The US Securities and Exchange Commission (SEC) asked a New York court to levy a fine of just under $2 billion against Ripple Labs, court filings cited by CoinDesk show.
Ripple Labs CLO Stuart Alderoty posted on social media on March 25 that the SEC was asking for this amount.
The total fine is $1.95 billion, including $876 million in civil penalties, $876 million in disgorgement, and $198 million in prejudgment interest.
Ripple’s XRP token trailed the broader market on news of the penalty demanded by the SEC.
History of the case
The case of SEC vs. Ripple began back in December 2020, when the regulator filed a lawsuit against Ripple Labs and its executives. The lawsuit accused them of violating federal securities laws by selling XRP to retail and institutional customers. The one against the executives was later dropped.
In July 2023, New York Judge Analisa Torres issued a verdict, according to which selling XRP via algorithms and on exchanges did not constitute a violation of US law. Sales to institutional investors were the only violation.
According to the filing, the SEC asks the court to consider how easy it is for people today to engage in behavior similar to Ripple’s, especially in the crypto market. The SEC wants to send the message that it will not tolerate such abuses.
According to Alderoty, who directed sharp criticism at the SEC, Ripple will file its response to the regulator’s motion in April. The deadline for the filing is April 22.
The reactions
Alderoty wrote that the SEC trades in misleading, mischaracterized, or outright false statements, which he claims is something we have seen “time and time again.” The lawsuit has incurred much damage to Ripple and its native token. When the case was filed, most US exchanges suspended trading or even delisted XRP.
Despite everything, the company hasn’t given up. Ripple CEO Brad Garlinghouse posted on X that Ripple would continue to fight the case, including the proposed motion for judgment. He wrote:
The SEC plans to ask the judge for $2 billion in a case that involved no allegations, let alone findings of fraud or recklessness. There is absolutely no precedent for this. We will continue to expose the SEC for what they are when we respond to this.
What does US case law say?
He is only partially right, however. US case law does establish a precedent, one entirely in Ripple’s favor. The precedent suggests a much lower penalty with one catch. The proposed fine could be enforced if Ripple continued to breach Section 5 of the 1933 Securities Act after the regulator filed the lawsuit.
How will the court rule? There are a few points to consider. The court must determine whether Ripple exercised bad will in selling XRP to institutional investors and whether fraudulent activity actually occurred.
According to the judgment in Liu vs. SEC, disgorgement must go to the victims and cannot exceed the perpetrator’s net profit. In the above case, the court ruled that the SEC was asking for a crippling disgorgement fine and failed to prove actual harm was suffered by investors.
In the case of Morrison vs. NAB, the US Supreme Court ruled that the SEC has jurisdiction only over sales in the US. The penalty would then be on US sales only, so if 95% of XRP sales were made outside the US, it would be on 5% of the company’s total sales.
One final point to consider is on-demand liquidity (ODL) transactions. The penalty would cover the value of XRP institutional sales comprised of ODL sales. Ripple would exclude ODL sales as they were not directly involved in them.
Based on the above considerations, experts predict Ripple will pay less than $150 million, which is a fraction of their legal fees so far.
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