SEC v Ripple: US regulator asks court to make Ripple produce more financial statements

The United States Securities and Exchange Commission (SEC) has requested a federal judge to compel Ripple Labs to produce more financial statements, as well as other documents, to help the court determine what penalties to impose in its case against the company.

In a January 11 filing with the U.S. District Court for the Southern District of New York, lawyers for the SEC requested Judge Sarah Netburn issue an order requiring Ripple to produce financial statements from 2022 to 2023 and “post-complaint contracts governing ‘Institutional Sales.’”

The information relates to a July 2023 ruling in which Judge Analisa Torres determined that sales of XRP to institutional investors amounted to unregistered, and thus illegal, securities offerings.

“The SEC requests this limited and targeted discovery to aid Judge Torres in determining whether, having found Ripple liable for violating Section 5 of the Securities Act of 1933, […] the Court should impose relief such as injunctions and civil penalties and, as to the latter, in what amount,” the filing read.

Ripple also filed a motion on January 11, requesting an additional two days to reply to the SEC’s motion to compel, giving the company until January 19 instead of January 17.

End in sight for the Ripple case

The long-drawn-out case goes back to December 22, 2020, when the SEC filed a complaint against Ripple Labs and its founders, Christian Larsen and Bradley Garlinghouse, accusing them of selling over 14.6 billion units of XRP without registering their offers and sales with the SEC; Larsen and Garlinghouse were also charged with aiding and abetting the violations.

The case reached a significant turning point in July 2023, when Judge Torres ruled on two summary judgment orders that sought to have the case either dismissed or confirmed before trial. In the end, Torres ruled that institutional offerings of XRP were illegal securities but that, controversially, the so-called programmatic sales—meaning sales of XRP sold on exchanges in blind bid/ask transactions—did not amount to securities offerings. Torres reasoned that due to the nature of the sales, buyers could not know whether their money was payments to Ripple or any other seller of XRP.

However, shortly after this double ruling, a different judge in the SEC’s case against Terraform Labs and Do Kwon ruled that Torres had misinterpreted securities law, noting that “the Howey test makes no such distinction between purchasers”—thus the status of securities sold blindly on exchanges is still hotly debated.

In August 2023, the SEC indicated it would be requesting an interlocutory—meaning coming before the end of the trial—appeal on the programmatic sales ruling. Both sides were allowed to make their case for and against the appeal, but on October 3, Judge Torres denied the SEC’s motion.

When an interlocutory appeal is denied, the denied party generally cannot appeal the same issue again at the end of the full trial, barring a change in legal precedent, new evidence, or procedural error.

This means that the issue of whether retail, “programmatic,” sales of XRP can be considered securities sales is most likely settled, in this case, and at this level of court at least, but the SEC always has the option to appeal to a higher court. Considering how central to its regulatory mandate the debate around digital assets and investment contracts is—as well as the more favorable ruling in the Terraform Labs case—it is likely that the SEC will not let the issue go.

Eventually, in October 2023, the SEC dropped its case against Larsen and Garlinghouse, meaning that the institutional sales—$757 million worth—are all that’s left of the case. It’s now up to the court to decide what Ripple will end up paying in penalties for these illegal securities sales, which is why the regulator is requesting more financial statements and documents from the company.

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