Former SEC Official Says Ripple Victory Decision Faces Escalating Trouble

A former SEC official says trouble looms for Ripple’s victory decision as SEC’s case against Terraform Labs progresses.

In a recent tweet, John Reed Stark, a prominent lawyer and former Chief of the SEC Office of Internet Enforcement, brought attention to the escalating trouble surrounding Ripple’s recent victory decision.

Stark revealed that District Judge Jed Rakoff gave the green light for the SEC to proceed with its case against Terraform Labs. He highlighted that in response to the US regulator’s argument, Judge Rakoff refused to adopt the reasoning put forth by Judge Analisa Torres in the Ripple case. 

Moreover, he noted that Judge Rakoff’s ruling represents a stark departure from the distinction drawn in the Ripple case between public and institutional sales. According to the lawyer, this makes it clear that the SEC’s intentions to appeal the Ripple decision now appear even more likely.

Newsflash: Ripple Decision Already in (Big) Trouble

SDNY District Judge Jed Rakoff today allowed the SEC to go forward with its case against Terraform Labs and founder Do Kwon. In doing so, Judge Rakoff specifically rejected the distinction made in the Ripple case between public… pic.twitter.com/JZZ8vukfFt

— John Reed Stark (@JohnReedStark) July 31, 2023

SEC vs. Terraform Lawsuit

In the Terra case, Judge Rakoff denied Terraform Labs’ motion to dismiss the SEC’s lawsuit, stating that the SEC had sufficiently argued that it had jurisdiction and presented a plausible claim.

Furthermore, Judge Rakoff emphasized that the Howey test, which determines whether an investment qualifies as a security, does not distinguish between purchasers. He pointed out that the profit expectations attributed to the defendant’s efforts remain the same whether the coins were bought directly from the defendants or through secondary transactions. 

Judge Rakoff highlighted Ripple’s public campaign to attract retail and institutional investors, promoting the profitability of XRP.

The judge argued that such campaigns would have reached individuals who purchased XRP on secondary markets, making them equally likely to believe that their capital contributions would generate profits on their behalf.

In the judge’s words: 

“Secondary market purchasers had every bit as good a reason to believe that the defendants would take their capital contributions and use it to generate profits on their behalf.”

Stark further emphasized that Judge Rakoff’s decision might be the first. However, it will certainly not be the last rejection of the Ripple decision. 

Speaking about Judge Rakoff’s reputation, Stark acknowledged his reputation among the most respected and experienced securities law jurists in the Southern District of New York and possibly the US federal court system. 

According to him, Judge Rakoff has a history of ruling independently and fearlessly against the SEC.