The diff between the original SEC complaint against Ripple and the amended one
--- original.txt 2021-02-18 18:32:43.171832036 -0800
+++ amended.txt 2021-02-18 18:32:29.103735165 -0800
@@ -1,4 +1,4 @@ -Case 1:20-cv-10832 Document 4 Filed 12/22/20 Page 1 of 71 +Case 1:20-cv-10832-AT Document 46 Filed 02/18/21 Page 1 of 79 Richard Best Kristina Littman @@ -34,9 +34,9 @@ : ------------------------------------------------------------------------x -20 Civ. 10832 +20 Civ. 10832 (AT) ECF Case -Complaint +First Amended Complaint Jury Trial Demanded Plaintiff Securities and Exchange Commission (the “SECâ€), for its Complaint against @@ -53,7 +53,7 @@ required by the federal securities laws, and no exemption from this requirement applied. 1 -Case 1:20-cv-10832 Document 4 Filed 12/22/20 Page 2 of 71 +Case 1:20-cv-10832-AT Document 46 Filed 02/18/21 Page 2 of 79 2. @@ -103,7 +103,7 @@ 2 -Case 1:20-cv-10832 Document 4 Filed 12/22/20 Page 3 of 71 +Case 1:20-cv-10832-AT Document 46 Filed 02/18/21 Page 3 of 79 VIOLATIONS 9. @@ -150,7 +150,7 @@ 3 -Case 1:20-cv-10832 Document 4 Filed 12/22/20 Page 4 of 71 +Case 1:20-cv-10832-AT Document 46 Filed 02/18/21 Page 4 of 79 15. @@ -193,7 +193,7 @@ 4 -Case 1:20-cv-10832 Document 4 Filed 12/22/20 Page 5 of 71 +Case 1:20-cv-10832-AT Document 46 Filed 02/18/21 Page 5 of 79 20. @@ -243,7 +243,7 @@ 5 -Case 1:20-cv-10832 Document 4 Filed 12/22/20 Page 6 of 71 +Case 1:20-cv-10832-AT Document 46 Filed 02/18/21 Page 6 of 79 27. @@ -287,7 +287,7 @@ 6 -Case 1:20-cv-10832 Document 4 Filed 12/22/20 Page 7 of 71 +Case 1:20-cv-10832-AT Document 46 Filed 02/18/21 Page 7 of 79 through which a person invests money in a common enterprise and reasonably expects profits or returns derived from the entrepreneurial or managerial efforts of others. Courts have found that @@ -331,7 +331,7 @@ 7 -Case 1:20-cv-10832 Document 4 Filed 12/22/20 Page 8 of 71 +Case 1:20-cv-10832-AT Document 46 Filed 02/18/21 Page 8 of 79 ledger, such as helping secure the ledger from manipulation or other forms of attacks. Like other “digital tokens,†native tokens may also be sold and traded for consideration. @@ -383,7 +383,7 @@ 8 -Case 1:20-cv-10832 Document 4 Filed 12/22/20 Page 9 of 71 +Case 1:20-cv-10832-AT Document 46 Filed 02/18/21 Page 9 of 79 43. @@ -442,7 +442,7 @@ 9 -Case 1:20-cv-10832 Document 4 Filed 12/22/20 Page 10 of 71 +Case 1:20-cv-10832-AT Document 46 Filed 02/18/21 Page 10 of 79 52. @@ -492,7 +492,7 @@ 10 -Case 1:20-cv-10832 Document 4 Filed 12/22/20 Page 11 of 71 +Case 1:20-cv-10832-AT Document 46 Filed 02/18/21 Page 11 of 79 59. @@ -538,7 +538,7 @@ 11 -Case 1:20-cv-10832 Document 4 Filed 12/22/20 Page 12 of 71 +Case 1:20-cv-10832-AT Document 46 Filed 02/18/21 Page 12 of 79 currency,†that it would “keep between 25% to 30%†of XRP, and noted the “record highs†of prices other digital assets had achieved as something Ripple hoped to emulate for XRP. @@ -586,7 +586,7 @@ 12 -Case 1:20-cv-10832 Document 4 Filed 12/22/20 Page 13 of 71 +Case 1:20-cv-10832-AT Document 46 Filed 02/18/21 Page 13 of 79 69. @@ -624,29 +624,38 @@ Garlinghouse joined Ripple as COO in April 2015 and substantially assisted its -ongoing unregistered Offering by, among other things, being responsible for its operations. In -January 2017, Garlinghouse became CEO and Larsen retained his role as chairman of the Board. +ongoing unregistered Offering by, among other things alleged here, being responsible for its +operations. In January 2017, Garlinghouse became CEO and Larsen retained his role as chairman +of the Board. 75. After the change in corporate structure, both Garlinghouse and Larsen remained key -decision makers and participants in Ripple’s ongoing Offering. As CEO, Garlinghouse approved -the timing and amounts of unregistered offers and sales of XRP, and, as chairman of the Board, -Larsen was consulted on such offers and sales. Both continue to communicate with potential and +decision makers and participants in, and continued to direct, Ripple’s ongoing Offering. As Ripple +explained in June 2018 to a New York-based investment firm when the firm was considering the 13 -Case 1:20-cv-10832 Document 4 Filed 12/22/20 Page 14 of 71 +Case 1:20-cv-10832-AT Document 46 Filed 02/18/21 Page 14 of 79 -actual XRP investors and Ripple equity shareholders and to participate in certain projects Ripple is -pursuing with respect to XRP. Both have continued selling XRP into public markets. +creation of an XRP-based fund, the “XRP Sales Committee consisting of Brad Garlinghouse (CEO), +Chris Larsen (Co-founder and Executive Chairman)†and two other individuals at Ripple “make[ ] +XRP distribution and sales decisions at the company . . . .†76. +As CEO, Garlinghouse approved the timing and amounts of unregistered offers and + +sales of XRP, and, as chairman of the Board, Larsen was consulted on such offers and sales. Both +continue to communicate with potential and actual XRP investors and Ripple equity shareholders +and to participate in certain projects Ripple is pursuing with respect to XRP. Both have continued +selling XRP into public markets. +77. + In 2017, Defendants also began accelerating Ripple’s sales of XRP because, while Ripple’s expenses continued to increase (reaching nearly $275 million for 2018), its revenue outside of XRP sales did not. -77. +78. For example, starting in 2016, Ripple began selling two software suites, xCurrent and @@ -658,70 +667,76 @@ Overview of Ripple’s XRP Distribution -78. +79. Ripple’s planned distribution of XRP succeeded. -79. +80. From 2014 through the end of 2019, to fund its operations, Ripple sold at least 3.9 billion XRP through Market Sales for approximately $763 million USD. -80. +81. From 2013 through the end of the third quarter of 2020, Ripple sold at least 4.9 billion XRP through Institutional Sales for approximately $624 million USD, also to fund Ripple’s operations, for a total of at least $1.38 billion USD in Market and Institutional Sales alone. -81. + +14 + +Case 1:20-cv-10832-AT Document 46 Filed 02/18/21 Page 15 of 79 + +82. The market price for XRP—and Ripple’s sales prices in the Offering—ranged from a low price of approximately $0.002 per XRP in 2014 to a high price of $3.84 per XRP in early 2018, an increase of nearly 137,000%. XRP traded at approximately $0.58 USD per XRP as of last week. -82. +83. Ripple also undertook to achieve its goal of widespread distribution of XRP by exchanging XRP for non-cash consideration, such as labor and market-making services. Through the Other XRP Distributions, Ripple paid third parties to assist in its efforts to accomplish as widespread a distribution of XRP as possible and to attempt to develop a “use†for XRP. +84. -14 - -Case 1:20-cv-10832 Document 4 Filed 12/22/20 Page 15 of 71 - -83. - -Since 2014, Defendants have disbursed at least 4.05 billion XRP (valued at at least +Since 2014, Defendants have disbursed at least 4.05 billion XRP (valued at least $500 -$500 million USD when the XRP was distributed) through Other XRP Distributions. -84. +million USD when the XRP was distributed) through Other XRP Distributions. +85. In addition, Larsen (beginning in 2015) and Garlinghouse (beginning in 2017) directly participated in the Offering by offering and selling their own holdings of XRP into the same market as Ripple’s Market Sales, typically following the same manner of sale. -85. +86. From 2015 through at least March 2020, while Larsen was an affiliate of Ripple as its CEO and later chairman of the Board, Larsen and his wife sold over 1.7 billion XRP to public investors in the market. Larsen and his wife netted at least $450 million USD from those sales. -86. +87. -From April 2017 through December 2019, while an affiliate of Ripple as CEO, +From April 2017 through at least October 2020, while an affiliate of Ripple as CEO, -Garlinghouse sold over 321 million XRP he had received from Ripple to public investors in the -market, generating approximately $150 million USD from those sales. -87. +Garlinghouse sold over 357 million XRP he had received from Ripple to public investors in the +market, generating approximately $159 million USD from those sales (with Larsen’s sales, the +“Individual Defendants’ XRP Salesâ€). +88. Defendants offered and sold XRP to any person, without restricting offers or sales to persons who had a “use†for XRP (particularly given that little to no “use†existed until Ripple subsidized some “use†operations in recent months, as described below) and without restricting anyone’s ability to resell their XRP to investors within the United States or elsewhere. -88. + +15 + +Case 1:20-cv-10832-AT Document 46 Filed 02/18/21 Page 16 of 79 + +89. With respect to all four types of distribution (Market Sales, Institutional Sales, Other @@ -729,13 +744,15 @@ purchasers routinely resold XRP to other investors in the United States and other countries. These resales aligned with Defendants’ own goals of achieving as widespread a distribution of XRP as possible, which was necessary to promote an aftermarket of buyers and sellers of XRP. -89. +90. -Defendants sold approximately 14.6 billion XRP, as summarized in Table 1, below. +At all relevant times, Garlinghouse and Larsen knew or recklessly disregarded that -15 +investors were using money to purchase XRP and that Ripple was pooling that capital to fund its +efforts to create profits for Ripple and XRP purchasers (in the form of increased prices for XRP). +91. -Case 1:20-cv-10832 Document 4 Filed 12/22/20 Page 16 of 71 +Defendants sold approximately 14.6 billion XRP, as summarized in Table 1, below. Type of Sales @@ -758,7 +775,7 @@ Individual Defendants’ XRP Sales – Garlinghouse -321 million* +357 million* Total Offering @@ -770,28 +787,33 @@ Defendants’ Market Sales of XRP -90. +92. As CEO, Larsen initiated and approved Ripple’s Market Sales of XRP. -91. +93. Ripple conducted the Market Sales first by transferring ownership of XRP on the XRP Ledger directly to investors and later by using traders who specialized in algorithmic digital asset trading to offer and sell XRP to investors, both on the XRP Ledger and on digital asset trading platforms, both in exchange for fiat currencies or other digital assets such as bitcoin. -92. + +16 + +Case 1:20-cv-10832-AT Document 46 Filed 02/18/21 Page 17 of 79 + +94. The entities Defendants enlisted to help carry out the Market Sales—the specialized traders or the trading platforms—were typically not registered with the SEC in any capacity. -93. +95. Ripple conducted the Market Sales by paying at least four entities commissions, paid in XRP, for executing Ripple’s XRP sales to the public on digital asset trading platforms. -94. +96. One of these entities is based in New York and was registered with the SEC as a @@ -799,89 +821,105 @@ while another entity is internationally-based but has offices in the United States. The fourth entity, through which Ripple conducted most of the Market Sales, is a global digital asset trading firm with an office in the United States (the “Market Makerâ€). - -16 - -Case 1:20-cv-10832 Document 4 Filed 12/22/20 Page 17 of 71 - -95. +97. To increase Market Sales throughout the Offering, Ripple has also directed all readers of its website to information about “How to Buy XRP†and has provided a list of digital asset trading platforms, including some with principal places of business in the United States, on which investors can make those purchases. -96. +98. While each was CEO, Larsen and Garlinghouse had final decision-making authority over which trading venues to use for Market Sales and how much XRP to sell on a particular venue, which Ripple communicated to traders as an overall percentage of XRP’s daily trading volume. -97. +99. At Ripple’s direction, the intermediaries such as the Market Maker ensured that Market Sales were programmatically set not to exceed a certain percentage of XRP’s overall daily trading volume, and Ripple referred to the Market Sales as “programmatic sales.†-98. +100. + +Ripple employees or the Market Marker specifically sought Larsen’s and -On occasion, Ripple employees or the Market Marker consulted Larsen and +Garlinghouse’s approval as to parameters for conducting Ripple’s Market Sales. For example, in +mid-December 2015, Ripple’s then-Chief Financial Officer (the “CFOâ€) emailed Larsen and +Garlinghouse with daily updates regarding the market price and volume of XRP and how they +impacted Ripple’s Market Sales strategy. The CFO informed Larsen and Garlinghouse that the -Garlinghouse as to parameters for conducting Ripple’s Market Sales, which they at times approved. +17 + +Case 1:20-cv-10832-AT Document 46 Filed 02/18/21 Page 18 of 79 + +Market Sales had been paused due to a drop in XRP price but suggested the following day that the +sales be restarted. Larsen instead instructed the CFO to “keep paused for now†and “[w]ait until +[the] market had recovered from this mistake.†That afternoon, the CFO indicated that the XRP +price had remained stable that day and suggested re-starting Market Sales the following day, a +proposal that Larsen then approved. +101. + +Similarly, in April 2016, the CFO emailed Larsen and Garlinghouse regarding + +continued “downward pressure on the price of XRP†and suggested having the Market Maker +“adjust down a bit our net sell target for a few days to see if we can help stabilize and/or increase +the XRP price.†Larsen responded, “Yes – let’s adj[ust],†while Garlinghouse stated that he was “in +favor of†adjustment but was “marginally inclined to be more aggressive when we do this.†D. Defendants’ Public Distribution through Institutional Sales of XRP -99. +102. Since at least 2013, Ripple and Larsen tried to make Institutional Sales to obtain essential funding for Ripple’s operations and develop a speculative trading market in XRP. -100. +103. Ripple viewed the Institutional Sales as the lynchpin of its strategy to generate speculative interest in XRP from public investors. As Ripple stated in a document published on its website on January 24, 2017, which Ripple Agent-2 authored, Ripple’s Institutional Sales of XRP were “indicative of [XRP’s] broader capital market potential.†-101. +104. Ripple—through its agents, including Larsen and Garlinghouse—offered and sold XRP for investment to influential players in the digital asset space, including XRP market makers, dealers, and blockchain-focused private investment funds looking to create an XRP-based fund or include XRP in their fund. These market makers were also typically not registered with the SEC. +105. -17 +With a few exceptions, Ripple conducted the Institutional Sales through XRP II, -Case 1:20-cv-10832 Document 4 Filed 12/22/20 Page 18 of 71 +which applied for a license with the NYDFS to engage in the “virtual currency business activity†of -102. +18 -With a few exceptions, Ripple conducted the Institutional Sales through XRP II, +Case 1:20-cv-10832-AT Document 46 Filed 02/18/21 Page 19 of 79 -which applied for a license with the NYDFS to engage in the “virtual currency business activity†of selling “units of Ripple’s virtual currency . . . to institutional and other accredited investors†who are “purchasing XRP for speculative purposes.†-103. +106. From 2013 to the present, Ripple has made Institutional Sales to at least twenty-six institutional investors. -104. +107. Ripple made many of the XRP Institutional Sales at a discount from XRP market prices. At least seven of the institutional investors—including some described below—bought XRP -at discounts between 4% and 30% to the market price -105. +at discounts between 4% and 30% to the market price. +108. The agreements governing Ripple’s Institutional Sales typically provided no restrictions on the buyer’s ability to resell XRP, provided only brief lock-up periods (during which the investor could not resell its XRP) of typically three to twelve months, or limited the buyer’s ability to resell quantities of XRP that could potentially lower XRP’s trading price. -106. +109. In other words, Ripple expected that most, if not all, Institutional Sales buyers would @@ -889,76 +927,127 @@ that could be resold during any given time period. By selling at discounts to market prices, Ripple incentivized these buyers to seek to sell their XRP into the public markets in order to realize what was essentially a guaranteed profit. -107. +110. -The paragraphs below describe three examples of Institutional Sales. +Larsen and Garlinghouse both played significant roles in negotiating and approving -108. +Ripple’s Institutional Sales and other offers and sales of XRP to institutional investors, including +while Garlinghouse was COO. +111. -On June 12, 2017, Larsen and others employees met with an investment fund +For example, in mid-2015, Garlinghouse negotiated an institutional investor’s -(“Institutional Investor Aâ€), which Ripple Agent-2 described in a June 12, 2017 email to Ripple -Agent-3 as “a $12B [$12 billion] alternative asset hedge fund based out of New York.†+purchase of XRP in connection with the investor’s formation of a “private investment fund†whose +sole purpose would have been to speculate on XRP as an investment (“XRP Fund Aâ€). On July 10, +2015, Garlinghouse emailed that potential investor a document—which Ripple had created in 2014 +(as described further below) and that Garlinghouse described to the potential investor as a “white -18 +19 -Case 1:20-cv-10832 Document 4 Filed 12/22/20 Page 19 of 71 +Case 1:20-cv-10832-AT Document 46 Filed 02/18/21 Page 20 of 79 -109. +paperâ€â€”entitled “The Ripple Protocol: A Deep Dive for Financial Professionals†(the “2014 Promotional +Documentâ€). On August 3, 2015, Ripple, through XRP II, entered into a “Memorandum of +Understanding†(which Larsen signed on XRP II’s behalf), committing Ripple to sell XRP to that +investor for XRP Fund A. Around November 2015, Garlinghouse, Larsen, and others received +drafts of the potential offering documents for XRP Fund A and provided comments on these +documents. +112. + +The paragraphs below describe three examples of Institutional Sales, certain of + +which, as alleged, Larsen and Garlinghouse negotiated, approved, or signed on behalf of Ripple. +113. + +On June 12, 2017, Larsen and others employees met with an investment fund + +(“Institutional Investor Aâ€), which Ripple Agent-2 described in a June 12, 2017 email to Ripple +Agent-3 as “a $12B [$12 billion] alternative asset hedge fund based out of New York.