What Does Ripple Decision Mean? Unclear, Other Than "Lawyers are Going to Make More Money"

Ripple Decision Means More Attorney Work in SEC Crypto Fights

Ripple’s general counsel, Stuart Alderoty, is a Wall Street veteran who has been the outspoken face of its legal battle with the SEC. Alderoty turned to an all-star lineup from the law firms Debevoise, Paul Weiss, and Cleary Gottlieb.

White and former SEC enforcement director Andrew Ceresney, who is also at Debevoise, along with Cleary Gottlieb partner Matt Solomon, a former SEC chief litigation counsel, are among the attorneys who represented Ripple and its executives.

The Ripple decision stalls the momentum the agency built in the preceding months. But it will also likely incentivize the SEC to “double down” on its position on what constitutes an investment contract before other court venues, said UCLA law professor James Park.

“The lawyers are going to make more money because the SEC will continue litigating,” Park said. “I imagine [the agency] will get the resources to keep up with these large defense firms, given how important this issue is to the SEC.”

The Irony of Coinbase’s “Regulatory Estoppel” Defense

In its lawsuit with the SEC, Coinbase argues that when Coinbase’s IPO registration went effective, the SEC also approved the bonafides of Coinbase’s business. This week, in a scheduling conference, Judge Katherine Failla, expressed some sympathy for Coinbase’s position, stating:

“It’s not crazy in the Failla parlance for Coinbase’s to think that what they were doing was OK because it was exactly what you [the SEC] let them do when they issued the S-1. That’s the point I am making. You may say that they and I are reading too much into the issuance of the S-1.”

Despite her initial skepticism, I believe Judge Failla will not accept Coinbase’s argument. Why? Because she would be ruling that the SEC has the power to refuse to allow an S-1 Registration Statement to go effective merely because an SEC corp fin staffer thinks the company’s business plan is potentially unlawful. That seems extreme to say the least.

‘Ripple’ effect from ruling in SEC crypto case could be game-changer for class action defendants

Under Torres’s ruling, in other words, XRP was simultaneously a security (in Ripple’s sales to institutional investors) and not a security (in sales to retail investors on crypto exchanges). It all hinges, in the judge’s analysis, on the expectations of the buyer.

That sounds complicated – which is exactly why defense lawyers believe that the ruling will help crypto defendants avert, or at least narrow, class actions by investors who claim they were duped into buying unregistered securities.

Securities class actions, after all, are premised on the idea that all investors in a particular corporate stock or bond are more or less the same. Torres said in her Ripple ruling that XRP purchasers aren’t interchangeable – and that securities laws don’t protect all of them.

Binance Lays Off Over 1,000 Employees

Binance, the giant crypto exchange, is cutting a big chunk of its workforce during a federal crackdown in the U.S.

Over 1,000 people have been fired in recent weeks, according to a person familiar with the moves. The exercise, which is continuing, could result in Binance losing more than a third of its staff, the person said.

More employees were laid off this week, according to former employees, who said customer-service workers were heavily affected. The cuts were global, including about three dozen customer-service employees in India.

Baxter Hit with Supply Chain-Related Securities Class Action Lawsuit

In my 2022 year-end wrap up of D&O insurance developments, I identified macroeconomic factors as among the sources of D&O claims during the past year including, among other things, interest rate increases, economic inflation, labor supply and supply chain disruption, and the Ukraine War. In various posts this year, I have noted that these factors continue to affect companies and to contribute to the number of securities class action lawsuit filings. In the latest example of the way in which these macroeconomic factors can translate into securities litigation, the drug and healthcare company Baxter International was sued last week due to the decline in the company’s share price after the company’s announcement that continuing supply chain woes were setting back its operations and financial results more significantly than the company had anticipated. The new lawsuit shows that macroeconomic factors such as supply chain constraints are continuing to contribute to securities lawsuit filings. A copy of the July 12, 2023, complaint against Baxter can be found here.

Ripple Is a Security and It Isn’t

More broadly, if you take this decision seriously, it means that the SEC has essentially no jurisdiction over crypto. Most token sales will either be (1) direct to institutional investors or (2) on exchanges. Sales on exchanges, says Judge Torres, are not securities offerings, because the buyer doesn’t know that she is giving money to the issuer. Sales to institutional investors are securities offerings, but anyone selling anything to institutional investors in 2023 can do so under an exemption from securities registration. (Securities registration is only for public sales, not sales to big institutions.) So basically no crypto sales will ever require SEC registration, no crypto exchange or brokerage will be a securities exchange or brokerage, and the SEC is out of crypto entirely.

But I am not sure that it is actually all that good for crypto in the long run. The message of this decision is that crypto companies can freely sell tokens to retail investors as long as those retail investors are uninformed and the companies are secretive about it; only if they sell tokens openly to sophisticated investors will they get in trouble. That’s bad.

Supreme Court to Decide Fund Manager’s 10-Year SEC Fight

Jarkesy contends, and a federal appellate court agrees, that the SEC’s administrative proceedings are unconstitutional and deny IAs and others their right to a jury.

“It’s a very broken system,” McColloch said.

The SEC sets up “these fake courts, I call them fake, inside the agency, administrative law judges … and they put on trials, just like a federal court would, except no right to trial by jury, the rules of evidence don’t apply, to the extent they ever do, they only apply in favor of the SEC and you lose 100% of the time,” McColloch said. “By and large it’s a kangaroo court.”