Former SEC Lawyer Calls Ripple Ruling ‘Shaky’

The court’s decision in the SEC case against Ripple raises ‘problems on several fronts’. To that conclusion came from former agency lawyer John Reed Stark.

According to the expert, the verdict in favor of the fintech company is ‘based on shaky ground’. He did not rule out that the agency would appeal and succeed — a higher court could overturn the rulings related to ‘programmatic’ and ‘other sales’.

On July 13, Judge Analisa Torres ruled that sales and other distributions of XRP did not constitute an offer or sale of investment contracts.

At the same time, purchases of more than $700 million worth of XRP by large players still violated US law. Torres granted the SEC’s motion for a ruling on this issue in a summary proceeding.

Now the company’s CEO Brad Garlinghouse and executive director Chris Larsen face a jury trial. It will decide whether the top executives are liable for the illegal sale of tokens to institutional investors.

The distribution of XRP via exchanges and algorithms did not qualify as securities transactions, as the SEC could not clearly determine that investors reasonably expected to profit from the entrepreneurial or managerial efforts of others.

The judge noted that the so-called ‘programmatic sales’ have accounted for less than 1% of the company’s token transactions globally since 2017.

In Stark’s view, such an outcome establishes ‘a class of quasi-securities that discriminates based on the token holder’s experience’.

“The same token can be an investment contract in some cases and not in others. The more ignorance and deliberate recklessness, the less protection market participants will receive. The less information disclosed about the token, the less accountability for the issuer. It should not be so,” — explained Stark.

Stark also noted that the verdict may run counter to investor-protection principles. The latter hold that the level of asset protection should not depend on studying materials related to the asset’s purchase.

“Securities laws were designed to protect individual investors on the premise that they cannot defend themselves […]. The Ripple decision turns this notion on its head. In short: shares always remain shares — they cannot become ‘not shares'” — explained Stark.

As noted, in the case the court disclosed the documents related to Hinman\’s 2018 remarks.

In his remarks, the former head of the agency’s corporate finance division said that Bitcoin and Ethereum are not securities. Ripple management welcomed his remarks, saying they were determined to win the case.