†+114. In 2017, Ripple sold approximately 14.8 million XRP for $2.1 million to Institutional Investor A, without restricting Institutional Investor A’s ability to resell this XRP into public markets in any way, at price discounts of up to 30% below XRP market prices. -110. +115. From at least 2016 through 2019, Ripple sold approximately 115 million XRP to an entity (“Institutional Investor Bâ€) that describes itself as a “full-service digital currency prime broker†that “provide[s] investors with a secure marketplace to trade, borrow, lend & custody digital currencies.†Institutional Investor B paid Ripple approximately $6.4 million for its XRP, the first -$500,000 of which it obtained at a 10% discount from XRP market prices. -111. +$500,000 of which it obtained in June 2016 at a 10% discount from XRP market prices. +116. + +In an internal email on April 22, 2016, Ripple Agent-3 had sought Larsen’s and + +Garlinghouse’s approval to sell XRP to Institutional Investor B, which Ripple Agent-3 described as +an “institutional reseller,†at a discount relative to current market conditions and with certain lockup restrictions. In response, Garlinghouse and Larsen both approved the sale—with each separately +telling Ripple Agent-3 that they were “good with it.†+ +20 + +Case 1:20-cv-10832-AT Document 46 Filed 02/18/21 Page 21 of 79 + +117. + +Around September 12, 2016, after Institutional Investor B’s initial purchase of XRP, + +Garlinghouse (as COO) and Ripple Agent-3 met with representatives for Institutional Investor B. +118. + +An internal Ripple email memorializing this meeting shows that Institutional + +Investor B explained to Garlinghouse that its “purchase of XRP was simply a consequence of . . . +Chris [Larsen] indicating XRP was central to Ripple’s success,†but that it would no longer +“purchase more XRP†unless certain “prerequisites†were met. These included, among others, +Ripple “mak[ing] it easier to trade XRP†by making it available on digital asset trading platforms, +showing “metrics and charts that show XRP trending up and to the right,†and “[c]onsider[ing] +moving [Ripple’s] XRP into escrow†to “guarantee distribution with a predictable and public +schedule.†As Institutional Investor B explained to Garlinghouse, “[i]nvestors will not invest when +they do not understand something,†which required a “clearly defined distribution plan†for XRP, +without which “it [would] be difficult/impossible to attract new money to XRP.†+119. Under the terms of its agreement with Ripple, Institutional Investor B—whose principal place of business is in Manhattan—agreed to resell its XRP subject to volume limitations to be specified at the time of each subsequent purchase. Ripple did not restrict the entity’s ability to resell XRP into the market in any other way. -112. +120. On September 24, 2018, Ripple entered into an agreement (as amended, -“Institutional Investor C Sales Agreementâ€), signed by Garlinghouse with a Japanese entity +“Institutional Investor C Sales Agreementâ€), signed by Garlinghouse, with a Japanese entity (“Institutional Investor Câ€) that describes itself as “operat[ing] sales and exchange service[s] of crypto-assets to offer safe and secure transactions of crypto-assets for as many people as possible.†-113. +121. Pursuant to the Institutional Investor C Sales Agreement, Ripple agreed to make up to $1 billion worth of XRP available for purchases to Institutional Investor C from November 1, 2018 through November 1, 2021, $800 million of which was offered at prices discounted between + +21 + +Case 1:20-cv-10832-AT Document 46 Filed 02/18/21 Page 22 of 79 + 15% and 30% below XRP’s market price, depending on the total amount of XRP purchased by Institutional Investor C. -114. +122. Pursuant to the Institutional Investor C Sales Agreement, Institutional Investor C agreed to limit the amount of its own “sales or transfers of XRP†to not exceed 10 basis points of the average daily volume of XRP trading in the market (a basis point is .0001 or 1/100th of 1%). - -19 - -Case 1:20-cv-10832 Document 4 Filed 12/22/20 Page 20 of 71 - -115. +123. From 2018 through the end of 2019, Ripple sold over $170 million worth of XRP, approximately 719 million XRP, to Institutional Investor C, sold approximately 361 million XRP to Institutional Investor C through the end of September 2020, and at least another 20 million XRP around December 15, 2020. -116. +124. Table 2 specifies the amounts Ripple raised in both Market and Institutional Sales: @@ -1019,14 +1108,19 @@ Defendants’ Other XRP Distributions and “Listing†of XRP on Digital Asset Trading Platforms -117. +125. At times, rather than directly selling XRP into the market to fund its operations, Ripple funded its dual XRP market-creating and company financing goals by transferring XRP to third parties as compensation. Ripple understood that these parties would in turn sell XRP into the public markets (often explicitly dictating the terms under which the parties could make these sales). -118. + +22 + +Case 1:20-cv-10832-AT Document 46 Filed 02/18/21 Page 23 of 79 + +126. These Other XRP Distributions consist of five other types of sales and distributions @@ -1035,36 +1129,32 @@ Executive Compensation Distributions -119. +127. Between December 2016 and at least May 2019, Ripple granted certain of its executives a total of approximately 900 million XRP in consideration for their labor as Ripple employees, at least 597 million of which Ripple has already tendered to these executives. -20 - -Case 1:20-cv-10832 Document 4 Filed 12/22/20 Page 21 of 71 - -120. +128. On December 13, 2016, Ripple granted Ripple Agent-3 and Garlinghouse 150 million and 500 million XRP, respectively, in separately negotiated compensation agreements. -121. +129. Ripple granted Garlinghouse an additional 250 million XRP on May 29, 2019. -122. +130. Pursuant to the terms of these agreements, Ripple has transferred approximately 521 million XRP to Garlinghouse and approximately 76 million XRP to Ripple Agent-3, worth -approximately $246 million and $44 million, respectively, at the time of transfer.1 +approximately $246 million and $44 million, respectively, at the time of transfer. 1 2. On-Demand Liquidity Distributions -123. +131. As described below, in late 2018 Ripple began to market a product (“On-Demand @@ -1072,52 +1162,53 @@ jurisdiction, transfer it to a separate destination, and sell XRP for the local fiat currency, to effect cross-border payments. To encourage adoption of ODL, Ripple paid XRP to both the money transmitting businesses and certain market makers that supported the product for their efforts. -124. +132. Ripple chose to compensate these entities (which were not investors in XRP) with XRP directly, understanding that they would monetize their fees by selling XRP into public markets. -125. +133. From approximately December 2018 through July 2020, Ripple issued at least 324 million XRP as fees, rebates, and incentives to entities associated with ODL, without restricting the + +These values are based on the weighted average of XRP’s closing price for a particular day, +month, or quarter, as reported by the digital asset platform Coinmarketcap. + +1 + +23 + +Case 1:20-cv-10832-AT Document 46 Filed 02/18/21 Page 24 of 79 + ability of these entities to resell the XRP received as incentives into public markets. This XRP was valued at approximately $67 million at the time of Ripple’s payments. -126. +134. These entities typically have resold all the XRP they have received from Ripple to investors in the public markets, typically on the same day that they received the XRP from Ripple. -127. +135. Ripple took no steps to ensure that these entities intended to hold XRP as an investment. To the contrary, Ripple gave these entities XRP to sell into the public markets. - -1 - -These values are based on the weighted average of XRP’s closing price for a particular day, -month, or quarter, as reported by the digital asset platform Coinmarketcap. -21 - -Case 1:20-cv-10832 Document 4 Filed 12/22/20 Page 22 of 71 - 3. Sales of XRP into the Market on Behalf of a Larsen-Established Entity and by Ripple-Funded Projects. (i) -128. +136. RippleWorks In 2015 and 2017, Ripple issued at least 2 billion XRP as contributions to “RippleWorks,†an entity Larsen co-founded to invest in, among other things, XRP-related projects -to further Ripple’s goals of achieving widespread trading of XRP in the market.2 -129. +to further Ripple’s goals of achieving widespread trading of XRP in the market. 2 +137. Larsen co-founded RippleWorks with another individual who would become its @@ -1125,66 +1216,79 @@ RippleWorks, and Ripple’s Board, including Larsen, approved giving 1 billion XRP to RippleWorks, in part because the Board “believe[d] [RippleWorks] will help promote [Ripple’s] business.†On February 1, 2017, Ripple committed an additional one billion XRP to RippleWorks. -130. +138. RippleWorks worked to achieve Ripple’s own goal of widespread distributions of XRP, with Larsen supervising RippleWorks’ sales of XRP into the market. -131. +139. Ripple took no steps to ensure that RippleWorks intended to hold XRP as an investment. To the contrary, Ripple gave XRP to RippleWorks so it would sell XRP into the public markets and, from mid-2015 to the present, enlisted the Market Maker to sell approximately 693 million XRP to the public on RippleWorks’ behalf, for approximately $176 million. -132. +In a November 21, 2019 tweet, Larsen explained that RippleWorks had “distribute[d] +$25M+†to a number of ventures, which then presumptively resold the XRP into public markets. -A November 11, 2016 email from the RippleWorks CEO to Larsen and +2 -Garlinghouse exemplifies the relationship between the two entities. In the email, the RippleWorks -CEO detailed RippleWorks’ “2016 Year End XRP selling†and “2017 XRP Sales†in order to -“insure [sic] we are all on the same page and allow anyone to chime in with any different thoughts.†+24 -2 +Case 1:20-cv-10832-AT Document 46 Filed 02/18/21 Page 25 of 79 -In a November 21, 2019 tweet, Larsen explained that RippleWorks had “distribute[d] -$25M+†to a number of ventures, which then presumptively resold the XRP into public markets. -22 +140. -Case 1:20-cv-10832 Document 4 Filed 12/22/20 Page 23 of 71 +Larsen coordinated these sales with the Market Maker by directing and approving -133. +changes to RippleWorks’ XRP sales strategy. For example, various mid-2017 emails between Larsen +and the Market Marker show that Larsen instructed the Market Maker to “restart†trading by one of +its trading bots and that he asked the Market Maker to “monitor[ ] closely to ensure†that certain +sales are “constructive to the market.†+141. + +A November 11, 2016 email from the RippleWorks CEO to Larsen and + +Garlinghouse exemplifies the relationship between the two entities. In the email, the RippleWorks +CEO detailed RippleWorks’ “2016 Year End XRP selling†and “2017 XRP Sales†in order to +“insure [sic] we are all on the same page and allow anyone to chime in with any different thoughts.†+142. Another example involves RippleWorks’ eventual investment into a fund that wished -to invest in digital assets (the “XRP Fundâ€) and Ripple’s “loan†of XRP to that fund so that it could +to invest in digital assets (“XRP Fund Bâ€) and Ripple’s “loan†of XRP to that fund so that it could engage in market-making activities. -134. +143. In an August 27, 2017 weekly update email, Ripple Agent-3 informed Garlinghouse -that the XRP Fund and Ripple had exchanged a term sheet. -135. +that XRP Fund B and Ripple had exchanged a term sheet. +144. In an October 2, 2017 weekly update email, Ripple Agent-3 informed Garlinghouse -that Ripple was “evaluating setting up [an investment in the XRP Fund] through RippleWorks.†-136. +that Ripple was “evaluating setting up [an investment in XRP Fund B] through RippleWorks.†+145. On November 1, 2017, Ripple Agent-3 informed Ripple Agent-2 that Ripple was looking to “accelerate/prioritize XRP-beneficial announcements,†including potentially the -formation of the XRP Fund. -137. +formation of XRP Fund B. +146. On November 11, 2017, a Ripple marketing executive asked Garlinghouse and Ripple Agent-3 in an email if they could use an upcoming investment conference in Manhattan to -“push†the XRP Fund or the RippleWorks CEO “to close so we can announce.†The next day, +“push†XRP Fund B or the RippleWorks CEO “to close so we can announce.†The next day, Ripple Agent-3 informed Garlinghouse that Ripple was “following up with [the RippleWorks CEO] -with some provisions [for the XRP Fund] to prevent harmful XRP behavior.†+with some provisions [for XRP Fund B] to prevent harmful XRP behavior.†+ +25 + +Case 1:20-cv-10832-AT Document 46 Filed 02/18/21 Page 26 of 79 + (ii) Third-Party Incentives Through “xPring†-138. +147. From approximately April 2018 through August 2020, Ripple publicly marketed an @@ -1193,19 +1297,14 @@ goals of achieving widespread XRP distribution. Ripple called xPring “a new initiative by Ripple that will invest in, incubate, acquire and provide grants to companies and projects run by proven entrepreneurs†in hopes of achieving Ripple’s stated goal of working to develop a use for XRP. -139. +148. Ripple used xPring as yet another way to get XRP into the hands of public investors through conduits, while obtaining the added benefit of incentivizing third parties to help Ripple - -23 - -Case 1:20-cv-10832 Document 4 Filed 12/22/20 Page 24 of 71 - pursue its XRP goals. Ripple gave XRP to these entities so they would sell it into public markets and took no steps to ensure that xPring-funded parties would not resell their XRP to the public. -140. +149. For example, a November 1, 2018, two-year “Services and Marketing Agreement†@@ -1215,7 +1314,7 @@ provided that these additional parties agreed to abide by Ripple-mandated parameters for their XRP trading volumes. By August 2020, Ripple had paid the entity at least 364 million XRP, of which the entity had distributed 178 million to other parties, typically approved by Ripple. -141. +150. Another such distribution included a November 8, 2018 agreement wherein Ripple @@ -1224,16 +1323,21 @@ that the company would seek to resell the XRP it received from Ripple, Ripple again required the entity to agree to certain volume-related parameters to effect XRP sales into the market. Ripple eventually transferred more than 163 million XRP to this entity. + +26 + +Case 1:20-cv-10832-AT Document 46 Filed 02/18/21 Page 27 of 79 + 4. The XRP Options -142. +151. From January 2018 through December 2019, Ripple sold at least 1.63 billion XRP when certain entities exercised options to buy XRP that Ripple had granted (the “Option Salesâ€). -143. +152. In February 2016, Ripple granted “an option to purchase units of Ripple XRP†to a @@ -1241,74 +1345,175 @@ exchange for advisory services provided†to Ripple by Option Investor A’s founder. Ripple granted options for up to one billion XRP as of January 1, 2014, at prices to be determined based on XRP’s average market prices. The options are from January 1, 2018, and for each month thereafter, until - -24 - -Case 1:20-cv-10832 Document 4 Filed 12/22/20 Page 25 of 71 - March 1, 2022. Between 2018 and September 2020, Ripple’s sales to Option Investor A consisted -of at least 588 million XRP. -144. +of at least 588 million XRP. Larsen negotiated the arrangement with Option Investor A on Ripple’s +behalf and ultimately signed the final agreement with Option Investor A. +153. Separately, in 2016, Ripple entered into an agreement with an enterprise software firm (“Option Investor Bâ€) based in Manhattan that gave the firm an option to buy up to 5 billion XRP at a discounted price in exchange for efforts to help Ripple develop a “use†for XRP. The amount of XRP available for purchase under the option was later reduced, and Option Investor B -purchased at least 1.04 billion XRP in 2019.3 +purchased at least 1.04 billion XRP in 2019. 3 Larsen signed the Memorandum of Understanding +with Option Investor B in May 2016. 5. Payments to Digital Asset Trading Platforms to Support XRP’s Trading Market -145. +154. + +Starting in 2016 at the latest, while he was Ripple’s COO, Garlinghouse began to + +oversee, direct, and lead Ripple’s efforts to make XRP available for purchasers to buy and sell on +digital asset trading platforms incorporated in the United States and abroad. + +To pressure Option Investor B to sell back the option grant (which covered approximately +5% of the XRP in existence at a reduced price), Ripple Agent-3 suggested to Ripple Agent-2 in an +email on February 26, 2017 that Ripple make the option public. Ripple Agent-2 responded that it +“would cause us some headaches . . . Better to keep it private.†+ +3 + +27 + +Case 1:20-cv-10832-AT Document 46 Filed 02/18/21 Page 28 of 79 + +155. + +Ripple and Garlinghouse engaged in these efforts because they believed that making + +XRP available on digital asset trading platforms was critical to their ability to sell XRP into the +market at higher prices—or, as internal Ripple documents explained it, increased trading volume for +XRP on digital asset trading platforms would create “momentum†for XRP. +156. + +In a May 27, 2016 email, Garlinghouse asked Ripple employees for an “update on + +the status of . . . listing XRP†on global digital asset trading platforms. +157. + +In August 2016, Garlinghouse sought to persuade the president of a digital asset + +trading platform whose principal place of business is in California (“Platform Aâ€) to permit buying +and selling of XRP on Platform A. In an August 19, 2016 email, Garlinghouse stated he had “joined +Chris Larsen about a year ago in leading the Ripple team†and that Ripple was “looking for credible +exchanges to list XRP where we can send market makers and trading desks.†+158. + +To support Ripple’s efforts to “list†XRP on digital asset platforms, Garlinghouse + +simultaneously negotiated deals as to XRP with other entities in the digital asset space. For example, +in an October 11, 2016 email to the CEO of a California-based custodial services provider, +Garlinghouse spoke of Ripple’s “key milestone of listing XRP on two digital asset exchanges by the +end of Q4,†asked the provider to “implement[ ] custody [or wallet] services for XRP†by October +17, 2016, and promised to “provide whatever resources [were] needed†for that purpose. +159. + +In December 2016, Garlinghouse again sought to get XRP listed on Platform A. In + +a December 1, 2016 email, he stated that Ripple’s 2017 “incentive program†for exchanges, along +with Ripple’s efforts to increase institutional adoption of XRP for settlement, would “enhance the +opportunity for [Platform A’s] traders†and that Ripple was “happy to offer minimum monthly +guarantees in 2017 to get this onto your near term priorities list.