Newsflash: Ripple Decision Already in (Big) Trouble
SDNY District Judge Jed Rakoff today allowed the SEC to go forward with its case against Terraform Labs and founder Do Kwon. In doing so, Judge Rakoff specifically rejected the distinction made in the Ripple case between public and institutional sales. Read the decision at:
johnreedstark.com/wp-content…
In court filings, the SEC had urged Judge Rakoff not to follow U.S. District Judge Analisa Torres’s reasoning in the Ripple case and indicated it's plan to appeal the Ripple decision (which now seems even more likely).
Specifically, Judge Rakoff denied issuer Terraform Labs' motion to dismiss an SEC lawsuit saying the SEC has sufficiently argued it has jurisdiction and "asserted a plausible claim" that TerraUSD (UST), the Anchor Protocol and LUNA may have violated securities laws.
Sample Quote form Judge Rakoff's Terra Decision, which is a stinging rebuke of the Ripple decision:
". . . the Court rejects the approach recently adopted by another judge of this District in a similar case, SEC v. Ripple Labs Inc., 2023 WL 4507900 (S.D.N.Y. July 13, 2023). There, that court found that,
“[w]hereas ... [i]nstitutional [b]uyers reasonably expected that [the defendant crypto-asset company] would use the capital it received from its sales to improve the [crypto-asset] ecosystem and thereby increase the price of [the crypto-asset],” those who purchased their coins through secondary transactions had no reasonable basis to expect the same. Id. at *11-12.
According to that court, this was because the re-sale purchasers could not have known if their payments went to the defendant, as opposed to the third-party entity who sold them the coin. Whatever expectation of profit they had could not, according to that court, be ascribed to defendants’ efforts.
But Howey makes no such distinction between purchasers. And it makes good sense that it did not. That a purchaser bought the coins directly from the defendants or, instead, in a secondary re- sale transaction has no impact on whether a reasonable individual would objectively view the defendants’ actions and statements as evincing a promise of profits based on their efforts. Indeed, if the Amended Complaint’s allegations are taken as true -- as, again, they must be at this stage -- the defendants’ embarked on a public campaign to encourage both retail and institutional investors to buy their crypto-assets by touting the profitability of the crypto- assets and the managerial and technical skills that would allow the defendants to maximize returns on the investors’ coins.
As part of this campaign, the defendants said that sales from purchases of all crypto-assets -- no matter where the coins were purchased -- would be fed back into the Terraform blockchain and would generate additional profits for all crypto-asset holders. These representations would presumably have reached individuals who purchased their crypto-assets on secondary markets –- and, indeed, motivated those purchases -- as much as it did institutional investors. Simply put, secondary-market purchasers had every bit as good a reason to believe that the defendants would take their capital contributions and use it to generate profits on their behalf." (emphasis added)
The Major Questions Doctrine
Judge Rakoff also rejected Terraform Labs' "major questions doctrine" objection. The doctrine stems from a Supreme Court ruling which functionally blocks regulatory agencies like the SEC from dramatically exceeding their mandate, and is an argument a number of crypto defendants have invoked against the SEC, including crypto trading platform Coinbase.
"As the doctrine’s name suggests and the Supreme Court has, in case after case, emphasized, the Major Questions Doctrine is intended to apply only in extraordinary circumstances involving industries of 'vast economic and political significance . . . This question, moreover, of whether an industry subject to regulation is of 'vast economic and political significance' should not be resolved in a vacuum. Rather, an industry can be considered to have 'vast economic and political significance' only if it resembles, in these two qualities, the industries that the Supreme Court has previously said meet this definition. With this standard in mind, the crypto-currency industry –- though certainly important –- falls far short of being a “portion of the American economy” bearing “vast economic and political significance.” Id.
Put simply, it would ignore reality to place the crypto-currency industry and the American energy and tobacco industries -- the subjects of West Virginia and Brown & Williamson, respectively –- on the same plane of importance. If one were to do so, almost every large industry would qualify as one of “vast economic and political significance” and the doctrine would frustrate the administrative state’s ability to perform the function for which Congress established it: the regulation of the American economy."
Judge Rakoff and Securities Law
For SEC lawyers like myself, Judge Jed Rakoff is arguably considered the most respected and experienced securities law jurist not only in the SDNY but perhaps in the entire U.S. federal court system.
Judge Rakoff has served since March 1996 as a U.S. district judge for the Southern District of New York. He frequently sits by designation on the 2nd and 9th Circuit Courts of Appeals. His most noteworthy decisions have been in the areas of securities law and criminal law. He is an adjunct professor at Columbia Law School and New York University School of Law and teaches at University of California, Berkeley School of Law and the University of Virginia School of Law. He has written over 180 published articles, 835 speeches, and 1,800 judicial opinions and has co-authored five books.
Judge Rakoff is also notoriously fiercely independent and has never hesitated to rule against the SEC, garnering significant headlines along the way. See, e.g.
reuters.com/article/sec-frau…;
washingtonpost.com/blogs/pos…;
socialaw.com/docs/default-so…
My take (and please don't shoot the messenger): Judge Rakoff's decision might be the first, but will certainly not be the last, rejection of the Ripple decision.
linkedin.com/pulse/ripple-de…