US SEC says earlier district court ruling got it wrong in latest appeal filing in ongoing case against Ripple

The U.S. Securities and Exchange Commission says an earlier district court decision got it wrong when it decided that some sales of XRP to retail investors did not violate securities laws. 

In a brief filed late on Wednesday, the SEC said it disagreed with the U.S. District Court for the Southern District Court's earlier ruling that said some sales of XRP to retail investors did not violate securities laws. The agency ultimately asked the U.S. Court of Appeals for the Second Circuit to "vacate" the district court's judgment, among other requests. 

"The district court reasoned that institutional investors reasonably expected profits from the efforts of others because Ripple represented that its efforts would increase the price of XRP," the SEC said. "But the district court erroneously found that retail investors did not have that same expectation because they purchased XRP through crypto asset trading platforms and thus did not know if the seller was Ripple, a Ripple affiliate, or someone else."

In 2020, the SEC accused Ripple of raising $1.3 billion through the sale of XRP, which it claims is an unregistered security. Over a year ago, U.S. District Court for the Southern District of New York Judge Analisa Torres ruled that some of Ripple’s sales, called programmatic, of XRP did not violate securities laws because of a blind bid process in place for them. She did, however, rule that other direct sales of the token to institutional investors were securities. Later in August, Judge Torres ordered Ripple to pay $125 million in fines.

Later in October 2024, the SEC appealed the case, and said the district court's decision conflicted with "decades of Supreme Court precedent and securities laws."

The agency often cites the Howey Test — as it did in its brief on Wednesday — which is a 1946 U.S. Supreme Court case that is used to determine whether transactions are investment contracts and thus subject to securities laws. An investment contract exists when there is an investment of money in a common enterprise with a reasonable expectation of profits to be derived from the efforts of others, according to the SEC.

In this case, the SEC said that over the years, Ripple tried to boost XRP's demand through public statements to "increase demand for XRP to increase XRP's price." 

"As a result of those representations, all XRP investors — not just institutional investors who purchased XRP knowingly from Ripple — reasonably expected profits from Ripple’s efforts to increase the price of XRP. Representations on Ripple’s website and social networking platforms and in news reports, for example, were equally accessible to retail and institutional investors alike," the SEC said. 

The initial case against Ripple was brought while former Trump-appointed Chair Jay Clayton was in office and carried on during current Chair Gary Gensler's leadership. Gensler said he will step down the day of Trump's inauguration on Jan. 20, and it is unclear what could happen next with the case under new leadership. Trump tapped former regulator and crypto-friendly nominee Paul Atkins to lead the SEC. 

Stuart Alderoty, chief legal officer of Ripple, called the SEC's lawsuit "just noise."

"As expected, the SEC’s appeal brief is a rehash of already failed arguments — and likely to be abandoned by the next administration," Alderoty said in a post on X. "We’ll respond formally in due time."