†+160. + +Garlinghouse and Larsen continued to participate in Ripple’s effort to make XRP -In 2017 and 2018, Ripple also entered into agreements with at least ten digital asset +available to buy and sell on Platform A in 2017 and 2018. In an internal Ripple email of July 2018, + +28 + +Case 1:20-cv-10832-AT Document 46 Filed 02/18/21 Page 29 of 79 + +Ripple Agent-2 updated Garlinghouse on “two paths in parallel†Ripple was taking to achieve listing +on Platform A, with Garlinghouse directing Ripple Agent-2 to make any document outlining these +paths “shareable†and “readable.†Larsen then weighed in, directing Garlinghouse to “work on a +fact based detailed doc that shows†what he viewed as important differences between the XRP +Ledger and the ledger for other digital assets. +161. + +In 2017 and 2018, Ripple entered into agreements with at least ten digital asset trading platforms—none of which were registered with the SEC in any capacity, and at least two of -which have principal places of business in the United States—providing for listing and trading +which have principal places of business in the United States—providing for “listing†and trading incentives with respect to XRP. Ripple paid these platforms a fee, typically in XRP, to permit the buying and selling of XRP on their systems and sometimes incentives for achieving volume metrics. -146. +162. As just one example of these arrangements, in May 2017, Ripple gave a digital asset -trading platform, based in the United States, 17 million XRP in exchange for the platform’s -agreement to make XRP available to buy and sell on its platform, as well as rebates on trading fees -of up to $60,000 per month for three months, and up to $150,000 in incentive payments per month -for three months to the top three traders of XRP for other assets on the platform. -147. +trading platform based in the United States (“Platform Bâ€) 17 million XRP in exchange for the +platform’s agreement to make XRP available to buy and sell on its platform, as well as rebates on +trading fees of up to $60,000 per month for three months. Ripple also promised Platform B up to +$150,000 in incentive payments per month for three months to the top three traders of XRP for +other assets on Platform B. +163. Between October 2016 and October 2017, Ripple distributed approximately 28 million XRP to these platforms, with a then-current market value of $6.8 million. +164. -3 +Ripple viewed these efforts as critical to its ability to sell XRP at favorable prices to -To pressure Option Investor B to sell back the option grant (which covered approximately -5% of the XRP in existence at a reduced price), Ripple Agent-3 suggested to Ripple Agent-2 in an -email on February 26, 2017 that Ripple make the option public. Ripple Agent-2 responded that it -“would cause us some headaches . . . Better to keep it private.†-25 +fund its operations. For example, as Ripple Agent-3 instructed a Ripple employee and an XRP +investor in June 2017, Ripple had to “load[ ] with ultimatums†any conversation with one particular +Manhattan-based digital asset trading platform (“Platform Câ€), because it was a “HIGH VALUE +target†for Ripple. +165. -Case 1:20-cv-10832 Document 4 Filed 12/22/20 Page 26 of 71 +Ripple tried repeatedly and unsuccessfully to persuade Platform C to “list XRP on -148. +29 -As reflected in internal documents, Ripple made these efforts because it believed that +Case 1:20-cv-10832-AT Document 46 Filed 02/18/21 Page 30 of 79 -increased trading volume for XRP on digital asset trading platforms would create “momentum†for -XRP. For example, as Ripple Agent-3 instructed a Ripple employee and an XRP investor in June -2017, Ripple had to “load[ ] with ultimatums†any conversation with one particular Manhattan-based -digital asset trading platform, because it was a “HIGH VALUE target†for Ripple. -149. +[its] exchange†by offering to “cover implementation costs, paying rebates, [and] brokering intros to +large XRP holders for custody.†Undaunted by these initial failures, Ripple Agent-3 emailed the two +owners of the firm directly in July 2017, copying Garlinghouse, and asked: “Does a $1M cash +payment move the needle for a Q3 listing?†+166. -Ripple tried repeatedly and unsuccessfully to persuade that digital asset trading firm +Garlinghouse, like Ripple, also viewed these types of efforts as critical components -to “list XRP on [its] exchange†by offering to “cover implementation costs, paying rebates, [and] -brokering intros to large XRP holders for custody.†Undaunted by these initial failures, Ripple -Agent-3 emailed the two owners of the firm directly in July 2017, copying Garlinghouse, and asked: -“Does a $1M cash payment move the needle for a Q3 listing?†-150. +of Ripple’s efforts as to XRP. In an internal March 29, 2018 email, he described Ripple’s efforts as +to Platform C as an example of Ripple “do[ing] whatever we can to invest in the success of the XRP +ecosystem,†which he viewed as “totally consistent with what [he had] also proactively said†to the +public about Ripple’s intended efforts. +167. + +Garlinghouse also understood that, while making XRP available on digital asset + +trading platforms could help XRP’s price, a platform’s refusal to “list XRPâ€â€”particularly out of +concerns that XRP was a security—could, in the words of an April 10, 2018 Garlinghouse email to +Platform A, “hurt[] Ripple.†Accordingly, when news suggested that Platform A had refused to +make XRP available to the public, Garlinghouse, working with Ripple’s internal and external public +relations teams, prepared “talking points†intended to dispel the notion that XRP was a security or +that Platform A had refused to make XRP available to the public out of concerns that XRP was a +security. +168. + +Larsen was involved in efforts to promote XRP on various platforms, even after he + +was no longer CEO. On August 30, 2018, he emailed Ripple Agent-1 asking if a certain futures and +options exchange “still plan[ned] to release [an XRP denominated] index today?†Ripple believed +this would further their goal of getting an XRP derivative product listed on that exchange. Ripple +Agent-1 responded that the platform was not, due to concerns raised by its lawyers. Larsen +forwarded this response, noting: “What a pain these guys are.†Garlinghouse, in turn, replied by +asking Ripple Agent-1 to keep both him and Larsen “updated on this topic.†+ +30 + +Case 1:20-cv-10832-AT Document 46 Filed 02/18/21 Page 31 of 79 + +169. + +At all relevant times, Garlinghouse and Larsen knew or recklessly disregarded that + +XRP purchasers had a reasonable expectation of deriving profits by buying and selling XRP on these +digital asset trading platforms. +170. Table 3, below, summarizes the Other XRP Distributions. Type of Other @@ -1335,9 +1540,6 @@ Digital Asset Trading Oct. 2016 to Platforms Oct. 2017 Total -Table 3: Other XRP Distributions - -26 597,000,000 324,000,000 @@ -1347,8 +1549,7 @@ 28,400,000 4,055,400,000 -Case 1:20-cv-10832 Document 4 Filed 12/22/20 Page 27 of 71 - +Table 3: Other XRP Distributions F. Larsen’s and Garlinghouse’s Sales of XRP @@ -1357,25 +1558,30 @@ Larsen’s Sales -151. +171. At all relevant times, Larsen was either the CEO or chairman of the Board of Directors of Ripple and thus part of the control group of XRP’s issuer. -152. +172. While CEO, Larsen had the power to appoint six out of eight seats on Ripple’s Board of Directors, and, as Ripple’s largest equity shareholder, had 68% of its voting power. -153. +173. The following sales of XRP took place with Larsen working in coordination with Ripple to develop and maintain a liquid market for XRP through which Defendants could monetize -their holdings. Email between Larsen and the Market Maker, from at least 2017 through at least +their holdings. Emails between Larsen and the Market Maker, from at least 2017 through at least + +31 + +Case 1:20-cv-10832-AT Document 46 Filed 02/18/21 Page 32 of 79 + 2019, show that, like Ripple and Garlinghouse, Larsen also attempted to strike a delicate balance between maximizing profits from his XRP sales while not depressing the price of XRP. -154. +174. Larsen at times paid the Market Maker to make offers and sales of his XRP on digital @@ -1383,15 +1589,31 @@ to investors all over the world, including in the United States, without marketing or restricting offers or sales to persons who had a “use†for XRP and without restricting purchasers from reselling their XRP to other investors, including to investors in the United States or elsewhere. -155. +175. Larsen and his wife netted approximately $450 million from these sales. -156. +176. -Larsen directed his offers and sales of XRP from within the United States. +Continuing into at least 2020, Larsen directed his offers and sales of XRP from -157. +within the United States. +177. + +Larsen’s offers and sales of XRP occurred on various digital asset trading platforms, + +including Platforms A and B and at least two others incorporated in the United States, and on one +incorporated abroad but with a principal place of business in New York. Though Larsen also made +offers and sales of XRP through certain digital asset trading platforms whose parent corporations +are located outside the United States, Larsen opened his account with at least one of those +platforms’ United States-based wholly owned subsidiary. Moreover, at least one of the digital asset +trading platforms with a foreign parent through which Larsen offered and sold his XRP used +resources located in the United States to execute Larsen’s trades in XRP. +178. + +Larsen made offers and sales of XRP to persons in the United States. + +179. Larsen intends to continue selling his XRP, as shown in an email he sent an investor @@ -1399,108 +1621,130 @@ XRP, to which Larsen described the “widely held view that over time, its [sic] better to have widely held assets, so continued reduction of Ripple and founder holdings is likely constructive.†On September 22, 2020, Larsen also publicly confirmed from his Twitter account that he had -transferred half a billion of his XRP, then worth approximately $115 million, to accounts he -27 +32 -Case 1:20-cv-10832 Document 4 Filed 12/22/20 Page 28 of 71 +Case 1:20-cv-10832-AT Document 46 Filed 02/18/21 Page 33 of 79 +transferred half a billion of his XRP, then worth approximately $115 million, to accounts he established with a digital asset firm incorporated in New York, and recently did in fact make such transfers, further evidencing his present intention to continue his unregistered sales of XRP. 2. Garlinghouse’s Sales -158. +180. From April 2015 to the present, Garlinghouse was either the COO or the CEO of Ripple and thus part of the control group of XRP’s issuer. -159. +181. After Garlinghouse joined Ripple in 2015, Garlinghouse was awarded XRP from Ripple, aligning his financial incentives with Ripple’s. Garlinghouse later resold significant quantities of XRP to amass profits well over one hundred million dollars. -160. +182. The following sales took place with Garlinghouse working in coordination with Ripple to develop and maintain a liquid XRP market that the Defendants could monetize. -161. +183. -From April 2017 through December 2019, Garlinghouse sold over 321 million of his +From April 2017 through at least October 2020, Garlinghouse sold over 357 million -XRP, for approximately $150 million, to the public through digital asset trading platforms or other -intermediaries. Beginning in December 2017, Garlinghouse used the Market Maker, who deployed -trading bots on multiple, worldwide digital asset trading platforms, to sell his XRP to the public. -162. +of his XRP, for approximately $159 million, to the public through digital asset trading platforms or +other intermediaries. Beginning in December 2017, Garlinghouse used the Market Maker to sell his +XRP to the public. The Market Maker deployed trading bots on multiple, worldwide digital asset +trading platforms and, in the second half of 2020 alone, sold at least another $9 million of +Garlinghouse’s XRP on Garlinghouse’s behalf. +184. Garlinghouse offered and sold XRP to investors all over the world, including in the United States, without marketing or restricting offers or sales to persons who had a “use†for XRP and without restricting purchasers from reselling their XRP to other investors, including to investors in the United States or elsewhere. -163. +185. -Garlinghouse directed his offers and sales of XRP from within the United States. +Continuing into at least 2020, Garlinghouse directed his offers and sales of XRP -164. +from within the United States. + +33 + +Case 1:20-cv-10832-AT Document 46 Filed 02/18/21 Page 34 of 79 + +186. + +Garlinghouse’s offers and sales occurred on various digital asset trading platforms, + +including Platforms A and B and at least two others incorporated in the United States, and one +incorporated abroad but with a principal place of business in New York. Though Garlinghouse also +made offers and sales of XRP through certain digital asset trading platforms whose parent +corporations are located outside the United States, Garlinghouse opened his account with at least +one of those platforms’ United States-based wholly owned subsidiary. Moreover, at least one of the +digital asset trading platforms with a foreign parent through which Garlinghouse offered and sold +his XRP used resources located in the United States to execute Garlinghouse’s trades in XRP. +187. + +Garlinghouse made offers and sales of XRP to persons in the United States. + +188. At various times between April 2017 and at least December 2019, Garlinghouse also paused his XRP sales at the Market Maker’s recommendation because XRP’s market price was -falling, seeking to avoid having the latter’s own XRP sales further drive down XRP’s market price. -165. +falling, seeking to avoid having the former’s own XRP sales further drive down XRP’s market price. +189. Recently, Garlinghouse transferred some of his XRP into accounts he opened with digital asset trading platforms, evidencing his intention to continue his unregistered sales of XRP. - -28 - -Case 1:20-cv-10832 Document 4 Filed 12/22/20 Page 29 of 71 - III. Defendants Created and Control the XRP Trading Markets While Selectively Disclosing Information about Their Activities -166. +190. Defendants’ offers and sales of XRP in the Offering occurred into a market that they had largely created and which—consistent with their dual purposes of raising funds from their XRP sales and managing the liquidity of the XRP market—they played a significant role overseeing. -167. +191. Defendants’ efforts in this regard principally involved monitoring the timing and amount of their XRP sales and purchases, sometimes to coincide with strategic announcements about Ripple or XRP, and establishing an escrow for Ripple’s own XRP holdings. -168. +192. The ability to sell investments in liquid markets is an important consideration for investors when determining whether to buy securities because it represents one way in which they can realize profits from their investments. +34 + +Case 1:20-cv-10832-AT Document 46 Filed 02/18/21 Page 35 of 79 + A. Ripple Managed the Price and Liquidity in the XRP Market -169. +193. Throughout the Offering, Ripple—as Garlinghouse and Larsen directed at various times—undertook significant efforts to monitor, manage, and impact the XRP trading markets, including the trading price and volume of XRP. -170. +194. As described in Section II, these efforts included: (1) using algorithms to time the amount and price of Defendants’ XRP sales into the market; (2) paying incentives to certain market makers—some of which Ripple engaged to effect the Market Sales—if the sales reached certain trading volume levels on XRP; and (3) paying digital asset trading platforms to permit XRP trading. -171. +195. These efforts also included timing the prices and amounts of XRP sales to achieve @@ -1508,127 +1752,134 @@ Ripple sought to maximize the amount it could earn from the XRP Market Sales while minimizing volatility and any downward pressure on XRP’s market price caused by Ripple’s constant injections of new XRP into the market to raise operating funds. - -29 - -Case 1:20-cv-10832 Document 4 Filed 12/22/20 Page 30 of 71 - -172. +196. Ripple internally described these strategies as aimed at maximizing the amount of money Ripple could raise in the Offering or at achieving “more speculative [XRP] volume.†At times, Ripple publicly described its efforts as meant to protect the public’s investments in XRP. -173. +197. Starting in late 2015, Ripple directed the Market Maker to buy or sell XRP (on occasion strategically timed around Ripple announcements), to account for the volume impact of XRP trading, as a Ripple executive told the Market Maker by email on September 20, 2016. -174. +198. To accomplish this, Ripple had an internal “XRP Markets Team†that monitored XRP’s price and volume daily and regularly communicated with Ripple’s XRP market makers about Ripple’s XRP sales strategy, which relied on selling XRP in amounts no greater than a certain percentage of XRP’s daily volume, generally between 10 and 25 basis points. -175. + +35 + +Case 1:20-cv-10832-AT Document 46 Filed 02/18/21 Page 36 of 79 + +199. Starting in 2017 at the latest, Larsen and Garlinghouse participated in meetings with, or were apprised of discussions by, the XRP Markets Team, in which they discussed adjustments to Ripple’s sales strategy and recommendations regarding the amount of Ripple’s XRP to sell, decisions over which Larsen and Garlinghouse had final authority as Ripple’s CEOs. -176. +200. On April 11, 2016, Ripple also directed the Market Maker to buy XRP in the open market with the goal of “[t]arget[ing] $0.008 incrementally over the course of 2 days†while “[c]ap[ping] activity at 5% of daily trading volume[,]†among other things. -177. +201. A few months later, on August 16, 2016, a Ripple employee reported to others at Ripple the “robust discussion activity [he had seen] on the XRPchat thread†(which included “[p]ositive feedback†with respect to “[u]nderstanding that Ripple has a long-term strategy, in which XRP is one of a few big betsâ€) and the “notable market activity†for XRP in recent days. (“XRP -Chat is an online forum that describes itself as “[t]he Largest XRP and Ripple Community Forumâ€.) -178. +Chat is an online forum that describes itself as “[t]he Largest XRP and Ripple Community Forum.