Originally published on July 9, 2018
Three class action lawsuits have been filed against Ripple claiming the company engaged in the unregistered sale of a Security, and violated the California Corporations Act.
SUMMARY OF THE THREE CASES:
The first case, Coffey, did a great job outlining all of the factual background explaining many of Ripple’s public statements. In contrast to the other two cases, Coffey actually lost money, a whole $550 when he sold his XRP holding into Tether. Notably, the Complaint did not cite a single other Case, and spent little time analyzing any of the SEC’s cautionary statements pertaining to ICOs. I would have expected to see SEC v. Howey Co., 328 U.S. 293 (1946); Gary Plastic Packaging Corp. v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 903 F.2d 176 (2d Cir 1990); SEC v. Shavers, Case №4:13-CV-416 (E.D.Tex. 2013); or SEC v. Glenn W. Turner Enterprises, 474 F.2d 476 (9th Cir 1973).
The second case, Zarkinov, seems to copy much of Coffey’s information and allegations, but does not go into nearly as extensive of a Security analysis of the Howey Test. Oddly, this case is brought by a plaintiff who has not actually lost any money, Zarkinov bought $636.57 worth of Ripple, but continues to hodl.
The third case, Oconer, also copies a lot of the Coffey and Zarkinov information, using almost identical allegations and citations. It does add a section with information about the SEC’s guidance, which is missing in the other two Complaints. Also missing from this complaint is how much Ripple Oconor bought or sold, and any damages.
1. Ryan Coffee v. Ripple Labs Inc., a Delaware corporation, XRP II, LLC, a South Carolina limited liability company, Bradley Gralinghouse, an individual, and DOES 1 through 10, inclusive. See https://www.scribd.com/document/383471778/Coffey-v-Ripple-Complaint
Filed May 3, 2018 in the Superior Court of California, San Francisco
Complaint for: (1)Offer and Sale of Securities in Violation of Sections 5 and 12(a)(1) of the Securities Act; (2) Unregistered Offer and Sale of Securities in Violation of Sections 25110 and 25503 California Corporations Code; (3) Violations of Section 13 of the Securities Act; and (4) Violations of California Corporations Code Section 504.
Prayer for Relief:
i. Declaring that this action may be maintained as a Class action under California Code of Civil Procedure section 382 and California Rule of Court 3.670 et seq., certifying Plaintiff as representative of the Class and designating his counsel as counsel for the Class;
ii. Declaring that Defendants offered and sold unregistered securities in violation of Sections 5, 12(a) and 15 of the Securities Act;
iii. Declaring that Defendants offered and sold unregistered securities in violation of Section 25110, 25503, and 25504 of the California Corporations Code,
iv. That judgment be entered against Defendants and in favor of Plaintiff and each member of the Class he represents, granting the remedy of rescission, and/or awarding compensatory damages in favor of Plaintiff and the Class against all Defendants, jointly and severally, for all damages sustained as a result of Defendants’ wrongdoing, in an amount to be proven at trial;
v. Requiring an accounting of all remaining assets and funds raised by Defendants through the sale of XRP
vi. Imposing a constructive trust over the assets and funds raised by Defendants through the sale of XRP
vii. Enjoining and restraining Defendants from violating the securities laws through the continued unregistered sale of XRP,
viii. For punitive damages,
ix. For pre and post-judgment interest,
x. For equitable relief, including a judicial determination of the rights and responsibilities of the parties;
xi. For attorneys’ fees;
xii. For costs of suit; and
xiii. For such other and further relief as may be deemed just and proper.
