SEC v. Ripple: Ripple Sold XRP Through the Use of Trading Algorithms

BACKGROUND

I. Factual Background

B. Defendants’ Sales and Distributions of XRP

At all times before the end of 2020, Ripple owned between 50 and 80 billion XRP. See Defs. 56.1 Resp. ¶¶ 15, 35; see also id. ¶ 256. Although the parties dispute the specific dollar amounts and details, they agree that from 2013 through the end of 2020, Ripple engaged in various sales and distributions of XRP. See id. ¶¶ 647, 716; see generally SEC 56.1 Resp. ¶¶ 92–123.

First, Ripple, through wholly owned subsidiaries, sold XRP directly to certain counterparties (primarily institutional buyers, hedge funds, and ODL customers) pursuant to written contracts (the “Institutional Sales”). SEC 56.1 Resp. ¶ 105; Defs. 56.1 Resp. ¶¶ 5–6, 619–20, 716. The SEC alleges that Ripple sold approximately $728.9 million of XRP in these Institutional Sales. Defs. 56.1 Resp. ¶ 716.

Second, Ripple sold XRP on digital asset exchanges “programmatically,” or through the use of trading algorithms (the “Programmatic Sales”). SEC 56.1 Resp. ¶ 95; Defs. 56.1 Resp. ¶ 647. Ripple’s XRP sales on these digital asset exchanges were blind bid/ask transactions: Ripple did not know who was buying the XRP, and the purchasers did not know who was selling it. SEC 56.1 Resp. ¶ 96; Defs. 56.1 Resp. ¶¶ 652–54. The SEC alleges that Ripple sold approximately $757.6 million of XRP in Programmatic Sales. Defs. 56.1 Resp. ¶ 647. Ripple used the proceeds from the Institutional and Programmatic Sales to fund its operations. Defs. 56.1 Resp. ¶¶ 156–70.[5]

Ripple also distributed XRP as a form of payment for services (“Other Distributions”). Defs. 56.1 Resp. ¶¶ 827–30. For instance, Ripple distributed XRP to its employees as a form of

employee compensation. SEC 56.1 Resp. ¶ 110; Defs. 56.1 Resp. ¶¶ 217–18. Ripple also distributed XRP in conjunction with its Xpring initiative to fund third parties that would develop new applications for XRP and the XRP Ledger. Defs. 56.1 Resp. ¶¶ 831–32. In sum, the SEC alleges that Ripple recognized revenue of $609 million from its distributions of XRP to individuals and entities in exchange for services. Id. ¶¶ 829–30. [6]

In addition to Ripple’s sales and distributions, Larsen and Garlinghouse offered and sold XRP in their individual capacities. After stepping down as CEO of Ripple in December 2016, Larsen became the Executive Chairman of Ripple’s Board of Directors, a position he currently holds. SEC 56.1 Resp. ¶¶ 128–29. From at least 2013 through 2020, Larsen sold XRP on digital asset exchanges programmatically and made at least $450 million from his sales. Defs. 56.1 Resp. ¶ 868.

Garlinghouse was hired as Ripple’s COO in April 2015. SEC 56.1 Resp. ¶ 140. After Larsen stepped down as CEO, Garlinghouse became CEO effective January 1, 2017, a position he currently holds. Id. ¶ 143. From April 2017 through 2020, Garlinghouse sold XRP on digital asset exchanges, id. ¶¶ 303, 310; the SEC alleges that Garlinghouse sold approximately $150 million in XRP during this period, Defs. 56.1 Resp. ¶ 870. Garlinghouse has also received XRP as part of his overall compensation from Ripple. SEC 56.1 Resp. ¶ 145.

Defendants did not file a registration statement as to any offers or sales of XRP. Defs. 56.1 Resp. ¶ 928. Ripple did not publicly file any financial statements or other periodic reports, nor did it make any EDGAR filings[7] with the SEC for Ripple or XRP, such as a Form 10-Q, Form 10-K, or Form 8-K relating to XRP. Id. ¶¶ 930–32.

[5] Since 2012, Ripple has also raised investment capital through multiple funding rounds in which it sold stock to investors. SEC 56.1 Resp. ¶ 34. Ripple has issued millions of shares of common stock, as well as convertible notes, preferred stock, and a stock warrant. SEC Add. 56.1 Resp. ¶¶ 1607, 1609, ECF No. 844.

[6] Ripple also distributed XRP for free to “early adopters and developers” and to charities and grant recipients. SEC 56.1 Resp. ¶¶ 92–94. The SEC does not include these transactions in its complaint. See SEC Opp. at 26 n.15, ECF No. 841.

[7] EDGAR, or “Electronic Data Gathering, Analysis, and Retrieval,” is an electronic filing system developed by the SEC “to increase the efficiency and accessibility of corporate filings.” James Chen, Electronic Data Gathering Analysis and Retrieval: Overview, FAQ, Investopedia (updated Feb. 13, 2022), https://www.investopedia.com/ terms/e/edgar.asp/.