â€) +202. A Ripple vice president of finance (the “VP of Financeâ€) then asked Garlinghouse and Ripple Agent-3 “if [they] discussed whether we should turn off the buying now with this news - -30 - -Case 1:20-cv-10832 Document 4 Filed 12/22/20 Page 31 of 71 - and the higher volume?†Ripple Agent-3 responded: “The thesis . . . is to show a period of consistent buying from an account that is known to be a consistent seller. The intended impact of the buying is not to move the price but rather to provide confidence in the market, which in turn will move the price.†-179. +203. Following this exchange, Ripple did not “turn off the buying†of XRP. -180. +204. The following month, September 2016, Ripple directed the Market Maker to place XRP buy and sell orders around the time of announcements Ripple made that month referring to Ripple’s achievements, though neither announcement concerned XRP. -181. +205. On September 20, 2016, the VP of Finance emailed the Market Maker and said that, after consultation with Garlinghouse and Larsen, Ripple wanted to “better understand[ ] the impact + +36 + +Case 1:20-cv-10832-AT Document 46 Filed 02/18/21 Page 37 of 79 + of our purchases [of XRP] over the past week†and that Ripple’s “[c]urrent thinking [was] that we should use our full $300k [designated for XRP purchases] in the first 24 hours post announcement.†-182. +206. The next day, the Market Maker provided the VP of Finance and Ripple Agent-3 with data showing “the positive relationship between hourly price changes of XRP and the hourly Net XRP purchases,†while noting the lack of data to provide a “statistically significant result.†-183. +207. On Friday, September 23, 2016, the VP of Finance, after consulting with Garlinghouse and Larsen and obtaining Garlinghouse’s “go ahead,†directed the Market Maker to “keep the buying light [the day after the announcement] and then do the bigger slug starting Sunday.†The Market Maker agreed. -184. +208. On Monday, September 26, 2016, the Market Maker reported to Ripple that it had “spent approximately $200K of the second tranche†and recommended a strategy “to make aggressive markets†going forward, to which the VP of Finance agreed. -185. +209. On October 15, 2016, the VP of Finance informed the Market Maker that, after an upcoming announcement, Ripple “would like to go to sales at 1%†of trading volume and asked the - -31 - -Case 1:20-cv-10832 Document 4 Filed 12/22/20 Page 32 of 71 - Market Maker to “be thoughtful / opportunistic around the timing of implementing 1%†because Ripple did not “want to depress the rally but rather capitalize on the additional volume.†He further instructed the Marker Maker “to take more money off the table,†if there was a chance to do so. -186. +210. Internally, Ripple executives frequently expressed concern over XRP’s price and planned proactive steps to protect the market. -187. +211. -For example, in an August 12, 2017 e-mail to Ripple Agent-2 and Ripple Agent-3, +For example, in 2016 while he was COO, Garlinghouse ensured that Ripple placed -Garlinghouse raised concerns about XRP being “squarely left out†of a recent market “rally†and -asked whether Ripple’s recent XRP sales were “impacting the market?†He instructed certain Ripple -employees to “proactively†attempt to increase speculative trading value with positive XRP news. -188. +restrictions on sales of XRP by Ripple’s Co-Founder in order to quell concerns that these sales +would negatively impact XRP’s market trading. +212. + +As another example, in an August 12, 2017 e-mail to Ripple Agent-2 and Ripple + +Agent-3, Garlinghouse raised concerns about XRP being “squarely left out†of a recent market + +37 + +Case 1:20-cv-10832-AT Document 46 Filed 02/18/21 Page 38 of 79 + +“rally†and asked whether Ripple’s recent XRP sales were “impacting the market?†He instructed +certain Ripple employees to “proactively†attempt to increase speculative trading value with positive +XRP news. +213. Similarly, in September 2019, Ripple’s “Head of Global Institutional Markets†@@ -1637,45 +1888,44 @@ recommended “buy[ing] [XRP] back†because she was very “worried about xrp at 0.20†and was “DREAD[ING]†an upcoming report—referring to quarterly reports Ripple began publishing in January 2017 (the “Markets Reportsâ€)—if Ripple didn’t “take swift, creative action now (!)†-189. +214. Defendants did not disclose publicly this XRP buying and selling strategy. -190. +215. But Ripple did publicly tout other actions it was taking to support XRP’s market price, including to limit XRP supply or to create scarcity through XRP buybacks. -191. +216. For example, on January 4, 2017, in an effort to assuage XRP investor concerns, Ripple told Institutional Investor C that Ripple “only sells or transfers XRP to financial institutions and accredited investors who bring payment volume and/or FX liquidity to Ripple.†Ripple made similar statements publicly, such as on its website, the “XRP Chat,†and certain Markets Reports. - -32 - -Case 1:20-cv-10832 Document 4 Filed 12/22/20 Page 33 of 71 - -192. +217. Similarly, in its Markets Report for the fourth quarter of 2017, Ripple told investors that it placed sales volume “restrictions†on the XRP it sold directly to financial institutions to “mitigate the risk of market instability due to potential subsequent large sales.†-193. +218. Later, in approximately June 2020, Ripple employees prepared and delivered an internal presentation for Garlinghouse and Larsen in which the employees highlighted that “XRP began underperforming [Bitcoin]†since early May 2020, partly because of Ripple’s sales of XRP. The employees proposed “supply limiting tactics,†such as Ripple’s buying back XRP. -194. +219. Garlinghouse approved the “buy back†option. -195. +38 + +Case 1:20-cv-10832-AT Document 46 Filed 02/18/21 Page 39 of 79 + +220. Following Garlinghouse’s decision, Ripple disclosed on November 5, 2020, in its @@ -1685,58 +1935,58 @@ Defendants Established an XRP Escrow -196. +221. XRP investors became concerned that Ripple’s sales could cause XRP’s price to crash. As Garlinghouse explained in an internal email on May 16, 2017, XRP investors were concerned that Ripple could “sell its [then] 61.68[ ]B[illion] XRP in the market at any time.†-197. +222. If Ripple had filed a registration statement and quarterly and annual reports—as it would have been required to do—Ripple’s sales would have been publicly disclosed. They were not. -198. +223. To assuage investor concerns, on May 16, 2017, Ripple announced that it would place 55 billion XRP (most of its current holdings) into a cryptographically-secured escrow that would restrict Ripple to accessing only one billion XRP every month (the “XRP Escrowâ€). -199. +224. Both Larsen and Garlinghouse were instrumental to the formation of the XRP Escrow by developing and, ultimately, approving the idea. -200. +225. An internal Ripple memo prepared by Ripple Agent-3 around April or May 2017 (the “Proposal to Escrow Ripple’s XRPâ€) explained that one purpose of the escrow was to “secur[e] - -33 - -Case 1:20-cv-10832 Document 4 Filed 12/22/20 Page 34 of 71 - speculative liquidity†in XRP and to “drive a material increase in XRP trading volume/liquidity†by removing uncertainty about when Ripple might dispose of its XRP holdings. -201. +226. The Proposal to Escrow Ripple’s XRP noted that Ripple wanted “more XRP liquidity and [that its] efforts are helping, [but] things are not moving as fast as [Ripple] want[s].†-202. +227. The Proposal to Escrow Ripple’s XRP concluded that the XRP Escrow would be successful if it resulted in “immediate increase in volume and price appreciation†for XRP as one of the “[r]ewards†to counter-balance the increased “[r]isk†of “Cash flow shortfall†for Ripple. -203. + +39 + +Case 1:20-cv-10832-AT Document 46 Filed 02/18/21 Page 40 of 79 + +228. Ripple and Garlinghouse publicly touted the formation of the XRP Escrow as proof that Ripple and XRP holders shared a common interest in the success of Ripple’s efforts as to XRP and as one of Ripple’s many efforts to manage the trading market for XRP. -204. +229. In other words, by announcing the XRP Escrow, Defendants sought to encourage @@ -1747,29 +1997,24 @@ IV. XRP Was a Security Throughout the Offering -205. +230. As noted, the Supreme Court made clear in its Howey decision of 1946 that the definition of whether an instrument is an investment contract and therefore a security is a “flexible rather than a static principle, one that is capable of adaptation to meet the countless and variable schemes devised by those who seek the use of the money of others on the promise of profits.†-206. +231. At all relevant times during the Offering, XRP was an investment contract and therefore a security subject to the registration requirements of the federal securities laws. -207. +232. Defendants understood and acknowledged in non-public communications that the principal reason for anyone to buy XRP was to speculate on it as an investment. - -34 - -Case 1:20-cv-10832 Document 4 Filed 12/22/20 Page 35 of 71 - -208. +233. For example, Ripple Agent-3 stated in an internal document called the “XRP @@ -1778,57 +2023,62 @@ you are holding xrp you should want [Ripple Labs] to retain xrp for business development.†Ripple acknowledged not only that XRP holders were speculating on Ripple’s ability to deploy XRP to develop its business, but also that Ripple’s interests aligned with other XRP holders’ interests. -209. -Similarly, on December 7, 2015, Ripple requested that the issuer of a fund created to +40 -generate investor exposure to XRP (through XRP Ripple sold to the fund), disclose the risk that -XRP could be deemed a security under the federal securities laws. Specifically, Ripple requested that -the following language be added to the risk disclosures for the fund: +Case 1:20-cv-10832-AT Document 46 Filed 02/18/21 Page 41 of 79 + +234. + +Similarly, on December 7, 2015, Ripple requested that the issuer of XRP Fund A + +(which would generate investor exposure to XRP through XRP Ripple sold to the fund), disclose +the risk that XRP could be deemed a security under the federal securities laws. Specifically, Ripple +requested that the following language be added to the risk disclosures for XRP Fund A: The Ripple ecosystem’s reliance on the efforts of Ripple Labs – the single largest holder of XRP – to promote and expand the ecosystem, creates greater risk that XRP might be deemed a security as compared to other virtual currencies and Ripple Labs might be deemed to be operating as an unregistered securities exchange, broker, or dealer under federal and State securities laws. -210. +235. Similarly, in its official application to the NYDFS for XRP II in 2016, Ripple acknowledged that buyers were “purchasing XRP for speculative purposes.†-211. +236. Later, in July 2019, a Ripple senior vice president emailed the CEO of the United States branch of a digital asset trading firm with which Ripple sought to make XRP available for trading. In his email, the Ripple executive explained: “The primary use case for XRP today is speculative and the exchanges . . . are the main enabler of this use case.†-212. +237. Sophisticated investors agreed. For example, a hedge fund, to which Ripple sold XRP, explained to the fund’s investors this economic reality in offering materials from March 2015: “The increase in XRP value is heavily dependent on the success of Ripple.†-213. +238. Consistent with its privately-stated understanding, Ripple publicly offered and sold XRP as an investment into a common enterprise that included Ripple’s promises to undertake - -35 - -Case 1:20-cv-10832 Document 4 Filed 12/22/20 Page 36 of 71 - significant entrepreneurial and managerial efforts, including to create a liquid market for XRP, which would in turn increase demand for XRP and therefore its price. -214. +239. Starting in at least 2013 and through the Offering, Defendants made statements promoting XRP as described in the preceding paragraph in a variety of publicly available media, including Twitter, YouTube, major financial news networks, industry conferences, the XRP Chat, an + +41 + +Case 1:20-cv-10832-AT Document 46 Filed 02/18/21 Page 42 of 79 + online discussion forum and an informational posting about Ripple that it hosted on its website (but since deleted) called “Ripple Forum†and “Ripple Wiki,†respectively, and the Markets Reports. -215. +240. In fact, throughout the Offering, Ripple held itself out as the primary source of @@ -1838,60 +2088,65 @@ misinformation†about Ripple’s alleged “dumping†of XRP and to address the “fear, uncertainty, and doubt†about investing in XRP spread by others. Ripple thus held itself out as the legitimate source of information essential for investors, inviting them to rely on what Ripple chose to disclose. -216. +241. Based on these representations, Ripple’s actions, and the economic reality, XRP investors in the Offering had a reasonable expectation of profiting from Ripple’s efforts to deploy investor funds to create a use for XRP and bring demand and value to their common enterprise. +242. + +At all relevant times, Garlinghouse and Larsen knew or recklessly disregarded that + +XRP investors had a reasonable expectation of profiting from Ripple’s efforts with respect to XRP. A. Ripple Led Investors to Reasonably Expect that Ripple’s and Its Agents’ Entrepreneurial and Managerial Efforts Would Drive the Success or Failure of Ripple’s XRP Projects -217. +243. Defendants repeatedly stated publicly that they would undertake significant efforts to develop and foster “uses†for XRP, so that banks, financial intermediaries, or other specialized -money transmitting businesses would want to buy it, including as alleged above in Section II. (The -identity of the “users†to whom it would position XRP varied over the years as Ripple explored -different strategies.) - -36 - -Case 1:20-cv-10832 Document 4 Filed 12/22/20 Page 37 of 71 - -218. +money transmitting businesses would want to buy it, including as alleged above in Sections II and +III. (The identity of the “users†to whom it would position XRP varied over the years as Ripple +explored different strategies.) +244. Defendants also persistently stated publicly that—partly to achieve the goal of widespread XRP trading—they would take steps to create, promote, and protect the market for trading in XRP, such as managing the manner in which Ripple bought and sold XRP, and by + +42 + +Case 1:20-cv-10832-AT Document 46 Filed 02/18/21 Page 43 of 79 + persuading digital asset trading platforms to permit investors to buy and sell XRP. These statements led reasonable investors to expect to profit from Ripple’s efforts on behalf of XRP. 1. Defendants Promised to Undertake Significant Efforts to Build Value for XRP -219. +245. From the outset of the Offering, Defendants publicly promised significant, meaningful entrepreneurial efforts with respect to XRP. -220. +246. In an April 14, 2014 interview published online, Larsen explained that Ripple was “helping to build in the Ripple protocol . . . the idea of an Internet-for-value exchange,†and that Ripple saw “this as a SWIFT 2.0,†referring to the established inter-bank payment network. -221. +247. -In approximately April 2014, Ripple created “The Ripple Protocol: A Deep Dive for +In approximately April 2014, Ripple created the 2014 Promotional Document, which -Financial Professionals†(the “2014 Promotional Documentâ€), which Ripple distributed publicly. -222. +Ripple distributed publicly. +248. In the 2014 Promotional Document, Ripple purported to examine the “Sources of @@ -1901,25 +2156,24 @@ unknown,†but predicted “increased speculative interest, which may have significant impacts on price,†if the Ripple network became more well-known or used, in which case Ripple concluded that it “expect[ed] the demand for XRP to be considerable.†-223. +249. -In the 2014 Promotional Document, Ripple held itself out the key party who would +In the 2014 Promotional Document, Ripple held itself out as the key party who -make these efforts with respect to XRP and the Ripple protocol, including by promising to +would make these efforts with respect to XRP and the Ripple protocol, including by promising to “distribute [certain XRP] to incent the participation of market makers, gateways and consumers to utilize the protocol,†and highlighting Ripple’s past “business development efforts.†Ripple also - -37 - -Case 1:20-cv-10832 Document 4 Filed 12/22/20 Page 38 of 71 - noted that it had recruited a “diverse set of talented individuals with experience in relevant technology and financial services companies†for these efforts and would enlist others to assist. -224. +250. Ripple repeated these types of promotional statements throughout the Offering. -225. +43 + +Case 1:20-cv-10832-AT Document 46 Filed 02/18/21 Page 44 of 79 + +251. On June 3, 2016, Cryptographer-1 explained in the XRP Chat, in response to the @@ -1927,7 +2181,7 @@ us, though it’s possible.†But, he continued, while “there are significant technical obstacles to using XRP as a bridge or vehicle currency[,] . . . [o]ur XRP strategy is based on promoting it as a bridging currency . . . through various strategies including paying traders an incentive.†-226. +252. On January 21, 2017, Cryptographer-1 represented in the XRP Chat that Ripple was @@ -1935,7 +2189,7 @@ “several strategies†to do so. Months later, on September 12, 2017, he posted on Reddit that Ripple had previously explained that it “will work to get XRP adopted for th[e] purpose†of serving as a “new intermediary asset†and noted “why that would be expected to create demand for XRP.†-227. +253. In an email to Ripple’s equity shareholders, advisors, and others on June 5, 2017, @@ -1955,25 +2209,25 @@ approximately 500 percent in the last 30 days and over 5,000 percent from the beginning of 2017! . . . In fact, factoring in the approx. $18 billion of XRP we own, Ripple is worth more than all but four US start-ups. - -38 - -Case 1:20-cv-10832 Document 4 Filed 12/22/20 Page 39 of 71 - -228. +254. In the same email, Garlinghouse reminded Ripple’s equity investors and advisors that Ripple remained “committed to making XRP the best digital asset for payments†and that XRP had “technical superiority compared to other digital assets.