2. Vladi Zakinov v. Ripple Labs Inc., XRP II, LLC, Bradley Garlinghouse, and Does 1–25 inclusive. See https://www.scribd.com/document/381340202/18-CIV-02845
Filed June 5, 2018 in the Superior Court of California, County of San Mateo
Complaint for:(1) Unregistered Offer and Sale of Securities in Violation of California Corporations Code Sections 25110 and 25503; and (2) Violations of Section 25504 and California Corporations Code
Prayer for Relief:
i. Certifying this is a Class action, appointing plaintiff as a Class representative under California Rule of Court 3.764, and appointing plaintiff’s counsel as Class counsel;
ii. Awarding damages in favor of plaintiff and the Class against all defendants, jointly and severally, in an amount to be proven at trial, including interest thereon;
iii. Awarding plaintiff and the Class their reasonable costs and expenses incurred in this action, including counsel fees and expert fees;
iv. Awarding rescission or a rescissory measure of damages; and
v. Awarding equitable, injunctive or other relief, including disgorgement or restitution, as deemed appropriate by the Court.
3. David Oconer v. Ripple Labs Inc., XRP II, LLC, Bradley Garlinghouse, and DOES 1–25, Inclusive. See https://www.scribd.com/document/383471774/Oconer-v-Ripple-Complaint
Filed June 27, 2018 in the Superior Court of California, County of San Mateo
Complaint for: (1) Violations of Section 25110 and 25503 of the Corporations Code; and (2) Violations of Section 25504 of the Corporations Code.
Prayer for Relief:
i. Determining that this action is a proper class action and certifying plaintiff as a class representative and plaintiff’s counsel as Lead Counsel
ii. Declaring that XRP is a Security and that defendants’ unregistered sales of XRP violated applicable law;
iii. Awarding compensatory damages in favor of plaintiff and other Class members against all defendants, jointly and severally, for all damages sustained as a result of defendants’ wrongdoing, in an amount to be proven at trial, including interest thereon;
iv. Awarding plaintiff and the Class their reasonable costs and expenses incurred in this action, including counsel fees and expert fees;
v. Awarding rescission or a recessionary measure of damages; and
vi. Awarding such equitable/injunctive or other relief as the Court may deem just and proper.
GOOD OR BAD PRECEDENT?
The most important thing here is that these complaints could give us some serious precedent — the first yet — that a crypto asset is a Security. Yes, we’ve had plenty of statements from the SEC to that effect, but this would be the first Court case that actually binds other Californian courts, and would be persuasive on other States. If Ripple loses, no doubt they will appeal, and then the decision will bind the entire 9th Circuit.
The Common Law legal system aims to decide cases according to consistent principled rules in hopes that future cases with similar facts will have predictable outcomes. The principle of precedence is also known as stare decisis, Latin for “to stand by decisions and not disturb the undisturbed.” The principle extends both horizontally and vertically, meaning that judges of similar levels (there are thirteen circuits, each with three levels) should respect the decisions of earlier judges within their circuit. Decisions of one circuit are not binding on other circuits though and often there are extreme circuit splits where geographical areas of the country interpret the law entirely differently, bound to developing law based on their circuit’s case history. The Supreme Court is the ultimate decider over the Circuits, and its decisions are binding on every court in the United States.
IF RIPPLE IS A SECURITY, SO SHOULD ALL SIMILARLY SITUATED ICOs.
While Jay Clayton has said that the determination of whether or not an ICO is a Security is analyzed on a case-by-case basis, if it turns out Ripple is a Security, it should mean that all similarly situated ICOs would also be securities. The importance of that classification is that most ICO-originated coins are in violation of the Securities Laws for selling to non accredited investors, failing to register with the SEC, promoting the securities offerings, insider trading, pump and dump schemes, and a whole host of other potential violations. The exchanges should be watching these cases closely as well, if it turns out Ripple is a Security, anyone who facilitated its unregistered sale has also run afoul of the SEC’s regulations.
RIPPLE’S LEGAL DEFENSE TEAM:
Ripple hired a formidable legal defense team, including the former SEC Chairwoman, Mary Jo White, and the former SEC Director of Enforcement, Andrew J Ceresney. Ms. White served as the SEC’s Chairwoman from 2013 until 2017, after nine years as the first and only female United States Attorney for the Southern District of New York. In his role with the SEC, Mr. Ceresney oversaw approximately 1400 SEC personnel, supervised law enforcement efforts across the country with a focus on financial reporting and accounting, asset management, insider trading, market structure and the Foreign Corrupt Practices Act (FCPA).
