SEC v. Ripple: Court Strikes Down SEC's Charge Against Ripple Founders

DISCUSSION

II. Analysis

C. Larsen’s and Garlinghouse’s Aiding and Abetting of Ripple’s Violations

The SEC also moves for summary judgment on its aiding and abetting claim against Larsen and Garlinghouse. See SEC Mem. at 66. To establish liability for aiding and abetting a securities violation, the SEC must show:

(1) the existence of a securities law violation by the primary (as opposed to the aiding and abetting) party;

(2) knowledge of this violation on the part of the aider and abettor; and

(3) substantial assistance by the aider and abettor in the achievement of the primary violation.

SEC v. Apuzzo, 689 F.3d 204, 206 (2d Cir. 2012) (cleaned up). Courts cannot consider the three requirements in isolation from one another because “[s]atisfaction of the knowledge requirement will depend on the theory of primary liability, and there may be a nexus between the degree of knowledge and the requirement that the alleged aider and abettor render substantial assistance.”

SEC v. Espuelas, 905 F. Supp. 2d 507, 517 (S.D.N.Y. 2012) (quoting SEC v. DiBella, 587 F.3d 553, 566 (2d Cir. 2009)). Indeed, courts have found that “‘[a] high degree of substantial assistance may lessen the SEC’s burden in proving scienter’ and vice versa.” SEC v. Wey, 246 F. Supp. 3d 894, 928 (S.D.N.Y. 2017) (quoting Apuzzo, 689 F.3d at 215).

As to the first requirement, the Court has already held that Ripple’s Institutional Sales constituted the unregistered offer and sale of investment contracts in violation of Section 5 of the Securities Act. See supra § II.B.1.

With respect to the second requirement, to show knowledge of Ripple’s violations, the SEC must demonstrate Larsen’s and Garlinghouse’s “general awareness of their overall role in Ripple’s illegal scheme.” MTD Order at 15; see SEC v. Yorkville Advisors, LLC, 305 F. Supp. 3d 486, 511 (S.D.N.Y. 2018); Dodd-Frank Wall St. Reform & Consumer Protection Act, Pub. L. 111-203, 124 Stat. 1376, § 929O (2010) (codified at 15 U.S.C. § 78t(e)). The SEC need not demonstrate that Larsen and Garlinghouse were aware that Ripple’s transactions and schemes were illegal. See SEC v. Mattessich, 407 F. Supp. 3d 264, 272–73 (S.D.N.Y. 2019). Rather, the SEC must show that Larsen and Garlinghouse knew, or recklessly disregarded, the facts that made Ripple’s transactions and schemes illegal under statutory and caselaw. See id

Based on the record, Defendants have raised a genuine dispute of material fact as to whether Larsen and Garlinghouse knew or recklessly disregarded the facts that made Ripple’s scheme illegal. See MTD Order at 15. It is not clear whether Larsen and Garlinghouse knew or recklessly disregarded that securities laws, rather than laws under other regulatory regimes, applied to XRP. For instance, Larsen and Garlinghouse testified that they did not believe XRP was a security because multiple foreign regulators, including regulators in Japan, Singapore, Switzerland, the United Arab Emirates, and the United Kingdom, had determined that XRP was not a security. SEC Add. 56.1 Resp. ¶¶ 1744, 1782. Larsen and Garlinghouse also stated that when the U.S. Department of Justice and the U.S. Treasury Department’s Financial Crimes Enforcement Network labeled XRP a “virtual currency” in 2015, they understood this as an “official United States government declaration that XRP [was] a currency” and “exempt from [U.S.] securities laws.” Id. ¶¶ 1734, 1759–60. Larsen further testified that he understood the 2018 speech by the then-Director of the SEC Division of Corporate Finance, Bill Hinman—in which he stated that neither bitcoin nor ether (another digital asset) were securities—to further reinforce the SEC’s position that XRP was not a security. See id. ¶¶ 1742–43.

The October 2012 Perkins Coie memorandum, which Larsen reviewed, advises, “[a]lthough we believe that a compelling argument can be made that [XRP tokens] do not constitute ‘securities’ under the federal securities laws, given the lack of applicable [caselaw], we believe that there is some risk, albeit small, that the [SEC] disagrees with our analysis.” Defs. 56.1 Resp. ¶ 993; see ECF No. 846-30 at 6. Larsen testified that after receiving the memorandum, Ripple took specific steps to ensure compliance with the advice contained within the memorandum. Defs. 56.1 Resp. ¶ 1730.

Likewise, Defendants have raised a genuine issue of material fact as to whether Larsen and Garlinghouse knew or recklessly disregarded facts about each of the Howey elements. For example, Defendants have adduced evidence that Larsen and Garlinghouse did not know that Ripple’s Institutional Sales of XRP satisfied the Howey “common enterprise” element because they did not believe that the proceeds from the sales were pooled and understood that Ripple did not manage, operate, or control the XRP Ledger or the broader “XRP ecosystem.” See id. ¶¶ 1748–50. Based on the disputed facts in the record, therefore, a reasonable juror could find that Larsen and Garlinghouse did not know or recklessly disregard Ripple’s Section 5 violations. See Apuzzo, 689 F.3d at 206.

As to the third requirement, Defendants concede that Larsen, as Ripple’s CEO prior to 2017, provided substantial assistance, and Garlinghouse, after becoming Ripple’s CEO in January 2017, provided substantial assistance. See Defs. Opp. at 71. However, Larsen claims that he did not provide substantial assistance during his time as Executive Chairman of Ripple’s Board, starting in 2017. See id.

To satisfy the substantial assistance component of aiding and abetting, the “SEC must show that the defendant in some sort associated himself with the venture, that he participated in it as in something that he wished to bring about, and that he sought by his action to make it succeed.” Apuzzo, 689 F.3d at 206 (cleaned up). In other words, the defendant must “consciously assist the commission of the specific crime in some active way.” SEC v. Mudd, 885 F. Supp. 2d 654, 670–71 (S.D.N.Y. 2012) (cleaned up).

Here, Larsen has raised a triable issue of material fact as to whether he provided “substantial assistance” beginning in 2017. See Anderson, 477 U.S. at 248. The record establishes that, starting in 2017, Larsen moved away from a day-to-day operational role at Ripple. See SEC Add. 56.1 Resp. ¶¶ 1722–29. But after he stepped down as CEO, Larsen also continued his role on the XRP Sales Committee, which approved Ripple’s sales of XRP. See Defs. 56.1 Resp. Part 2 ¶ 1099, ECF No. 835-1. The Court concludes, therefore, that a reasonable jury could find that, starting in 2017, Larsen did not “consciously assist [Ripple’s Section 5 violations] in some active way.” Mudd, 885 F. Supp. 2d at 670–71 (cleaned up).

Accordingly, the SEC’s motion for summary judgment on the aiding and abetting claim against Larsen and Garlinghouse is DENIED.