†-229. + +44 + +Case 1:20-cv-10832-AT Document 46 Filed 02/18/21 Page 45 of 79 + +255. Garlinghouse had made statements similar to these in an article posted on Ripple’s website on May 16, 2017. A few months later, in a December 7, 2017 post on its website, Ripple, confirming the formation of the XRP Escrow, once more reiterated Garlinghouse’s statements in the May 16, 2017 article and the June 5, 2017 email, described above. -230. +256. In a December 14, 2017 public interview, Garlinghouse explained Ripple’s market @@ -1981,7 +2235,7 @@ say, is XRP liquidity. Making sure . . . we are doing everything we can to make the XRP ecosystem successful on a liquidity basis. Priority three which admittedly is kind of a newer priority and something we’ll work on more in 2018, is investing in other use cases for the XRP Ledger.†-231. +257. In the Markets Report for the fourth quarter of 2017, Ripple stated that “it’s clear @@ -1989,40 +2243,40 @@ continues to seriously consider [XRP] as an alternate liquidity solution.†A Ripple executive similarly explained his view in a Yahoo! Finance interview on approximately March 15, 2018, that “the activities of the software company create value in . . . [XRP].†-232. +258. Also in the Markets Report for the fourth quarter of 2017, Ripple announced its upcoming intended efforts to “work towards the launch of institutional hedging instruments and custody solutions,†which “are important to institutional adoption [i.e., key forces in achieving liquidity and price increases] and thus are important components of our 2018 roadmap.†-233. +259. On September 11, 2017, Cryptographer-1 told public markets via a post on Reddit that, because “Ripple holds more than half the XRP in existence[,] . . . Ripple can justify spending $100 million dollars on something if it would be expected to increase the long term price of XRP by +a penny.†Then, on November 17, 2017, he posted on Reddit about why Ripple had an incentive to +continue these efforts and why it would continue these efforts: “[T]here is no rational reason why -39 +45 -Case 1:20-cv-10832 Document 4 Filed 12/22/20 Page 40 of 71 +Case 1:20-cv-10832-AT Document 46 Filed 02/18/21 Page 46 of 79 -a penny.†Then, on November 17, 2017, he posted on Reddit about why Ripple had an incentive to -continue these efforts and why it would continue these efforts: “[T]here is no rational reason why [Ripple] would not continue to execute [its] publicly announced strategy and do everything we can to maximize the price of XRP over at least the time it takes us to sell the XRP we have.†-234. +260. On January 17, 2018, Garlinghouse tweeted an article he said was “[a] good read on why fostering a healthy $XRP ecosystem is a top priority at @Ripple.†-235. +261. On February 17, 2020, Garlinghouse tied Ripple’s efforts to create “useâ€-driven demand for XRP to a potential for an increase in XRP price, in an interview on the floor of the New York Stock Exchange in Manhattan (the “NYSE Interviewâ€). -236. +262. In the NYSE Interview, Garlinghouse answered questions about the price of digital @@ -2037,12 +2291,12 @@ Defendants Promised to Undertake Significant Efforts to Develop and Maintain a Public Market for XRP Investors to Resell XRP -237. +263. Starting in at least 2014, Ripple also promised that it would undertake efforts to create, maintain, and protect secondary resale markets for XRP. -238. +264. For example, starting in 2014, Ripple stated on its website: “[W]e will engage in @@ -2050,19 +2304,19 @@ against other currencies.†Years later, in announcing the XRP Escrow, Ripple reminded investors that it “engaged in distribution strategies that we expect will result in a strengthening XRP exchange rate against other currencies,†touting its “proven [four-year] track record of doing just that.†-40 - -Case 1:20-cv-10832 Document 4 Filed 12/22/20 Page 41 of 71 - -239. +265. In a February 19, 2014 public interview, Larsen explained that one of Ripple’s “key roles is making sure that we distribute [XRP] as broadly in a way that adds as much utility and +46 + +Case 1:20-cv-10832-AT Document 46 Filed 02/18/21 Page 47 of 79 + liquidity as we possibly can.†He stated that he thought “our incentives are very well aligned . . . that for Ripple Labs to do well we have to do a very good job in protecting the value of XRP and the value of the network, and that really is the guiding principle here in our distribution of XRP.†-240. +266. In a May 16, 2017 article on Ripple’s website, Garlinghouse reminded investors that, @@ -2070,46 +2324,46 @@ goal in distributing XRP is to incentivize actions that build trust, utility and liquidity.†He concluded that, to incentivize financial institutions, payment providers, and banks to “use†XRP (though none had up to that point), Ripple “remain[ed] committed to increasing XRP liquidity.†-241. +267. In the Markets Report for the second quarter of 2019, Ripple promised to “focus institutional sales on markets where the on-exchange liquidity for XRP is insufficient to meet institutional demand,†which the report said was similar to what the company had done in 2017, purportedly leading to increased liquidity and “listings†on digital asset trading platforms in general. -242. +268. In the Markets Report for the second quarter of 2020, Ripple explained that, as part of its “responsible role in the [XRP] liquidity process,†it had begun purchasing XRP in the secondary market to ensure a “healthy, orderly XRP market.†-243. +269. Defendants engaged in many of these publicly-promised efforts with respect to XRP -markets, as alleged in Section III, above. +markets, as alleged in Sections II and III, above. 3. Ripple Touted the Ability of Its Team to Succeed in Its Promised Efforts -244. +270. In connection with the efforts Defendants promised the markets they would undertake, Ripple at times highlighted the experience, expertise, and abilities of the “team†it had assembled, which included Ripple employees, business partners, and other agents. - -41 - -Case 1:20-cv-10832 Document 4 Filed 12/22/20 Page 42 of 71 - -245. +271. In 2013, Ripple Agent-1 explained in the Ripple Forum that Ripple’s fundraising efforts through selling XRP “allows Ripple Labs to have a spectacularly skilled team to develop and promote the Ripple protocol and network.†-246. + +47 + +Case 1:20-cv-10832-AT Document 46 Filed 02/18/21 Page 48 of 79 + +272. In a Reddit post in 2017, Cryptographer-1 was asked to explain if there was a risk @@ -2121,13 +2375,13 @@ Ripple Publicly Touted the Efforts That It Did Actually Undertake -247. +273. During the Offering, not only did Ripple promise efforts that could lead to the increase in value of XRP, it actually made and touted extensive entrepreneurial and managerial efforts—made with proceeds from the Offering—to the market. -248. +274. In its 2016 “Year In Review†summary, posted on its website on December 28, @@ -2137,32 +2391,32 @@ had not sold a single XRP to any “user,†Ripple commented that “[g]ood news for XRP kept coming later in the spring†with the announcement of a partnership with a facility to trade in XRP derivatives. -249. +275. In the first Markets Report, published on January 24, 2017, Ripple touted its announcement of XRP investors’ ability to buy and sell XRP on a new digital asset trading platform as “part of a continued effort to expand the XRP ecosystem.†-250. +276. On February 15, 2017, Ripple Agent-2 tweeted a link to an article, posted on a digital asset discussion blog, about Ripple’s efforts to enlist companies to assist in its managerial efforts as +to XRP. The article discussed Ripple’s efforts to select a partner to help it build “functionality for +XRP†and directed readers to Ripple’s website on “How to Buy XRP.†-42 +48 -Case 1:20-cv-10832 Document 4 Filed 12/22/20 Page 43 of 71 +Case 1:20-cv-10832-AT Document 46 Filed 02/18/21 Page 49 of 79 -to XRP. The article discussed Ripple’s efforts to select a partner to help it build “functionality for -XRP†and directed readers to Ripple’s website on “How to Buy XRP.†-251. +277. As alleged above in Sections III and IV.A.1, Ripple and Garlinghouse made many statements in connection with the announcement of the XRP Escrow, reminding investors that Ripple had been a good “steward†of XRP, purportedly based on the ways Ripple had chosen to make its own market sales of XRP. -252. +278. In an interview on Bloomberg News Network (“Bloomberg Newsâ€) in @@ -2176,7 +2430,7 @@ really reduce the friction, and we’re talking about a multi-trillion dollar problem . . . yes, there’s going to be demand for that, when you have fixed supply . . . and you see increase in demand, prices go up. -253. +279. In a CNBC interview on March 7, 2018, Garlinghouse reminded investors that @@ -2184,7 +2438,7 @@ own a lot of XRP.†Thus, he continued, Ripple had “invested in venture funds . . . in hedge funds . . . in companies, [and] . . . partnered with payment providers [and] . . . market makers, in order to make sure that XRP is the most useful asset out there for solving a cross border payment problem.†-254. +280. On April 11, 2018, Ripple tweeted from the handle @Ripple that it “had invested @@ -2192,11 +2446,12 @@ use cases beyond payments.†Ripple Agent-3 similarly tweeted: “Ripple’s $25 million investment in @blockchaincap’s new fund is the first and not the last contribution to ventures that further develop the #blockchain and $XRP ecosystems.†-43 -Case 1:20-cv-10832 Document 4 Filed 12/22/20 Page 44 of 71 +49 -255. +Case 1:20-cv-10832-AT Document 46 Filed 02/18/21 Page 50 of 79 + +281. At various times, Ripple publicly touted that it was making certain of the XRP @@ -2207,7 +2462,7 @@ Economic Reality Dictates that XRP Purchasers Have No Choice But to Rely on Ripple’s Efforts for the Success or Failure of Their Investment -256. +282. Economic reality has also led reasonable investors to expect that Ripple and its @@ -2215,25 +2470,26 @@ accordingly understanding that Ripple has the economic incentive and capacity to undertake efforts to promote XRP and the XRP Ledger, which would serve Ripple’s economic interest and that of all XRP owners equally. -257. +283. -Indeed, the XRP market capitalization as of last week (approximately $58 billion) and +Indeed, the XRP market capitalization as of December 2020 (approximately $58 -the value of Ripple’s XRP holdings (approximately $28 billion) each far exceed the value of the one -product—ODL—that “uses†XRP (which “use†is not market-driven, but subsidized by Ripple). -258. +billion) and the value of Ripple’s XRP then holdings (approximately $28 billion) each far exceeded +the value of the one product—ODL—that “uses†XRP (which “use†is not market-driven, but +subsidized by Ripple). +284. The economic reality is that reasonable investors are speculating that Ripple has the incentive and potential to create demand for XRP. XRP investors are betting that Ripple may yet solve Garlinghouse’s “trillion-dollar problem,†and they will profit as a result. -259. +285. In contrast to Ripple, investors in XRP cannot take most or any of the steps that Ripple has taken to grow the XRP ecosystem and increase demand for XRP. Most, if not all, XRP investors simply lack the technical expertise and the resources to do so. -260. +286. XRP investors are not in any position to, for example, undertake various, complex, @@ -2241,25 +2497,24 @@ protect XRP’s price, volume, and liquidity—as Ripple has done in a purported attempt to foster adoption of XRP. Nor are XRP investors in any position to increase significantly “demand†or “value†for XRP by developing a “use†for the token through entrepreneurial efforts—at least not +50 -44 - -Case 1:20-cv-10832 Document 4 Filed 12/22/20 Page 45 of 71 +Case 1:20-cv-10832-AT Document 46 Filed 02/18/21 Page 51 of 79 without Ripple’s support. In other words, not only are Ripple’s touted efforts with respect to XRP significant, they are essential to the success or failure of the enterprise. -261. +287. Investors in XRP do not exercise any control or authority over how Offering proceeds have been or will be spent. Ripple possesses sole discretion to decide how to do so. -262. +288. Because certain Ripple executives publicize that they hold XRP, and some (including Garlinghouse) state that they hold it as an investment, it is reasonable for a holder of XRP to expect these individuals to undertake efforts to increase the value and price of XRP. -263. +289. Defendants’ statements and actions and the economic reality of Ripple’s relationship @@ -2270,96 +2525,97 @@ Purchasers of XRP Invested into a Common Enterprise -264. +290. Investors who purchased XRP in the Offering invested into a common enterprise with other XRP purchasers, as well as with Ripple. -265. +291. Because XRP is fungible, the fortunes of XRP purchasers were and are tied to one another, and each depend on the success of Ripple’s XRP Strategy. In other words, Ripple’s success or failure in propelling trading of XRP drives demand for XRP, which will dictate investors’ profits (recognized in increased prices at which they could sell XRP) or losses. -266. +292. XRP investors stand to profit equally if XRP’s popularity and price increase, and no investor will be entitled to a higher proportion of price increases. In other words, the price of XRP rises and falls for XRP investors together and equally for all investors. -267. +293. Moreover, Ripple pooled the funds it raised in the Offering and used them to fund its operations, including to finance building out potential “use†cases for XRP, paying others to assist it in developing a “use†case, constructing the digital platform it promoted, and compensating -45 +51 -Case 1:20-cv-10832 Document 4 Filed 12/22/20 Page 46 of 71 +Case 1:20-cv-10832-AT Document 46 Filed 02/18/21 Page 52 of 79 executives recruited for these purposes. Ripple did not segregate or separately manage proceeds -from different XRP purchasers in the Offering. The nature of XRP itself made it the common -thread among Ripple, its management, and all other XRP holders. -268. +from different XRP purchasers in the Offering, which Garlinghouse and Larsen knew or recklessly +disregarded at all relevant times. The nature of XRP itself made it the common thread among +Ripple, its management, and all other XRP holders. +294. Defendants recognized and repeatedly emphasized these common interests to prospective investors, including by explaining to the market that Ripple used proceeds from XRP sales to fund its operations and that Ripple wanted XRP to succeed. -269. +295. For example, from the outset of Ripple’s operations, Ripple Agent-1 and Cryptographer-1 made publicly clear that Ripple would sell XRP to raise funds for one common enterprise: to fund its operations, as described below. -270. +296. On March 10, 2013, Cryptographer-1 explained in the Ripple Forum on Ripple’s website that Ripple’s “source of revenue is the sale of XRP.†-271. +297. A few months later, on August 28, 2013, Ripple Agent-1 echoed that sentiment, stating that Ripple “wholesales XRP to fund operations.†-272. +298. On September 2, 2013, Ripple Agent-1 again noted on the Ripple Forum that Ripple “is funded by investments and the sale of XRP.†-273. +299. Similarly, the next year, in its 2014 Promotional Document, Ripple explained its “plans to retain 25% of all XRP issued to fund operations (and hopefully turn a profit).†-274. +300. This public disclosure echoed Larsen’s explanation, in an online interview dated April 14, 2014, that Ripple was “keeping 25% of . . . XRP . . . to cover the bills.†When asked about Ripple’s business model, Larsen reminded readers that Ripple was “keeping 25% of those XRP, and using the rest of it to incent market makers, gateways, consumers to come onto the protocol.†-275. -From at least 2014 through at least 2017, Ripple made a similar representation in the +52 -Ripple Wiki: “Ripple Labs sells XRP to fund its operations and promote the network. This allows -Ripple Labs to have a spectacularly skilled team to develope [sic] and promote the Ripple protocol.†+Case 1:20-cv-10832-AT Document 46 Filed 02/18/21 Page 53 of 79 -46 +301. -Case 1:20-cv-10832 Document 4 Filed 12/22/20 Page 47 of 71 +From at least 2014 through at least 2017, Ripple made a similar representation in the -276. +Ripple Wiki: “Ripple Labs sells XRP to fund its operations and promote the network. This allows +Ripple Labs to have a spectacularly skilled team to develope [sic] and promote the Ripple protocol.†+302. Ripple also made clear that the common interest was not just any interest, but a specific interest in XRP’s price increasing, as Ripple’s (significant) XRP holdings were essentially its only asset. For example, in his Ripple Forum post from September 2013, Ripple Agent-1 stated that Ripple’s “business model is to hold XRP in the hope that it will have value.†-277. +303. At times, Ripple used the terms “value†and “price†interchangeably. In one early @@ -2370,55 +2626,55 @@ or something you care about as a primary driver of business.†Garlinghouse said: “[A] healthy $XRP market and healthy $XRP ecosystem is CRITICALLY important to me. And it is indeed a primary driver. Long-term price will reflect success driving institutional use of $XRP.†-278. +304. In 2014, the Promotional Document explained Ripple’s view that, “as demand for XRP grows, the value of XRP should appreciate†and that, therefore, “Ripple Labs believes that its incentives are aligned with those of protocol’s users.†-279. +305. Cryptographer-1 has repeatedly and publicly expressed that Ripple’s incentives are aligned with other XRP holders’—specifically, as to increasing Ripple’s price—because Ripple “holds a huge pile of XRP,†including in a statement he made on XRP Chat on May 25, 2017. -280. +306. Garlinghouse in particular frequently encouraged investors to view their economic interests as aligned with Ripple’s. -281. + +53 + +Case 1:20-cv-10832-AT Document 46 Filed 02/18/21 Page 54 of 79 + +307. As alleged above, on January 17, 2018, Garlinghouse tweeted an article discussing Ripple’s remaining supply of XRP. Garlinghouse’s tweet noted that Ripple was not selling all of its remaining XRP supply, and that the article was “[a] good read on why fostering a healthy $XRP ecosystem is a top priority at @Ripple.†- -47 - -Case 1:20-cv-10832 Document 4 Filed 12/22/20 Page 48 of 71 - -282. +308. The following month, in an interview on February 11, 2018, Garlinghouse acknowledged: “Ripple the company, as the owner of 61% of the tokens today, is the most interested party in the success of the XRP ecosystem.†-283. +309. Similarly, on March 7, 2018 in a CNBC interview, Garlinghouse stated: “There’s no party more interested in the success of the XRP ecosystem than Ripple. We want that to be massively successful because we own a lot of XRP.