The Defense Team
A LITTLE RIPPLE BACKGROUND IN CASE YOU HAVEN’T BEEN WATCHING:
Ripple really took off during the parabolic crypto market we had in December 2017, going from $0.024 on December 5, 2018 to $3.71 on January 4, 2018. Today, July 9, 2018, it is trading at $0.48. This company seems to be the most-hated “shitcoin” on the market. There are several possible reasons for its bad reputation; many of them are outlined in the three lawsuits against them. I personally think a lot of it stems from the Company’s link to Jed McCaleb, the programmer who created Mt. Gox and sold it to the (allegedly highly unqualified) Mark Karpeles three months prior to the infamous hack. Ripple is also loathed because it’s “blockchain” is completely centralized; it’s purpose is to help banks send money to each other, a goal that is fundamentally at odds with Bitcoin; it has no proof of work; the 100 Billion coins were created out of thin air; the team often goes on twitter and makes cringe-worthy statements about Ripple being better than Bitcoin, at its high, its co-founder Chris Larsen was listed as having a higher net worth than Elon Musk in a Forbes list. I could go on and on here, but I’ll let the chart and memes explain the rest.
Some of the more interesting excerpts:
Ryan Coffey — May 3, 2018 Case
- 100 Billion XRP were created out of thin air in 2013, as opposed to being mined like Bitcoin
- 20 Billion XRP were given to the Advisors, and Ripple Labs held 80 Billion XRP.
- Defendants have earned massive profits by selling XRP to the general public in a never-ending ICO.
- Defendants consistently portrayed XRP as a good investment, relayed optimistic price predictions, and conflated Ripple Labs’ enterprise customers with usage of XRP.
- Defendants reportedly offered to bribe popular U.S. based cryptocurrency exchanges Coinbase, Inc. (“Coinbase”) and Gemini Trust Company, LLC (“Gemini”) to list XRP. Ripple Labs is reported to have offered Coinbase more than $100 million worth of XRP to start letting users trade XRP. A Ripple executive is also reported to have asked whether a $1 million cash payment could persuade Gemini to list XRP in the third Quarter of 2017 and early 2018. (Can’t wait to see if this is real after discovery!)
- Defendant purchased 650 XRP at $2.60 per XRP and sold for $1.70 worth of USDT (Tether), which was valued at $1.03 at the time, realizing a loss of $551.89, or over 32 percent of his initial investment.
- The ten DOES were co-conspirators, agents, representatives, alter egos, employers, and/or joint venturers of the defendants.
- In May 2015, regulatory authorities in the US fined Ripple Labs and XRP II $700,000 for violating the Bank Secrecy Act by selling XRP without obtaining the required authorization. XRP agreed to register with FinCEN at the time.
The never-ending ICO:
- The amount XRP has listed as being held by all others is overstated because it includes the 20 billion provided to the founders and an undisclosed amount of XRP used in “business development agreements that are still pending.”
- Defendants primary source of income is the sale of XRP. While publicly focusing on their enterprise solutions, Defendants earned over $342.8 million through XRP sales in 2017 alone.
- In Q4 2017, XRP II sold $71.5 million worth of XRP through exchanges, and $20.1 million directly.
- Ripple Labs aggressively markets XRP to drive demand and increase price.
- Defendants sold at least $167.7 million worth of XRP between January 1, 2018 and March 31, 2018.
Saying Ripple Labs is connected to XRP’s price:
- Defendants blur differences between Ripple Labs’ Enterprise Solutions and XRP to further drive demand.
