws.

On June 20, California District Court Judge Phyllis Hamilton ruled that a jury would determine whether Garlinghouse made “misleading statements” in a 2017 interview. However, four claims regarding Ripple’s “failure to register XRP as a security” were dismissed.

In a 2017 interview with Canada’s BNN Bloomberg, Garlinghouse claimed to be “very, very long” on XRP, but the lawsuit contends this was false, alleging he sold millions of XRP that year.

Ripple’s Chief Legal Officer, Stu Alderoty, expressed satisfaction that all class action claims were dismissed, noting the remaining individual state law claim would be addressed at trial.

Judge Hamilton noted Ripple’s argument that the “misleading statement” claim should be dismissed because XRP is not a security under the Howey test, citing a notable ruling by Judge Analisa Torres in July 2023 in a Securities and Exchange Commission (SEC) lawsuit. However, Hamilton disagreed, stating XRP could be considered a security when sold to retail investors, who would likely expect profits from Ripple’s efforts—one of the criteria of the Howey test.

Hamilton explained that the court could not conclude that a reasonable investor would not have expected profit due to Ripple’s activities. Consequently, the court could not dismiss the claim based on this reasoning.

Alderoty maintained that Judge Torres’ ruling in the SEC case remains intact and undisturbed by Hamilton’s decision.

Last year, Judge Torres’ ruling was celebrated in the U.S. crypto industry as a significant victory, with expectations that it would set a precedent for other crypto cases. However, it has not had the widespread impact anticipated.

In another SEC case against Terraform Labs, presiding Judge Jed Rakoff, from the same courthouse as Judge Torres, disagreed with the Ripple ruling when rejecting Terraform’s dismissal motion in August. Terraform eventually lost the case and was ordered to pay a $4.5 billion settlement to the SEC.