Published: May 8th, 2020
Crypto company Ripple faced another class-action lawsuit this week, with the plaintiff alleging securities law violations in the way XRP has been sold and marketed.
The suit claims that XRP, the third-largest cryptocurrency by market cap, was marketed to the public using a ‘litany of false and misleading statements’.
The lawsuit filed in California’s Northern District Court says Ripple created XRP solely as a vehicle to make its founders and a handful of others rich.
The US Securities and Exchange Commission (SEC) has yet to rule on whether XRP fits the definition of a security.
Ripple faces numerous class-action lawsuits from California investors seeking damages from losses they attribute to the company’s supposed failure to list XRP as a security with the SEC, which would compel the company to make public detailed documents and disclosures.
This new lawsuit makes a number of similar claims. It was filed on behalf of Bitcoin Manipulation Abatement LLC, a company with no apparent presence beyond its legal registration. According to public records, it was set up in March 2019 by an attorney named Pavel Pogodin – who is also the lawyer who filed the lawsuit against Ripple.
Bitcoin Manipulation Abatement is the plaintiff in a related class-action lawsuit against crypto derivatives exchange FTX, which was filed in November 2019. The FTX suit demanded $150 million from the exchange in damages, but courts dismissed the claim.
The latest complaint claims XRP is a security because buyers were told that XRP would be a long-term growth asset, and led to believe they could expect a profit from their purchase. The law firm representing Bitcoin Manipulation Abatement also claims XRP can’t be considered a currency because ‘no products or services can be purchased using it.
Are the plaintiffs right? XRP is undoubtedly different from other cryptocurrencies. Unlike decentralised coins like Ethereum and Bitcoin, the 100 billion XRP were created in a centralised manner – without Ripple having to bear any significant costs, the latest complaint says.
When it launched in 2012, twenty per cent of the total supply of XRP supply was given to Ripple’s founders, while the remaining 80 per cent was retained by the company, which put its 80 billion XRP into an escrow account. Ripple now says it can’t touch the escrow funds, from which a portion is released each month. Ripple has sold XRP on cryptocurrency exchanges in the past but ceased the practice in 2019.
‘Defendants have profited massively by selling off XRP to the general public across several offerings, having sold more than a billion dollars in XRP in exchange for legal tender cryptocurrencies like Bitcoin,’ the lawsuit says.
The complaint goes on to say that Ripple’s survival as a company rests solely on how successful it is at promoting XRP, creating a Catch-22 for investors. ‘XRP is effectively pre-functional as a cryptocurrency, and only purchased by investors in anticipation of profits Ripple will purportedly generate from other activities’.
In February a US federal district court decided to allow a lawsuit to progress which also alleged that XRP was an unregistered security. At the time, the Court of the Northern District of California considered a motion by Ripple to dismiss the suit, but it was only partially granted.
That lawsuit was filed by Bradley Sostack, an XRP investor who alleges that Ripple did not represent itself accurately to investors and broke federal law by selling XRP as a digital currency rather than a security.
The judge set aside claims made against Brad Garlinghouse, Ripple’s CEO, for personal liability, along with further claims of false advertising. A further allegation that Ripple breached California state law was also dismissed.
Sostack re-filed the suit last month and added claims supporting the accusation that Ripple and Garlinghouse had engaged in fraudulent and unfair business practices around XRP.
Court documents included a claim for relief based on ‘false advertising’ that Sostack says broke California law. Legal analysts have noted that the false advertising claim could potentially undermine the claimant’s original case, as its states that the request for relief is based on ‘the theory’ (e.g. Ripple’s position) that XRP is a digital currency, not a security.
By injecting false advertising accusations into the suit, the claimants may be creating a fallback position in the event the courts say XRP is not an unregistered security. A seventh claim adds to original accusations that Ripple engaged in unfair competition as defined by California law.
The other notable changes to the re-filed case suggest Garlinghouse and Ripple made inaccurate and deceptive statements when they said sales of XRP went mainly to market makers, and that XRP was a utility token intended to facilitate international payments.
The claimants said that Ripple owns more than 60 per cent of XRP, and that amount sits mainly unused. The suit also takes aim at Garlinghouse's previous statements about being ‘HODL’ and ‘very, very long on XRP,’ e.g. keeping it for long-term gains.
The suit claims that those statements were false, as at the time he made them in 2017 Garlinghouse had sold millions of XRP on a number of crypto exchanges. The claimants say their review of XRP sales shows Garlinghouse sold 67 million XRP that year, and that any XRP he received from Ripple was sold off within days receiving it.
A US. District Judge said in February that the original suit by Sostack could move to trial. However, the judge dismissed some of the original claims made under California state law, which apparently prompted the re-filing.