It seemed like a no-brainer inside the Securities and Exchange Commission last December when the agency filed a lawsuit charging that one of the biggest players in crypto technology, Ripple Labs, violated securities laws.
Then-Chairman Jay Clayton signed off on the case just hours before resigning from the SEC following the defeat of Donald Trump in the 2020 presidential election. That made the timing a bit odd, since big decisions in government are usually left to the incoming administration to sort out.
But the SEC’s enforcement division has a reputation for being independent, with staff attorneys remaining in their roles no matter who is in power. And the enforcement staff was united in their decision to file, while the five-member commission voted 3-2, FOX Business has learned.
Ripple executives had, according to the SEC’s lawsuit, brazenly ignored warnings from the commission that when they sold $1.3 billion worth of XRP, the digital coin used on the Ripple platform, they were violating securities laws because the sales weren’t registered with the commission and disclosures to investors weren’t provided — contrary to mandatory prerequisites for whenever a company sells a security.
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XRP was definitely a security, in the SEC’s view, just like a stock or a bond, because it was being used to finance the buildout of Ripple’s platform and enrich its top executives. The company could settle with the commission, as most do even if the price is steep: It would have to repurchase $1.3 billion in XRP that the SEC believes was illegal. Or Ripple could fight it out in federal court, a battle SEC staff attorneys were confident they would win. It didn’t seem to matter that SEC action would hammer not just Ripple, but average people who purchased the now suspect XRP digital coin.
Well, not so fast. Yes, most SEC targets choose to, in fact, settle rather than spend money fighting in the courts, but not Ripple. Its CEO Brad Garlinghouse and general counsel Stuart Alderoty chose to fight both in the courtroom and in the court of public opinion. They hired a dream team of legal talent and top lobbyists, and crafted a compelling public relations campaign that the SEC’s lawsuit is nothing more than prosecutorial overreach, wrong on the law, and so riddled with conflicts of interest that, if successful, it will benefit its competitors and stifle crypto innovation.
Things are now getting nasty as both sides head to court. The SEC is taking issue with Ripple’s voluminous document requests from the commission, comparing them to harassment. Ripple says the SEC has abandoned its role as an independent regulator and has overstepped its authority. Legal experts question whether the SEC’s time could have been better spent on other issues.
With neither side looking to back down, the case is likely headed for trial possibly early next year.