†-284. +310. Garlinghouse publicly reiterated sentiments similar to these on March 7, 2018 in an interview with the Financial Times and again on August 13, 2020 in an interview with a major financial publication, where he said: “We are a capitalist, we own a lot of XRP. So do I care about the overall XRP market? 100 per cent.†-285. +311. On October 8, 2019 in a speech at the Economic Club of New York in Manhattan @@ -2426,29 +2682,29 @@ XRP. So clearly we’re very interested in the health and success of that [XRP] ecosystem.†Asked about Ripple’s “revenue model,†he explained that while Ripple has software it sells, “it owns a lot of this digital asset†and that “[a]nything we do that is good for that digital asset is good for us.†-286. +312. Currently, Ripple continues to make clear on its website that it holds at least 54 billion XRP, making it by far the largest single holder of the asset. -287. +313. The Legal Memos focused on this very fact—the existence of an identifiable actor who held itself out as responsible for making efforts with respect to XRP—in distinguishing XRP from bitcoin for purposes of the federal securities laws. The Legal Memos noted that, unlike with + +54 + +Case 1:20-cv-10832-AT Document 46 Filed 02/18/21 Page 55 of 79 + bitcoin, there was “a specific entity,†Ripple, “which is responsible for the distribution of [XRP] and the promotion and marketing functions of the Ripple Network.†-288. +314. At least one Ripple equity shareholder (“Equity Investor Aâ€), a sophisticated investor, understood this distinction. In an internal email on April 26, 2018, an Equity Investor A - -48 - -Case 1:20-cv-10832 Document 4 Filed 12/22/20 Page 49 of 71 - employee wondered whether the XRP Ledger was subject to a “51% attack†(a threat to the status of the digital ledger), as he perceived the bitcoin blockchain to be. He concluded that it was “more of a longer-term question given the current incentives of the stake holders,†meaning that Ripple @@ -2459,7 +2715,7 @@ Ripple Led Investors to Reasonably Expect a Profit from Their Investment Derived from Defendants’ Efforts -289. +315. Ripple also led investors to reasonably expect that they could reap a profit from their @@ -2468,7 +2724,7 @@ XRP; assuring investors that Ripple would take steps to protect the market for XRP, including by fostering a readily available XRP trading market; highlighting XRP price increases and at times tying them to Ripple’s efforts; and selling XRP to certain institutional investors at discounted prices. -290. +316. Ripple made many of these statements in the Markets Reports, which typically @@ -2479,31 +2735,31 @@ Defendants’ Publicly Stated Goal Was to Increase “Demand†for XRP Through Their Entrepreneurial and Managerial Efforts -291. +317. Throughout the Offering, as alleged in Section IV.A.1, above, Defendants repeatedly told investors that Ripple’s XRP-related efforts were meant to spur “demand†for XRP. Ripple at times even explicitly tied the hope for an increase in demand to what any reasonable investor would + +55 + +Case 1:20-cv-10832-AT Document 46 Filed 02/18/21 Page 56 of 79 + understand an increase in demand to entail: an increase in XRP’s market price. -292. +318. Ripple made other such statements encouraging investors to expect to profit from Ripple’s efforts to create institutional demand for XRP. For example, in response to questions about XRP’s declining market price during a March 14, 2018 interview, Garlinghouse explained that, - -49 - -Case 1:20-cv-10832 Document 4 Filed 12/22/20 Page 50 of 71 - if Ripple was “successful in building out the project of xCurrent and expanding the number of users around xRapid, the price of XRP will take care of itself over a 3 to 5 year period.†2. Ripple and Garlinghouse Assured Investors Ripple Would Protect the Trading Markets for XRP -293. +319. Ripple executives confirmed in internal emails that one of Ripple’s goals in @@ -2511,7 +2767,7 @@ Markets Update†to certain Ripple executives, Ripple Agent-2 noted that “XRP activity in the last few days has been impressive, to say the least,†and that this activity “seems to be driven by speculation around the lockupâ€; and highlighted the 50% “rall[y]†in XRP’s price after Ripple Agent2 publicly mentioned the possibility of the XRP Escrow for the first time. -294. +320. Ripple sought to assure investors that they could trust Ripple to protect the XRP @@ -2525,34 +2781,34 @@ Ripple and Garlinghouse Touted Investors’ Ability to Easily Buy and Sell XRP -295. +321. Related to Ripple’s touting of its efforts to protect the trading markets for XRP, Ripple touted the ability of investors to buy and sell XRP on digital asset trading platforms (none of which had anything to do with “using†XRP in any way other than as a speculative vehicle). -296. -Ripple undertook extensive efforts—starting in at least late 2015—to persuade digital +56 -asset trading companies to permit investors to buy and sell XRP on their platforms, especially those -that would make XRP tradable against the USD, as alleged in Section III.B. +Case 1:20-cv-10832-AT Document 46 Filed 02/18/21 Page 57 of 79 -50 +322. -Case 1:20-cv-10832 Document 4 Filed 12/22/20 Page 51 of 71 +Ripple undertook extensive efforts—starting in at least late 2015—to persuade digital -297. +asset trading companies to permit investors to buy and sell XRP on their platforms, especially those +that would make XRP tradable against the USD, as alleged in Section II.E.5 above. +323. -On May 18, 2017, Ripple Agent-3 tweeted: “Kraken [a digital asset trading platform] +On May 18, 2017, Ripple Agent-3 tweeted that “[Platform B] [i]ntroduces New Fiat -Introduces New Fiat Pairs for XRP Trading! USD, JPY, CAD, EUR @Ripple.†-298. +Pairs for XRP Trading! USD, JPY, CAD, EUR @Ripple.†+324. In the Markets Report for the first quarter of 2017 Ripple touted another platform’s “successful launch of XRP for USD, EUR, and BTC currency pairs†as a “bright spot†for XRP. -299. +325. In a follow-up to his June 5, 2017 email described above, Garlinghouse @@ -2562,7 +2818,7 @@ Garlinghouse responded, among other things, that “for XRP more specifically,†Ripple “announcements about new exchanges listing XRP . . . continues to create tailwinds,†and that Ripple would continue making these efforts, “which should hopefully drive some tailwinds.†-300. +326. On December 14, 2017, Garlinghouse stated on Ripple’s YouTube Channel: “Today @@ -2570,60 +2826,60 @@ exchanges that are reputable and regulated in those appropriate markets. So it is a very high priority for us to be listed more broadly but you know we’re going to continue working on that with partners around the globe.†-301. +327. Ripple itself publicly noted the importance of XRP being traded on digital asset trading platforms. In articles published on its website on December 21, 2017 and January 18, 2018, Ripple noted: “[I]t’s a top priority for Ripple to have XRP listed on top digital asset exchanges. . . . Ripple has dedicated resources to the initiatives so you can expect ongoing progress.†-302. +328. That day, Ripple also tweeted about “XRP Available on 50+ Exchanges.†+57 + +Case 1:20-cv-10832-AT Document 46 Filed 02/18/21 Page 58 of 79 + 4. Ripple and Garlinghouse Touted XRP as an Investment, Including by Highlighting XRP Price Increases -303. +329. Ripple and Garlinghouse also encouraged reasonable investors to view the purchase of XRP as something from which they could profit by persistently touting increases in XRP’s price. -51 - -Case 1:20-cv-10832 Document 4 Filed 12/22/20 Page 52 of 71 - -304. +330. In a January 18, 2017 email, Garlinghouse told an XRP investor that “XRP had a good year in 2016—with significant increases in price and volume—which in turn has increased investor interest.†-305. +331. On March 24, 2017, Ripple tweeted: “The price of #XRP continues to surge showing that people are looking for #bitcoin alternatives.†-306. +332. On May 3, 2017, Ripple tweeted: “#Ripple adoption is sparking interest in XRP ‘which has had an impressive rally in the last two months’ via @Nasdaq.†-307. +333. Two days later, on May 5, 2017, Cryptographer-1 tweeted, along with a picture of champagne, that he “finally got to drink the champagne [he was] reserving for #XRP at $0.10.†-308. +334. On June 29, 2017, Ripple tweeted a clip of an interview Garlinghouse gave on CNBC with the caption: “#XRP – up 4000% this year – has shown the market favors a real use case for #digitalassets.†Garlinghouse also predicted that “digital assets broadly are in a position to be more useful than gold as a value transfer†and described XRP as “solving a real-world use case.†-309. +335. In the Markets Report for the third quarter of 2017, published October 19, 2017, @@ -2631,43 +2887,42 @@ meaningful spike in XRP†and that this rise in price lacked any “corresponding rally in [bitcoin] and [the digital asset referred to as ETH],†noting that XRP’s price was “at times overwhelmingly independent†from that of bitcoin and ETH. -310. +336. On December 7, 2017, when the XRP Escrow began, Ripple tweeted: “55B $XRP is now in escrow. Interested in what this means for $XRP markets?†Garlinghouse similarly tweeted: “Boom! 55B $XRP now in escrow. Good for supply predictability and trusted, healthy $XRP +58 + +Case 1:20-cv-10832-AT Document 46 Filed 02/18/21 Page 59 of 79 + markets. Glad to finally let this #cryptokitty out of the bag!†-311. +337. A week later, on December 12, 2017, Garlinghouse retweeted Institutional Investor C’s tweet: “Wow, XRP at all time high! Forget bitcoin, we’re all in on XRP!†- -52 - -Case 1:20-cv-10832 Document 4 Filed 12/22/20 Page 53 of 71 - -312. +338. Later that month, on December 22, 2017, Garlinghouse tweeted an article discussing how “Ripple Soars at Year End,†with the caption “I’ll let the headline speak for itself. $xrp.†-313. +339. Ripple did not limit its touting of XRP purchases as a potential means for investors to profit only to increases in XRP prices in the abstract. Frequently, Ripple explicitly tied actual or potential XRP investment returns to Ripple’s completed or upcoming efforts—both with respect to developing demand for XRP and to protecting the XRP markets themselves. -314. +340. In connection with a significant rise in the price of XRP on March 23, 2017, Ripple explained in the Markets Report for the first quarter of 2017 that “key [Ripple] developments may have had an impact[,]†including statements by Ripple “about its commitment to XRP and the Ripple Consensus Ledger (RCL) as part of its long-term strategy.†-315. +341. In the Markets Report for the second quarter of 2017, Ripple noted that various @@ -2676,7 +2931,7 @@ in the following quarter. Ripple also stated that “[t]here were a number of significant announcements and events which clearly contributed to XRP’s incredible second quarter,†reflected by a “stunning QoQ [price] increase of 1[,]159%†and “YTD [year to date] growth of 3[,]977%.†-316. +342. Garlinghouse himself was a particularly persistent spokesperson for Ripple’s efforts @@ -2684,19 +2939,19 @@ millions of XRP, Garlinghouse frequently told investors that he was invested in XRP, and that he was bullish on the investment. Throughout the Offering and as XRP’s price fluctuated, he also encouraged investors to be patient and look at the price of XRP on a longer time horizon. -317. -For example, in the June 5, 2017 email described above, Garlinghouse noted that +59 -Ripple’s efforts to develop uses for XRP and the XRP Escrow had “translated into significant +Case 1:20-cv-10832-AT Document 46 Filed 02/18/21 Page 60 of 79 -53 +343. -Case 1:20-cv-10832 Document 4 Filed 12/22/20 Page 54 of 71 +For example, in the June 5, 2017 email described above, Garlinghouse noted that +Ripple’s efforts to develop uses for XRP and the XRP Escrow had “translated into significant improvements in both the liquidity (trading volume) and price of XRP,†which was “up approximately 500 percent in the last 30 days and over 5,000 percent from the beginning of 2017!†-318. +344. In a follow-up to that email, an individual asked Garlinghouse to explain “what @@ -2705,12 +2960,12 @@ . . . as Ripple has done well in announcing customers – that has driven market interest in buying XRP as a speculative investment.†He then gave examples of such Ripple announcements that were “catalysts to this market rally†or that “furthered the rally.†-319. +345. Later, in a September 11, 2017 interview on CNBC, Garlinghouse noted Ripple’s supposed success as a company and stated: “I think that’s increased the value of XRP.†-320. +346. The following month, during an October 18, 2017, question-and-answer session at a @@ -2720,7 +2975,7 @@ stated, in response to a question about XRP’s price, that he had “no qualms saying definitively if we continue to drive the success we’re driving, we’re going to drive a massive amount of demand for XRP, because we’re solving a multi-trillion dollar problem.†-321. +347. Similarly, in a November 2017 interview with CNBC, Garlinghouse noted: “On a @@ -2728,14 +2983,14 @@ XRP.†He repeated the sentiment the following month, in a December 14, 2017 interview with Bloomberg News. When asked if he invested in XRP, he said: “I’m long XRP, I’m very, very long XRP as a percentage of my personal . . . balance sheet†(though he had already sold at least 67 -million XRP). Later, he reiterated, “I remain very, very, very long XRP, . . . I’m on the HODL -side,†referring to a digital asset industry term meaning to be long on an asset for long-term gains. -54 +60 -Case 1:20-cv-10832 Document 4 Filed 12/22/20 Page 55 of 71 +Case 1:20-cv-10832-AT Document 46 Filed 02/18/21 Page 61 of 79 -322. +million XRP). Later, he reiterated, “I remain very, very, very long XRP, . . . I’m on the HODL +side,†referring to a digital asset industry term meaning to be long on an asset for long-term gains. +348. In a March 12, 2018 interview with Bloomberg News, Garlinghouse, noting the @@ -2745,7 +3000,7 @@ trillions of dollars, then there is a lot of opportunity to create value in XRP.†Garlinghouse also speculated in the December 14, 2017 interview that, if a company created “utility†for a digital asset like XRP, “then there will be demand for the tokens, [and] the price of the tokens will go up.†-323. +349. In the NYSE Interview, when the interviewer asked, “[s]o, XRP, is that a good @@ -2756,70 +3011,75 @@ Ripple’s Privately-Stated Goal Was to Increase Speculation on the Price of XRP -324. +350. As these public statements show, speculative investment in XRP was precisely what Ripple wanted and promoted—it needed speculative investment for its own stated strategy to be successful and to increase the value of and monetize its XRP holdings. -325. +351. Ripple explicitly stated these goals internally, including in documents describing one of the reasons to establish the XRP Escrow as securing speculative liquidity, with the hopes that it would lead to “immediate increase in volume and price appreciation.†-326. +352. Ripple Agent-3’s March 31, 2017 “Q2 [second quarter] XRP Plan Update†email to Garlinghouse acknowledged that Ripple was taking most of the steps described above to encourage speculative investment in XRP. He also told Garlinghouse that “[t]he goal [was] to drive XRP speculative trading volume†and that the “tactics†Ripple planned to undertake to do so included -“escrow announcement,†“[s]ign[ing] exchanges,†putting out information into the market to “tak[e] -on skeptics,†and announcing business deals to “[s]park speculation about potential partnerships.†-55 +61 -Case 1:20-cv-10832 Document 4 Filed 12/22/20 Page 56 of 71 +Case 1:20-cv-10832-AT Document 46 Filed 02/18/21 Page 62 of 79 +“escrow announcement,†“[s]ign[ing] exchanges,†putting out information into the market to “tak[e] +on skeptics,†and announcing business deals to “[s]park speculation about potential partnerships.†6. XRP’s Characteristics—as Constructed by Ripple—Reasonably Fueled Purchasers’ Expectations of Profiting -327. +353. The very nature of XRP in the market—as constructed and promoted by Ripple— compels reasonable XRP purchasers to view XRP as an investment. -328. +354. Except for certain trading volume limitations, XRP is freely transferable or tradeable without restrictions the moment it is purchased, and it was offered broadly and widely to all potential purchasers, not just those who might be reasonably expected to “use†XRP. -329. +355. Ripple made certain Institutional Sales of XRP at discounted priced, leading purchasers to reasonably expect to profit on their resale of XRP into the public markets. -330. +356. Moreover, the value of Ripple’s current holdings of XRP (approximately $28 billion -as of last week) and of XRP’s total market capitalization of approximately $58 billion—given that, as -Garlinghouse has publicly stated, Ripple “would not be profitable or cash flow positive†without -selling XRP—demonstrates that XRP investors are speculating that Ripple will achieve its stated -goals with respect to XRP. In other words, market participants, when they buy XRP, are speculating -that Ripple’s economic incentives and its promises with respect to XRP will lead it to successfully -solve the “trillion-dollar problem†that will increase demand for XRP. -331. +as of December 2020) and of XRP’s then total market capitalization of approximately $58 billion— +given that, as Garlinghouse has publicly stated, Ripple “would not be profitable or cash flow +positive†without selling XRP—demonstrates that XRP investors are speculating that Ripple will +achieve its stated goals with respect to XRP. In other words, market participants, when they buy +XRP, are speculating that Ripple’s economic incentives and its promises with respect to XRP will +lead it to successfully solve the “trillion-dollar problem†that will increase demand for XRP. +357. As Garlinghouse summed it up in a December 29, 2017 interview with Bloomberg News, XRP’s current market value and Ripple’s holdings of XRP “gives [them] a huge strategic asset to go invest in and accelerate the vision we see for an internet of value. . . . For me this is all . . . about an opportunity to participate and accelerate a vision we’ve had for some time.