Ripple decision is ‘troubling on multiple fronts’, former SEC official says

Former Securities and Exchange Commission official John Reed Stark spoke out against the recent ruling in Ripple Labs’ case, calling the decision “troubling on multiple fronts” in a LinkedIn analysis.

Stark tore apart Judge Analisa Torres’ July 13 ruling by examining the reasoning behind her ruling in favor of Ripple in a lawsuit filed by the SEC back in 2020, alleging that the company’s XRP (XRP) token was a security.

Judge Torres’ ruling states that the XRP token was a security when sold to institutional investors, but was not a security in “programmatic sales”[ads1]; [public sales] and ‘other types of sales’, such as token distribution to employees. Ripple also faces a penalty for the alleged breach, as well as a levy for institutional investors – whose sales reportedly involved $720 million.

In the decision, Judge Torres argues that institutional investors “reasonably expected that Ripple would use the capital it received from its sales to improve the XRP ecosystem and thereby increase the price of XRP,” while the investors who used exchanges to purchase the XRP tokens “could not reasonably expect the same.”

For Stark, the decision establishes a “class of quasi-securities that discriminate” based on the sophistication of the investor purchasing the token.

“The Ripple decision argues that the same exact token can be a security sometimes but not a security other times. And the more ignorance and willful blindness of retail investors, the less protection retail investors will receive. And the less disclosure about the token, the less responsibility of the token issuer. That just can’t be right.”

Stark also notes that this argument seems contrary to investor protection principles, which state that an investor’s level of protection should not be affected by whether they read material related to the purchase of an asset. “Securities laws were specifically designed to protect individual investors, based on the idea that they cannot fend for themselves […]. The Ripple decision turns this notion on its head,” Stark noted.

In Stark’s view, who served as an attorney for over 18 years in the SEC’s Enforcement Division, “the decision is on shaky ground, is likely (and ripe) for appeal, likely to result in reversal.”

“The bottom line: Stock is always stock – it can’t be converted to ‘not stock.’ So my take is that the SEC will appeal the Ripple decision to the 2nd Circuit and the 2nd Circuit will overturn the district court’s rulings related to ‘programmatic’ and ‘other sales,’ he noted.

Judge Torres’ ruling was received as a victory by the crypto community and Ripple. The company’s CEO Brad Garlinghouse said in a recent interview that the SEC could face a lengthy process before they get a chance to appeal the decision. In addition, Garlinghouse called the institutional sales ruling “the smallest part” of the lawsuit, and said an SEC appeal of the retail sales ruling would only strengthen Torres’ ruling.

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