- According to their site, “xCurrent is Ripple’s enterprise software solution that enables banks to instantly settle cross-border payments with end to end tracking. Using xCurrent, banks message each other in real-time to confirm payment details prior to initiating the transaction and to confirm delivery once it settles.” xCurrent doesn’t operate on the same technology as XRP or even require the use of XRP. In short, there is no reason to believe that adoption of xCurrent would correlate in any way with adoption of XRP.
- Ripple Labs publicly limits the supply of XRP to drive price appreciation.
The Centralized Ledger:
- Defendants acknowledge that Development of the XRP ledger is dependent on their technical, entrepreneurial, and Managerial Efforts
- Ripple Labs maintains a Centralized XRP Ledger, requiring no Proof of Work (“PoW”).
The R3 Option debacle
- Ripple Labs Promises R3 a 5 Billion-XRP Option (at $0.85/XRP) to drive adoption of XRP — and even structured these agreements so that their partners compensation is tied to appreciation of XRP — just as companies often do with shares to ensure that their interests are aligned. In early 2016, Ripple Labs promised R3 Holdco, LLC (“R3”) an enterprise software firm with a network of banks and financial institutions, the option to purchase five billion XRP in exchange for R3 providing Ripple Labs with access to R3’s consortium of member banks and financial institutions. Ripple repudiated this deal when the XRP price rose, claiming R3 failed to commercialize Ripple’s technology.
XRP is a Security:
1. Purchasers made an Investment of Money in a Common Enterprise.
a. The Plaintiff and other Class members invested fiat and other digital currencies to purchase XRP. Investment of both fiat and digital currency meets the first prong of Howey.
b. Defendants concede that they sell XRP tokens to the general public through cryptocurrency exchanges.
c. The profits of each investor in XRP are inextricably intertwined with those of all other purchasers because XRP is fungible. As Defendants note, it can be bought or sold on over 50 exchanges.
d. The profits of Plaintiff and the Class are also intertwined with the fortunes of Ripple Labs. Ripple Labs concedes that it “sells XRP to fund its operations and promote the network. This allows Ripple Labs to have a spectacularly skilled team to develop and promote the Ripple protocol and network.”
2. XRP Investors Had a Reasonable Expectation of Profits — The CEO himself publicly touted himself as “very, very, very long XRP”, and all the statements about locking up the supply to provide “supply predictability and trusted, healthy $XRP markets.” Actions like announcing it had invested $25 million in XRP to Blockchain Capital Parallel IV, LP, to support and develop additional XRP use cases beyond payment.
3. The Success of XRP Requires Efforts of Ripple Labs and Others. The Lead Plaintiff and the Class have entirely passive roles vis-à-vis the success of the XRP Ledger and XRP. Rather, as Defendants’ own marketing makes clear, the success of the XRP Ledger, and the profits the Class reasonably expected to derive from investing in XRP are dependent solely on the technical entrepreneurial, and managerial efforts of Defendants and their agents and employees. Ripple is also in complete control of moving the ledger forward, so the system is centralized. XRP derives its value entirely from the usefulness and popularity of the XRP Ledger, which is in turn dependent entirely on the technical, entrepreneurial, and managerial efforts of Defendants. The purchase is thus an investment in a common enterprise, with an expectation of profits, solely from the efforts of Defendants.
- Defendant used interstate commerce to facilitate the sale of a security. XRP are securities within the meaning of Section 2(a)(1) of the Securities Act, 15 U.S.C. § 77b(a)(1). No registration statements have been filed with the SEC.
- The Control Person — CEO — had the influence to have caused XRP II and/or Ripple Labs to submit a registration statement, and therefore aided and abetted the failure to register.
Vladi Zakinov — June 5, 2018 Case
Ripple sells XRP through exchanges and directly to investors
Plaintiff bought 162 XRP at $1.4337, and 57 XRP at 1.365 and 299 XRP at $1.092 — Has not sold any! (That’s a grand total investment of USD $636.57 and NO LOSS).
Ripple sold $92 million worth of XRP in the fourth quarter of 2017, which on information and belief, substantially dwarfs any other sources of revenue for the Company.