†+ +62 + +Case 1:20-cv-10832-AT Document 46 Filed 02/18/21 Page 63 of 79 + V. In the Offering, Ripple Did Not Sell XRP for “Use†or as “Currency†@@ -2828,23 +3088,18 @@ No Significant Non-Investment “Use†for XRP Exists, and Ripple Did Not Sell XRP in the Offering for “Use†-332. +358. The first potential use that Defendants touted for XRP—to serve as a “universal digital asset†and/or for banks to transfer money—never materialized. - -56 - -Case 1:20-cv-10832 Document 4 Filed 12/22/20 Page 57 of 71 - -333. +359. Not until approximately mid-2018 did Ripple first begin earnestly testing ODL—to date its only product that permits XRP use for any purpose. The potential “users†of ODL that Ripple is targeting are money transmitters. -334. +360. ODL involves a transaction in which a money transmitter in a sender’s jurisdiction @@ -2852,128 +3107,133 @@ XRP into the fiat currency of that locale. Typically, instead of holding XRP directly, money transmitters who may use ODL would rely on market makers in the sender’s and recipient’s jurisdictions to trade in and out of XRP in about ninety seconds or less. -335. +361. ODL is an enterprise-grade software product intended for managing a financial institution’s daily and long-term treasury operations—it is not intended for individual use. -336. +362. On June 21, 2018, Garlinghouse explained in a public speech that nobody was using XRP to effect cross-border transactions as of that date. Instead, he said that Ripple “expect[ed] this year for at least one bank to use XRP in their payment flows, to use xRapid [ODL].†-337. +363. Ripple did not commercially launch ODL until October 2018. -338. +364. Since its launch, ODL has gained very little traction, in part due to certain costs of using the platform. From October 2018 through July 26, 2020, only fifteen money transmitters (none of which are banks) signed on to potentially use ODL, and ODL transactions comprised no more than 1.6% of XRP’s trading volume during any one quarter (and often substantially less). -339. +365. Much of the onboarding onto ODL was not organic or market-driven. Rather, it was subsidized by Ripple. Though Ripple touts ODL as a cheaper alternative to traditional payment +63 + +Case 1:20-cv-10832-AT Document 46 Filed 02/18/21 Page 64 of 79 + rails, at least one money transmitter (the “Money Transmitterâ€) found it to be much more expensive and therefore not a product it wished to use without significant compensation from Ripple. -340. +366. Between early 2019 and July 2020, the “Money Transmitter†conducted the overwhelming majority of XRP trading volume in connection with ODL. Ripple had to pay the - -57 - -Case 1:20-cv-10832 Document 4 Filed 12/22/20 Page 58 of 71 - Money Transmitter significant financial compensation—often paid in XRP—in exchange for the -Money Transmitter’s agreement to help Ripple increase volume on ODL.4 -341. +Money Transmitter’s agreement to help Ripple increase volume on ODL. 4 +367. Specifically, from 2019 through June 2020, Ripple paid the Money Transmitter 200 million XRP, which the Money Transmitter immediately monetized by selling XRP into the public market, typically on the very days it received XRP from Ripple. The Money Transmitter publicly disclosed earning over $52 million in fees and incentives from Ripple through September 2020. -342. +368. The Money Transmitter became yet another conduit for Ripple’s unregistered XRP sales into the market, with Ripple receiving the added benefit that it could tout its inorganic XRP “use†and trading volume for XRP. The Money Transmitter has served that principal purpose for Ripple in exchange for significant financial compensation. -343. +369. Ripple and Garlinghouse did not disclose to XRP investors or the public the full extent of incentives that Ripple provided to the Money Transmitter in return for its assistance in increasing XRP trading volume. -344. +370. For example, in a September 12, 2019 interview on CNN, Garlinghouse refuted speculation that Ripple was manufacturing demand for ODL and claimed: “When [the Money Transmitter] is moving money from U.S. dollar to Mexican peso, they’re buying [XRP] at market. There’s no special sweetheart deal there.†While the Money Transmitter was buying XRP in the -market at current market prices (not from Ripple), Garlinghouse did not disclose that Ripple was -paying the Money Transmitter significant financial incentives to do so. -345. - -Even after ODL’s launch, Ripple publicly acknowledged in July 2019 that XRP has - -no significant use beyond investment, as alleged in paragraph 211 above. - -4 In June and November 2019, Ripple also made equity investments in the Money Transmitter totaling $50 million in exchange for its stock and a seat on its Board of Directors. Ripple currently holds approximately 9% of the Money Transmitter’s publicly-traded stock. -58 -Case 1:20-cv-10832 Document 4 Filed 12/22/20 Page 59 of 71 +4 -346. +64 + +Case 1:20-cv-10832-AT Document 46 Filed 02/18/21 Page 65 of 79 + +market at current market prices (not from Ripple), Garlinghouse did not disclose that Ripple was +paying the Money Transmitter significant financial incentives to do so. +371. + +Even after ODL’s launch, Ripple publicly acknowledged in July 2019 that XRP has + +no significant use beyond investment, as alleged in paragraph 236 above. +372. Though it had started selling XRP to public investors in 2013, Ripple announced, for the first time in its history in 2020, that it began selling XRP directly to money transmitters specifically for effecting money transfers through ODL. -347. +373. From May through mid-August 2020, Ripple sold XRP to two other money transmitters for use in ODL for total proceeds of approximately $70 million dollars. In order to effectuate the ODL transaction, the money transmitters then immediately resold those XRP into the public markets, to individuals and entities that had no “use†for XRP. -348. +374. Ripple earns only de minimis fees from the ODL platform. Instead, Garlinghouse views “the value creation of xRapid [ODL] as driving the liquidity in the XRP markets.†-349. +375. Throughout the Offering, Defendants did not target sales of XRP to people to whom XRP’s undeveloped, potential future “uses†could reasonably be expected to appeal. For example, Defendants did not market XRP in the Offering to entities that might “use†XRP as a bridge currency or even to individuals who had a need for an alternative to fiat currency. -350. +376. Throughout the Offering, Defendants did not restrict sales of XRP to purchasers who would actually “use†XRP as a medium to execute cross-border transactions. Defendants offered, sold, and distributed XRP to investors worldwide, in any quantities and at various prices. -351. +377. Throughout the Offering, Defendants offered, sold, and distributed XRP in amounts that far exceeded any potential “use†of XRP as a medium to transfer value. -352. + +65 + +Case 1:20-cv-10832-AT Document 46 Filed 02/18/21 Page 66 of 79 + +378. Defendants did not restrict the XRP they sold to money transmitters for use in ODL @@ -2983,66 +3243,61 @@ XRP Are Not “Currency†Under the Federal Securities Laws -353. +379. In May 2015, Ripple and XRP II agreed (i) to settle charges brought by the United States Department of Justice and FinCEN for failing to register as a “Money Services Business†- -59 - -Case 1:20-cv-10832 Document 4 Filed 12/22/20 Page 60 of 71 - under the Bank Secrecy Act and (ii) to comply with other regulatory requirements with respect to Ripple’s XRP sales, which the settlement called “virtual currency.†-354. +380. Consequently, Ripple has at times suggested that XRP are not securities, but instead exempt from the Securities Act altogether as “currencies.†-355. +381. -XRP is not “currency†under the federal securities laws.5 +XRP is not “currency†under the federal securities laws. 5 -356. +382. XRP has not been designated as legal tender in any jurisdiction. XRP is not issued by, nor is backed by the full faith and credit of, any country, national government, central bank, or other central monetary authority. A “native currency†that operates, for example, on Ripple’s -decentralized network of blockchain technology is a specialized instrument for a particular computer -network, not legal tender. Similarly, using XRP as a “bridge†between two real, fiat currencies does -not bestow legal tender status on XRP. -357. +decentralized network of blockchain technology, is a specialized instrument for a particular +computer network, not legal tender. Similarly, using XRP as a “bridge†between two real, fiat +currencies does not bestow legal tender status on XRP. +383. Moreover, Ripple has never offered or sold XRP as “currency,†as that term is used in the federal securities laws. Throughout the Offering, Ripple never restricted offers or sales of + +FinCEN has repeatedly reiterated its view that “virtual currency†that may be converted for +traditional fiat currencies may still be subject to the federal securities laws “regardless of other +intended purposes†for the convertible virtual currency. See, e.g., FinCEN Guidance, Application of +FinCEN’s Regulations to Certain Business Models Involving Convertible Virtual Currencies, FIN2019-G001 (May 9, 2019) available at https://www.fincen.gov/sites/default/files/201905/FinCEN%20Guidance%20CVC%20FINAL%20508.pdf. +5 + +66 + +Case 1:20-cv-10832-AT Document 46 Filed 02/18/21 Page 67 of 79 + XRP solely to purchasers who had a need for alternatives to traditional, fiat currencies, nor did Ripple promote XRP as an instrument for consumers to purchase goods or services. -358. +384. Instead, Ripple and its executives repeatedly publicly disclaimed that XRP was “currency†and tried to dissuade investors from thinking about XRP as “currency.†-359. +385. For example, in June 2016, Cryptographer-1 explained in a public XRP Chat post: “We do not plan to encourage use of XRP as an alternative to Bitcoin or as a direct payment method at this time.†- -5 - -FinCEN has repeatedly reiterated its view that “virtual currency†that may be converted for -traditional fiat currencies may still be subject to the federal securities laws “regardless of other -intended purposes†for the convertible virtual currency. See, e.g., FinCEN Guidance, Application of -FinCEN’s Regulations to Certain Business Models Involving Convertible Virtual Currencies, FIN2019-G001 (May 9, 2019) available at https://www.fincen.gov/sites/default/files/201905/FinCEN%20Guidance%20CVC%20FINAL%20508.pdf. -60 - -Case 1:20-cv-10832 Document 4 Filed 12/22/20 Page 61 of 71 - -360. +386. Two years later, in a press conference on March 14, 2018, Garlinghouse stated: @@ -3052,7 +3307,7 @@ something you can use to transact efficiently and broadly. Very few people, even in the crypto community have used the, you know, Bitcoin or XRP to buy something. -361. +387. Similarly, in Garlinghouse’s Economic Club Speech in October 2019, a moderator @@ -3061,11 +3316,11 @@ use case today. . . . [W]hen people talk about using crypto for consumer use case I go to the ‘well what problem are we trying to solve?’ . . . [I]n first world countries like the United States . . . I don’t see the consumer use for crypto any time soon,†or even for “95% of global GDP.†-362. +388. Ripple’s own current internal policies treat XRP as securities—not currency. -363. +389. Since at least 2015, Ripple’s internal “Code of Conduct†has directed Ripple @@ -3073,41 +3328,42 @@ or the Ripple protocol that has not been publicly announced, and which might reasonably affect the decision to buy or sell XRPâ€â€”effectively, a prohibition against insider trading, applicable to securities under the federal securities laws. -364. + +67 + +Case 1:20-cv-10832-AT Document 46 Filed 02/18/21 Page 68 of 79 + +390. Similarly, since at least July 2019, Ripple has banned certain members of its “leadership team†from entering into a “trading plan†for XRP “on the basis of information a reasonable person would consider important in making his or her decision to purchase, hold or sell XRPâ€â€”another implicit reference to rules governing insider trading. -365. +391. Even if some country were to recognize XRP as fiat “currency†at some point in the future, that would result from Defendants’ significant entrepreneurial and managerial efforts to date (and likely in the future), on which public investors expecting profit relied when making an investment of money into Defendants’ common enterprise. -61 - -Case 1:20-cv-10832 Document 4 Filed 12/22/20 Page 62 of 71 - VI. Defendants Failed to Register the Offering with the SEC -366. +392. Defendants used interstate commerce for the Offering by, among other things, promoting investments in XRP in emails, interviews disseminated to the public through television and the Internet, and publicly available social media applications; and by effecting transfers of XRP and of the Offering proceeds through global digital asset trading platforms. -367. +393. Defendants have never filed a registration statement with the SEC with respect to any XRP they have offered or sold or intend to offer or sell, and no registration statement has ever been in effect with respect to any offers or sales of XRP. -368. +394. Ripple’s public disclosures contained selective or no information about Ripple’s @@ -3118,6 +3374,11 @@ operations, financial condition, or other factors relevant in considering whether to invest in XRP. XRP investors have also been deprived of information about how Ripple’s executives are being compensated as a result of the Offering or about Ripple’s use of funds derived from the sale of + +68 + +Case 1:20-cv-10832-AT Document 46 Filed 02/18/21 Page 69 of 79 + XRP. Nor have investors received complete information about any steps Ripple is taking to incentivize financial institutions to adopt XRP for use in a payment system, including the extent and nature of incentive payments made to businesses Ripple touts as market-driven “users†of its @@ -3125,11 +3386,6 @@ XRP purchasers and the market lack information that issuers provide under the Securities Act and the Exchange Act when they solicit public investment and foster a secondary market when their securities are publicly traded. - -62 - -Case 1:20-cv-10832 Document 4 Filed 12/22/20 Page 63 of 71 - VII. Larsen and Garlinghouse Knowingly or Recklessly Provided Substantial Assistance @@ -3139,16 +3395,16 @@ Larsen Assumed the Risk that XRP Could Be a Security and Pushed the Offering Forward -369. +395. Ripple and Larsen knew that XRP may be a security from the onset of the Offering -and simply ignored legal requirements regarding registration and required periodic and current -public disclosures. As described above in Section I.B, above, the Legal Memos Ripple -commissioned in February and October 2012 warned that there was some risk that XRP would be -considered an “investment contract†(and thus a security under the federal securities laws) -depending on various factors. -370. +but disregarded legal requirements regarding registration and required periodic and current public +disclosures. As described above in Section I.B, above, the Legal Memos Ripple commissioned in +February and October 2012 warned that there was some risk that XRP would be considered an +“investment contract†(and thus a security under the federal securities laws) depending on various +factors. +396. Although both the February 2012 and the October 2012 Legal Memos warned that, @@ -3158,13 +3414,18 @@ stewardship, Ripple promoted XRP as a speculative investment when either no use case existed or, with the eventual development of the ODL product, only a small fraction of XRP arguably was being “used†for a few moments for non-investment purposes before being sold to investors. -371. + +69 + +Case 1:20-cv-10832-AT Document 46 Filed 02/18/21 Page 70 of 79 + +397. Larsen understood that investors were purchasing XRP as an investment—precisely the situation that both the February 2012 and the October 2012 Legal Memos had warned could lead to a determination that XRP was a security. -372. +398. For example, on February 6, 2017, “an early investor in XRP†wrote Larsen to @@ -3172,22 +3433,42 @@ connecting banks serves . . . emerging trends†such that “the more banks that connect thru Ripple . . . the more demand we should see for XRP as an asset to reduce liquidity costs.†Acknowledging the investors’ “concerns around the current state of volume flows†for XRP, Larsen concluded: - -63 - -Case 1:20-cv-10832 Document 4 Filed 12/22/20 Page 64 of 71 - “Frankly, the entire industry is really in the earliest stages of developments. Most volume in the space is speculation in advance of enterprise and eventually consumer flows.†-373. +399. Larsen also received additional warnings that XRP could be subject to the federal -securities laws. On January 5, 2015, the head of an entity establishing a fund to invest in XRP +securities laws, including because XRP was not a “currency†and because, even if it was, it could still +be a security under the federal securities laws. +400. + +On November 11, 2013, Ripple’s accountants sent Larsen a draft memo regarding + +certain United States taxation considerations for Ripple and XRP. The memo explained that XRP +was likely not currency under federal income tax laws, principally because XRP “is not considered +legal tender in the U.S.†The memo also explained to Larsen that “‘virtual’ currency†like XRP was +not traditional currency under FinCEN guidance issued on March 18, 2013 for the same reason— +namely, that XRP was not legal tender in any jurisdiction. +401. + +On January 5, 2015, the head of the entity looking to establish XRP Fund A + forwarded to Larsen an email from the fund’s attorney, who worked at a prominent global law firm. The attorney’s email advised that, while the attorney did not know “whether a virtual currency is itself a security[,] . . . one certainly can create a security by packaging virtual currency.†-374. + +70 + +Case 1:20-cv-10832-AT Document 46 Filed 02/18/21 Page 71 of 79 + +402. + +On March 9, 2016, while Larsen was CEO, Ripple’s attorneys wrote to the NYDFS + +stating that “XRP II and Ripple consider XRP a digital asset, not a currency†and that “XRP is not +intended to be used as a currency.†+403. Including as described above in this Complaint, Larsen provided substantial @@ -3200,130 +3481,200 @@ Garlinghouse Was Warned and Understood That XRP Had “Securities-Type†Characteristics -375. +404. -By at least June 2017, Garlinghouse knew or recklessly disregarded that Ripple’s +By at least June 2015, Garlinghouse knew or recklessly disregarded that Ripple’s offers and sales of XRP were part of the offer and sale of an investment contract and thus a security. -376. +405. -For example, in an email conversation between Garlinghouse and Ripple Agent-1 on +From the outset of his employment at Ripple, Garlinghouse was involved in -June 2015, Ripple Agent-1 expressed a desire to maintain a Ripple trading platform to specifically -and uniquely target “non-consumer[s].