SEC Hands Ripple a $125M Reality Check

III. Civil Penalties

A. Legal Standard

The SEC is also authorized to seek the imposition of civil monetary penalties, which serve “the dual goals of punishment of the individual violator and deterrence of future violations.” Off. Comm. of Unsecured Creditors of WorldCom, Inc. v. SEC, 467 F.3d 73, 81 (2d Cir. 2006) (quotation marks and citation omitted). “Courts can impose penalties in civil injunctive actions not to exceed the greater of: (i) the gross pecuniary gain to a defendant as a result of the violation, or (ii) a specified amount per violation, depending on whether the violation falls in the first, second[,] or third penalty tier.” SEC v. Bajic, No. 20 Civ. 07, 2023 WL 6289953, at *4 (S.D.N.Y. Sept. 27, 2023) (citing 15 U.S.C. § 77t(d)(2); 15 U.S.C. § 78u(d)(3)(B)). A court may impose a first-tier penalty for any violation of the Exchange or Securities Acts; a second-tier penalty if the violation “involved fraud, deceit, manipulation, or deliberate or reckless disregard of a regulatory requirement”; and a third-tier penalty if, in addition to meeting the second-tier requirements, the “violation directly or indirectly resulted in substantial losses or created a significant risk of substantial losses to other persons.” Id. (citations omitted). Because “[t]he term ‘violation’ is not defined by the statutory scheme,” courts have discretion to determine the unit of violation for the purposes of imposing civil penalties under the tier method. SEC v. Fowler, 6 F.4th 255, 264 (2d Cir. 2021); see id. at 265.

Although gross pecuniary gain or “the tier determines the maximum penalty, . . . the actual amount of the penalty [is] left up to the discretion of the district court.” SEC v. Kern, 425 F.3d 143, 153 (2d Cir. 2005). In determining the appropriate penalty, courts may consider factors including:

(1) the egregiousness of the defendant’s conduct; (2) the degree of the defendant’s scienter; (3) whether the defendant’s conduct created substantial losses or the risk of substantial losses to other persons; (4) whether the defendant’s conduct was isolated or recurrent; and (5) whether the penalty should be reduced due to the defendant’s demonstrated current and future financial condition.

SEC v. Rajaratnam, 918 F.3d 36, 44 (2d Cir. 2019) (citation omitted); see also id. at 45 (noting that the list is not exhaustive); cf. Fowler, 6 F.4th at 266 (noting that the Circuit has not held that “the civil penalty for a securities fraud offense needs to be proportional to the disgorgement amount”). The Court may also consider “the extent to which other aspects of the relief and/or judgment issued in this matter will have the desired punitive effect.” SEC v. Universal Exp., Inc., 646 F. Supp. 2d 552, 568 (S.D.N.Y. 2009), aff’d, 438 F. App’x 23 (2d Cir. 2011).

B. Application

The SEC asks the Court to impose a penalty of $876,308,712, equal to the net profits it calculates for the Institutional Sales. SEC Mem. at 23. Ripple argues that a penalty of no more than $10 million, or “about [redacted] of Ripple’s actual gross revenues . . . from pre-Complaint Institutional Sales,” is appropriate. Ripple Opp. at 30 (citation omitted).

The Court finds that a first-tier penalty is appropriate in this case, which involves no allegations of “fraud, deceit, [or] manipulation,” and no conclusively established “deliberate or reckless disregard of a regulatory requirement.” 15 U.S.C. § 77t(d)(2)(B); see supra Part I.B. Although Ripple’s gross pecuniary gain from the Institutional Sales sets a higher statutory ceiling, the Court finds that the tier-analysis method more closely tailors the penalty to the scope of Ripple’s actual wrongdoing than the parties’ (virtually) all-or-nothing requests.

As to the amount of the penalty, the Court has discussed the second and fourth Rajaratnam factors, which overlap with the factors relevant to injunctive relief, above. See supra Part I.B. On the first factor, the egregiousness of Ripple’s conduct, there is no question that the recurrent, highly lucrative violation of Section 5 is a serious offense. However, this case does not involve allegations of fraud, misappropriation, or other more culpable conduct. Relatedly, as to the third factor, the SEC has not established that Ripple’s failure to register the Institutional Sales caused substantial losses (or the risk thereof) to investors. See supra Part II.B. And, on the fifth factor, Ripple does not contest that its current financial condition does not merit a reduced penalty. See Ripple Opp. at 28–29.

Beyond the Rajaratnam factors, the Court considers that Ripple will not be ordered to pay disgorgement, which dictates in favor of a larger penalty to accomplish “the desired punitive effect.” Universal Exp., Inc., 646 F. Supp. 2d at 568. The Court finds, therefore, that a perviolation penalty at the first-tier maximum is appropriate.

The final step is to define and count the “violations” involved in the Institutional Sales. Because Section 5’s registration requirement is “transaction-specific,” it follows that each unregistered transaction constitutes a separate violation of the statute. Cavanagh, 155 F.3d at 133; see also SEC v. Colonial Inv. Mgmt. LLC, 381 F. App’x 27, 29 (2d Cir. 2010) (summary order) (affirming per-transaction penalties calculation). The SEC suggests that each of Ripple’s “1,700 relevant contracts” constitutes a separate violation. SEC Mem. at 23–24 n.8. Ripple responds that the “1,700 relevant contracts” figure includes “hundreds of contracts related to Programmatic Sales and Other Distributions,” which should be excluded. Ripple Opp. at 19 n.20. But, Ripple does not offer its own tabulation of the relevant contracts, and the SEC does not respond to Ripple’s contention in its reply brief. Based on the Court’s independent analysis of Ripple’s expert report summarizing the relevant contracts, see Schwarz Rep., ECF No. 582-7, the Court finds that 1,278 transactions violated Section 5, resulting in a civil penalty of $125,035,150. [10] Accordingly, the SEC’s request for a civil monetary penalty is GRANTED in part, and the Court will impose a penalty of $125,035,150.

[10] The Court arrived at this figure by first tabulating the 1,278 “Sales Contracts” listed in Exhibit C of the expert’s report, which excluded “Programmatic Contracts,” “Service Contracts,” and “Other Contracts.” Schwarz Rep. at 80–124; see id. ¶¶ 18–55. The Court then determined the applicable penalty for each contract based on its date. See 17 C.F.R. § 201.1001, Tbl. I; Adjustments to Civ. Monetary Penalty Amounts, Release No. 6521, 2024 WL 111023 (Jan. 5, 2024) (“Release No. 6521”). For contracts entered into on or after November 2, 2015, the penalty is currently $115,231 per contract. Release No. 6521. For contracts entered into between March 6, 2013 and November 2, 2015, the penalty is $80,000 per contract. 17 C.F.R. § 201.1001, Tbl. I. And, for contracts entered into between March 4, 2009 and March 5, 2013, the penalty is $75,000 per contract. Id. For the four undated contracts, the Court applied the current inflation-adjusted penalty amount. Finally, the Court totaled the per-contract penalties to arrive at a civil penalty of $125,035,150. This sum is concededly an estimate of the maximum first-tier penalty; it is possible that the contracts listed in Exhibit C are either an incomplete or overinclusive list of Ripple’s Institutional Sales during the relevant period. Because neither party provided a more specific calculation, however, the Court believes that its estimate is an adequate approximation.