Plaintiff and the class have no ability to control the direction of the Company or development of the XRP Ledger.
XRP’s value is the result of defendants efforts, they control both the supply
Ripple’s CEO has conceded that, “Our self-interest is aligned with building and maintaining a healthy XRP market.” 
The price of XRP is dependent on development and adoption of the XRP Ledger, which in turn is entirely dependent on the efforts of Defendants and their employees or agents.
XRP is centralized because, in contrast to being mined like Bitcoin, XRP created all the 100 Billion XRP coins at once, and distributed to the founders and put some in escrow for a never-ending ICO, where they can sell up to one billion per month.
The XRP Ledger is not distributed; rather it is a consensus project where XRP Ledger nodes evaluate proposals from a specific set of peers, called chosen validators. Or UNLs. These UNLs are chosen by Ripple itself based on what it deems trusted.
Ripple says its ledger consists of distributed servers, and claims to have come up with a plan “to increase decentralization and ensure that no single entity has operational control of the XRP Ledger.”
Defendants limited supply and attempted to build demand for the security through aggressive marketing, such as videos showing how to buy XRP on their website. There is a page that says the Company is “committed to the long term health and stability of XRP Markets.” (They’re really grasping at straws to put something this generic into a lawsuit, imho).
In interviews, Garlinghouse has said that XRP is “a more stable digital asset” Also he often conflated the value of XRP with the software Ripple was developing.
During a Bloomberg News network Interview, Garlinghouse said, “the reason why XRP has performed so well this year, we’re solving a real problem, it’s a multi-trillion-dollar problem around cross-border payments. There is a lot of friction, it is very slow, its expensive, we’re working with the institutions to deliver on that, so people have gotten excited. We now have over 100 customers we’ve announced publicly.” He also stated,
At the end of the day, the value of digital assets will be driven by their utility. If they are solving a real problem, and that problem has scale, and that problem, you know there here real value there, then there will be demand for the tokens, and the price will go up. For XRP we have seen because it’s required, it’s something that can really reduce the friction, and we’re talking about a multitrillion-dollar problem in how cross-border payments flow. And so, I think if you drive real utility, yes there’s going to be demand for that. . . . XRP is up 100X this year, and I think it’s because the problem we are solving people realize is a real problem, it’s a big problem.
Violation of California Corporations Code
- No registration statements have been filed with any state or federal government entity
- Defendants directly or indirectly sold and offered to sell the unregistered securities.
- Garlinghouse was a control person with power and influence to cause the ahad sufficient influence to have caused XRP II and/or Ripple to submit a registration statement
- Participated in and/or added and abetted, XRP II and/or Ripple failure to register XRP
Oconer v. Ripple — the June 28 Case
-Recent SEC Guidance undermines Ripple’s Denials — Ripple has long claimed that it is not a security, on April 12, 2018, on a CNBC interview, Kate Rooney said, “We absolutely are not a security. We don’t meet the standards for what a security is based on the history of court law.”
It will be interesting to see what transpires, which class action gets chosen as the lead, whether or not the cases move forward, whether the courts will throw out the two cases where the plaintiff’s don’t even have damages, how many people will actually join, etc. I’m looking forward to reading Mary Jo White’s carefully crafted answer.
In my opinion, the first case filed was the best of the three, and if anyone reading was damaged by Ripple, you can join it by emailing Attorney Taylor at: firstname.lastname@example.org.
 Adeleye Gabriel et al. World Dictionary of Foreign Expressions: a Resource for Readers and Writers, page 371 (1999)
 7Ripple credits,
https://wiki.ripple.com/Ripple_credits#XRP_funds_the_development_and_promotion_of_the_protocol_and_the_netw ork (last visited May 3, 2018).
 Ripple Invests $25 Million to Drive Innovation in Blockchain and Digital Assets, https://ripple.com/insights/ripple-invests-25-million-to-drive-innovation-in-blockchain-and-digital-assets/ (Last visited May 3, 2018).