†In response, Garlinghouse told Ripple Agent-1 it was “not -clear to [him] . . . how one would reasonably discern (through an online process) between a -speculator and a consumer.†In essence, Garlinghouse conveyed that Ripple was then already -unable to distinguish between sales it made to speculators and to “consumers.†-377. +decisions regarding offers and sales of XRP and understood, at all relevant times, that sales of XRP +drove Ripple’s revenues and that, as reflected in his numerous public statements, the digital asset +space entails risks relating to the application of the federal securities laws. +406. + +Moreover, in an email conversation between Garlinghouse and Ripple Agent-1 on + +June 2015, Ripple Agent-1 conveyed to Garlinghouse Larsen’s desire to maintain a Ripple trading +platform to specifically and uniquely target “non-consumer[s].†In response, Garlinghouse told +Ripple Agent-1 it was “not clear to [him] . . . how one would reasonably discern (through an online +process) between a speculator and a consumer.†In essence, Garlinghouse conveyed that Ripple was +then already unable to distinguish between sales it made to speculators and to “consumers.†+407. On March 11, 2017, Ripple’s then-chief compliance officer explained to Garlinghouse in an email that “XRP certainly has some ‘securities-type’ characteristics and we do need to hone our playbook/messaging.†-64 +71 -Case 1:20-cv-10832 Document 4 Filed 12/22/20 Page 65 of 71 +Case 1:20-cv-10832-AT Document 46 Filed 02/18/21 Page 72 of 79 -378. +408. On April 16, 2017, Garlinghouse was similarly advised by e-mail that the same chief compliance officer “want[ed] to make sure the verbiage [in employee offer letters regarding XRP notional value] doesn’t put us at risk of XRP sounding like a security.†-379. +409. Garlinghouse, demonstrating a keen interest in the regulatory status of digital assets, also commented on Ripple’s website immediately after the SEC issued the DAO Report in July 2017: “I say, if it looks like a duck and quacks like a duck then let’s regulate it like a duck.†-380. +410. Garlinghouse nevertheless continued to make XRP sound like a security, including in interviews later in 2017 boasting about being “very long†XRP and in comments in connection with the XRP Escrow about how Ripple’s efforts were meant to stabilize XRP’s price. -381. +411. + +On December 11, 2017, Ripple’s public relations firm emailed Garlinghouse to + +notify him that they wanted to “call . . . out†a recent statement by the then-SEC Chairman that +“[m]erely calling a token a ‘utility’ token or structuring it to provide some utility does not prevent the +token†from being a security, given that it “had been a concern to have XRP considered a security.†+412. The following year, in January 2018, Garlinghouse again demonstrated he understood at least certain factors that could determine whether XRP could be deemed a security. Only weeks after he touted being “very long†XRP in interviews, he commented, on an internal Ripple draft document, that XRP should not be promoted as an investment. -382. +413. The following month, in a Yahoo! Finance interview he gave in February 2018, Garlinghouse acknowledged his understanding that “if there is not a real use case then it’s really a securities offering. And if it’s a securities offering there’s not regulatory uncertainty. It should be regulated as a securities offering.†At that time, Garlinghouse knew or recklessly disregarded that -none of Ripple’s sales of XRP up to that point had been with respect to any “use†of XRP. -383. +none of Ripple’s sales of XRP up to that point had been with respect to any “use†of XRP. In this +interview, Garlinghouse also characterized “people in the crypto space talking about ‘regulatory -Garlinghouse also admitted in a non-public setting that he is cognizant of the risk +72 -that XRP could be “classified as a security.†Specifically, as reflected in an Equity Investor A -employee email, dated July 23, 2018, Garlinghouse (accompanied by Larsen) met with Equity -Investor A, “spoke for a while on the outstanding issue of whether XRP gets classified as a -security,†and noted that, while he was “optimistic that†it would not, he could “[]not guarantee -that.†+Case 1:20-cv-10832-AT Document 46 Filed 02/18/21 Page 73 of 79 -65 +uncertainty’†by saying “more often than not that means ‘I disagree with the regulatory certainty so +I’m going to call it regulatory uncertainty.’†+414. -Case 1:20-cv-10832 Document 4 Filed 12/22/20 Page 66 of 71 +On January 11, 2018, Garlinghouse signed Ripple’s application to seek Platform A to -384. +make XRP available for trading. The application represented that “[w]e understand that whether or +not a digital asset may be considered a security is an important consideration for many in the digital +asset ecosystem†and stated that Ripple had “received a legal memorandum from a reputable law +firm†regarding the status of XRP under the federal securities laws. +415. + +Platform A was one of at least four platforms incorporated in the United States that + +asked Ripple for a legal opinion as to the status of XRP under the federal securities laws. At least +one such platform declined to make XRP available for trading due to Ripple’s failure to provide +such an opinion, as Ripple Agent-2 informed Garlinghouse and Larsen in a July 14, 2018 email. +416. + +As alleged in Section II.E.5 and herein, Garlinghouse actively participated in Ripple’s + +efforts to make XRP available on these platforms from the outset of his tenure at Ripple and was +therefore aware that the status of XRP under the federal securities laws was important to these +United States-based platforms. More specifically, Garlinghouse’s participation in these processes +made him aware that, if there was a market or independent legal consensus that XRP is a security +under the federal securities laws, United States-based platforms would question whether to allow +XRP to be traded on their platforms. +417. + +As also alleged in Section II.E.5, Garlinghouse understood that Ripple’s ability to sell + +XRP on these platforms was critical to its ability to capitalize its operations. Garlinghouse +understood that Ripple is not profitable and cannot operate without continued sales of XRP because +such sales are Ripple’s “revenue driver,†as he has publicly stated. +418. + +For example, in an April 10, 2018 email, a Ripple employee told Garlinghouse that + +Platform A was “hesitant to list XRP†precisely because of the “regulatory uncertainty†that XRP + +73 + +Case 1:20-cv-10832-AT Document 46 Filed 02/18/21 Page 74 of 79 + +could be deemed a security. The employee further informed Garlinghouse that, for that reason, +Platform A had declined Ripple’s request that Platform A tell the press that regulatory uncertainty +had not factored into Platform A’s decision not to make XRP available. +419. + +In his April 11, 2018 response, Garlinghouse demonstrated his understanding that + +“regulatory uncertainty†about the status of XRP could hurt Ripple’s XRP trading strategy (including +making it available on digital asset trading platforms for speculators) and sought to dispel such +concerns. Garlinghouse stated that, while he was “not exactly ‘ok’ with†Platform A’s proposed +response to the press, he thought it “achieve[d] our primary goal of dispelling the BS that +Bloomberg put out there that [Platforms A and C] are hesitant to list XRP because of concerns +about it being a security.†+420. + +Garlinghouse again admitted in a non-public setting that he is cognizant of the risk + +that XRP could be “classified as a security†to Equity Investor A. Specifically, as reflected in an +Equity Investor A employee email, dated July 23, 2018, Garlinghouse (accompanied by Larsen) met +with Equity Investor A, “spoke for a while on the outstanding issue of whether XRP gets classified +as a security,†and noted that, while he was “optimistic that†it would not, he could “[]not guarantee +that.†+421. In a speech he gave in Manhattan in October 2019, Garlinghouse further acknowledged that people are “speculating on digital assets†and that “99.9% of all crypto trading today is just speculation,†a factor he knew could lead to a determination that XRP was a security. -385. +422. Throughout the course of this conduct, Garlinghouse had an incentive to make -efforts to increase XRP’s trading price and volume. Pursuant to an options grant of up to 500 -million XRP dated December 13, 2016, Ripple would pay Garlinghouse in XRP, only if the volume -weighted average price of XRP was “at least $0.02/XRP†for four consecutive weeks and the weekly -XRP trading volume was at least 1.4 billion for at least four consecutive weeks. -386. +efforts to increase XRP’s trading price and volume, including to obtain more favorable prices for the +sale of his own XRP and Ripple’s. Moreover, pursuant to an options grant of up to 500 million +XRP dated December 13, 2016, Ripple would pay Garlinghouse in XRP, only if the volume -Garlinghouse understands that Ripple is not profitable and cannot operate without +74 -continued sales of XRP, as he has publicly stated. -387. +Case 1:20-cv-10832-AT Document 46 Filed 02/18/21 Page 75 of 79 + +weighted average price of XRP was “at least $0.02/XRP†for four consecutive weeks and the weekly +XRP trading volume was at least 1.4 billion for at least four consecutive weeks. +423. From April 2015 to the present, Garlinghouse provided substantial assistance to Ripple in conducting its Offering. -388. +424. In addition to making the various promotional statements and efforts described above in this Complaint, Garlinghouse, as both COO and later CEO, participated in weekly XRP -sales meetings where he exercised final decision-making authority over the timing and amount of -Ripple’s XRP sales, including whether to adjust Ripple’s XRP sales based on factors such as market -conditions, volume, price, or the capital needs of the company. -389. +sales meetings where he exercised decision-making authority (including final decision-making +authority as CEO) over the timing and amount of Ripple’s XRP sales. Garlinghouse’s decisions +included whether to adjust Ripple’s XRP sales based on factors such as market conditions, volume, +price, or the capital needs of the company. +425. Garlinghouse similarly exercised final decision-making authority over how much XRP Ripple would offer and sell on a daily basis. -390. +426. -Garlinghouse also made the decision to establish the XRP Escrow and approved +Garlinghouse also made the decision to establish the XRP Escrow and, as alleged, -paying XRP as incentives to digital asset trading platforms for “listing†XRP or achieving certain -trading volume benchmarks. -391. +approved paying XRP as incentives to digital asset trading platforms for “listing†XRP or achieving +certain trading volume benchmarks. +427. Garlinghouse acted at least recklessly while engaging in this conduct. - -66 - -Case 1:20-cv-10832 Document 4 Filed 12/22/20 Page 67 of 71 - TOLLING AGREEMENTS -392. + +428. Ripple and the SEC entered into tolling agreements suspending the running of any @@ -3331,20 +3682,25 @@ September 7, 2019, from September 8, 2019 through December 8, 2019, from December 9, 2019 through June 8, 2020, from June 9, 2020 through December 9, 2020, and from December 10, 2020 through December 24, 2020. -393. +429. Larsen and the SEC entered into a tolling agreement suspending the running of any applicable statute of limitations from September 1, 2020, through December 31, 2020. + +75 + +Case 1:20-cv-10832-AT Document 46 Filed 02/18/21 Page 76 of 79 + FIRST CLAIM FOR RELIEF Violations of Sections 5(a) and 5(c) of the Securities Act (All Defendants) -394. +430. The Commission realleges and incorporates by reference here the allegations in -paragraphs 1 through 393. -395. +paragraphs 1 through 429. +431. By virtue of the foregoing, (a) without a registration statement in effect as to that @@ -3354,7 +3710,7 @@ of transportation or communication in interstate commerce or of the mails to offer to sell through the use or medium of a prospectus or otherwise, securities as to which no registration statement had been filed. -396. +432. Ripple violated Sections 5(a) and 5(c) of the Securities Act by conducting the @@ -3362,14 +3718,9 @@ directly and indirectly making use of the means and instruments of transportation or communications in interstate commerce or of the mails to sell 14.6 billion XRP without a registration statement in effect as to XRP, and by making use of the means and instruments of - -67 - -Case 1:20-cv-10832 Document 4 Filed 12/22/20 Page 68 of 71 - transportation or communication in interstate commerce or of the mails to offer to sell XRP, which were offered and sold as securities, as to which no registration statement had been filed. -397. +433. Larsen violated Sections 5(a) and 5(c) of the Securities Act by, from 2013 through @@ -3378,17 +3729,22 @@ statement in effect as to XRP, and by making use of the means and instruments of transportation or communication in interstate commerce or of the mails to offer to sell XRP, which were offered and sold as securities, as to which no registration statement had been filed. -398. + +76 + +Case 1:20-cv-10832-AT Document 46 Filed 02/18/21 Page 77 of 79 + +434. Garlinghouse violated Sections 5(a) and 5(c) of the Securities Act by, from 2016 through the present, directly and indirectly making use of the means and instruments of -transportation or communications in interstate commerce or of the mails to sell 321 million XRP +transportation or communications in interstate commerce or of the mails to sell 357 million XRP without a registration statement in effect as to XRP, and by making use of the means and instruments of transportation or communication in interstate commerce or of the mails to offer to sell XRP, which were offered and sold as securities, as to which no registration statement had been filed. -399. +435. By reason of the conduct described above, Defendants, directly or indirectly, @@ -3397,36 +3753,36 @@ SECOND CLAIM FOR RELIEF Aiding and Abetting Violations of Securities Act Sections 5(a) and 5(c) (Larsen and Garlinghouse) -400. +436. The Commission realleges and incorporates by reference here the allegations in -paragraphs 1 through 393. -401. +paragraphs 1 through 429. +437. By engaging in the acts and conduct described in this Complaint, Defendants Larsen and Garlinghouse, directly or indirectly, knowingly or recklessly provided substantial assistance to - -68 - -Case 1:20-cv-10832 Document 4 Filed 12/22/20 Page 69 of 71 - Ripple, who, from 2013 through the present, directly and indirectly have made and are making use of the means and instruments of transportation or communications in interstate commerce or of the mails to sell 14.6 billion XRP without a registration statement in effect as to XRP, and by making use of the means and instruments of transportation or communication in interstate commerce or of the mails to offer to sell XRP, which were offered and sold as securities, as to which no registration statement had been filed. -402. +438. Larsen knowingly or recklessly provided substantial assistance to Ripple’s violations -of Sections 5(a) and 5(c) of the Securities Act including by: (i) from 2013 to 2016, deciding when and -how much XRP Ripple would sell, establishing the XRP Escrow, making promotional statements -with respect to XRP, and spearheading Ripple’s efforts to attempt to increase demand for XRP; and -(ii) from 2015 to the present, making his own sales of XRP. -403. +of Sections 5(a) and 5(c) of the Securities Act including by, from 2013 to the present, deciding when + +77 + +Case 1:20-cv-10832-AT Document 46 Filed 02/18/21 Page 78 of 79 + +and how much XRP Ripple would sell, establishing the XRP Escrow, making promotional +statements with respect to XRP, spearheading Ripple’s efforts to attempt to increase demand for +XRP, and making his own sales of XRP. +439. Garlinghouse knowingly or recklessly provided substantial assistance to Ripple’s @@ -3434,7 +3790,7 @@ deciding when and how much XRP Ripple would sell, establishing the XRP Escrow, making promotional statements with respect to XRP, spearheading Ripple’s efforts to attempt to increase demand for XRP, and making his own sales of XRP. -404. +440. By reason of the foregoing, Larsen and Garlinghouse are liable pursuant to Section @@ -3444,21 +3800,22 @@ PRAYER FOR RELIEF WHEREFORE, the Commission respectfully requests that the Court enter a Final Judgment: - -69 - -Case 1:20-cv-10832 Document 4 Filed 12/22/20 Page 70 of 71 - I. Permanently enjoining Defendants, and each of their respective agents, servants, employees, attorneys and other persons in active concert or participation with any of them, from violating, directly or indirectly, Sections 5(a) and 5(c) of the Securities Act [15 U.S.C. § 77e(a), 77e(c)], including by delivering XRP to any persons or taking any other steps to effect any unregistered offer or sale of XRP; + +78 + +Case 1:20-cv-10832-AT Document 46 Filed 02/18/21 Page 79 of 79 + II. Ordering Defendants to disgorge all ill-gotten gains obtained within the statute of limitations, with prejudgment interest thereon, pursuant to Section 21(d)(5) of the Exchange Act -[15 U.S.C. § 78u(d)(5)]; +[15 U.S.C. § 78u(d)(5)] and Sections 6501(a) and (b) of the National Defense Authorization Act for +Fiscal Year 2021, Pub. L. 116-283, 134 Stat. 3388 (Jan. 1, 2021); III. Prohibiting Defendants from participating in any offering of digital asset securities pursuant to Section 21(d)(5) of the Exchange Act [15 U.S.C. § 78u(d)(5)]; @@ -3468,35 +3825,30 @@ V. Granting any other and further relief this Court may deem just and proper for the benefit of investors. - -70 - -Case 1:20-cv-10832 Document 4 Filed 12/22/20 Page 71 of 71 - JURY DEMAND The Commission demands a trial by jury. Dated: New York, New York -December 22, 2020 +February 18, 2021 + +/s/ Richard Best ________________________________ -Richard R. Best -Preethi Krishnamurthy +Richard Best Jorge G. Tenreiro Dugan Bliss Attorneys for Plaintiff SECURITIES AND EXCHANGE COMMISSION -New York Regional Office -Brookfield Place +New York Regional Office - Brookfield Place 200 Vesey Street, Suite 400 New York, New York 10281-1022 (212) 336-9145 (Tenreiro) Email: TenreiroJ@sec.gov + Of Counsel -Kristina Littman -John O. Enright +Preethi Krishnamurthy Daphna A. Waxman -Jon Daniels +Jon A. Daniels -71 +79 \ No newline at end of file
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