Ripple’s decision is “problematic on multiple fronts,” says former SEC official

Former Securities and Exchange Commission official John Reed Stark has spoken out against the recent ruling in the Ripple Lab case, profession a “difficult on multiple fronts” decision in LinkedIn’s analysis.

Stark tore apart Judge Analisa Torres’ July 13 ruling by examining the grounds on which ruled in favor of Ripple in a lawsuit brought by the SEC in 2020 alleging that the company’s XRP (XRP) token was a security.

Judge Torres’ verdict states that the XRP token was a security in the sale to institutional investors, but that it was not a security in the “programmatic sales.” [public sales] and “other types of sales” such as token distributions to employees. Ripple also faces fines for alleged violations, as well as cancellations for institutional investors — whose sales reportedly included $720 million.

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

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

“The Ripple decision takes the view that the same exact token can sometimes be a security, but sometimes not. And the more ignorance and willful blindness on the part of retail investors, the less protection retail investors get. And the less information about the token, the less accountability for token issuers. That just can’t be right.”

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

In Stark’s opinion, who served as a lawyer for more than 18 years in the SEC’s enforcement division, “the decision stands on shaky ground, is likely (and ripe) for appeal, and will likely lead to reversal.”

“Bottom line: Stocks are always stocks – they can’t be converted to ‘non-stocks.’ So my view is that the SEC will appeal Ripple’s decision to the 2nd Circuit, and the 2nd Circuit will overturn the district court’s decision regarding ‘programmatic’ and ‘other sales,’” he noted.

Judge Torres’ decision was hailed as a victory for the crypto community and Ripple. The company’s CEO Brad Garlinghouse said during a recent interview that the SEC may face a long process before you have the chance to appeal decision. In addition, Garlinghouse called the institutional sales decision the “smallest part” of the lawsuit and said an SEC appeal of the retail sales decision would only strengthen the Torres decision.

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