Plaintiff, the Securities and Exchange Commission (the “SEC”), brings this action against Defendants Ripple Labs, Inc. (“Ripple”) and two of its senior leaders, Bradley Garlinghouse and Christian A. Larsen, alleging that Defendants engaged in the unlawful offer and sale of securities in violation of Section 5 of the Securities Act of 1933 (the “Securities Act”). The SEC also alleges that Larsen and Garlinghouse aided and abetted Ripple’s Section 5 violations. On July 13, 2023, the Court granted in part and denied in part the parties’ cross-motions for summary judgment (the “Order”).
The SEC now moves to certify for interlocutory appeal two holdings in the Order. For the reasons stated below, the SEC’s motion for certification of the interlocutory appeal is DENIED.
This case involves Defendants’ offer and sale of XRP. XRP is the native digital token of the XRP Ledger, a cryptographically secured ledger, or “blockchain.” The SEC alleges that Ripple engaged in three categories of unregistered XRP offers and sales:
- Institutional Sales under written contracts for which it received $728 million;
- Programmatic Sales on digital asset exchanges for which it received $757 million; and
- Other Distributions under written contracts for which it recorded $609 million in “consideration other than cash.”
The SEC also alleges that Larsen and Garlinghouse engaged in unregistered individual XRP sales from which they received at least $450 million and $150 million, respectively.
Under Section 5 of the Securities Act, it is “unlawful for any person, directly or indirectly, . . . to offer to sell, offer to buy or purchase, or sell” a “security” unless a registration statement is in effect or has been filed with the SEC as to the offer and sale of such security to the public. To prove a violation of Section 5, the SEC must show: (1) that no registration statement was filed or in effect as to the transaction, and (2) that the defendant directly or indirectly offered to sell or sold the securities (3) through interstate commerce.
At summary judgment, Defendants did not dispute that they offered and sold XRP through interstate commerce and that they did not register those offers or sales. Rather, the relevant question before the Court was whether Defendants offered to sell or sold XRP as a security. The SEC alleged that Defendants sold XRP as an “investment contract,” which is a type of security as defined by the Securities Act. Defendants argued that they did not sell XRP as an investment contract, and, therefore, no registration statement was required.
In SEC v. W.J. Howey Co., the Supreme Court held that under the Securities Act, an investment contract is “a contract, transaction, or scheme whereby a person (1) invests his money (2) in a common enterprise and (3) is led to expect profits solely from the efforts of the promoter or a third party.” In analyzing whether a contract, transaction, or scheme is an investment contract, “form should be disregarded for substance and the emphasis should be on economic reality” and the “totality of circumstances.”
In the Order, the Court declined to adopt Defendants’ novel “essential ingredients” test. Instead, the Court applied Howey to each category of Defendants’ unregistered XRP offers and sales. After the Court “examined the totality of circumstances surrounding Defendants’ different transactions and schemes involving the sale and distribution of XRP,” the Court concluded that Ripple’s Institutional Sales constituted offers or sales of investment contracts, but Ripple’s Programmatic Sales and Other Distributions did not. The Court also held that Larsen’s and Garlinghouse’s individual sales were not offers or sales of investment contracts for “substantially the same reasons” stated in the Court’s analysis of Ripple’s Programmatic Sales. The Court, therefore, granted in part and denied in part the parties’ cross-motions for summary judgment.
On August 9, 2023, the Court set a pretrial scheduling order and directed the parties to submit blackout dates for trial. On August 18, 2023, the SEC moved to certify for interlocutory appeal two holdings in the Order:
- the ruling that, as a matter of law, Defendants’ “Programmatic” offers and sales of XRP over crypto asset trading platforms could not lead investors to reasonably expect profits from the efforts of others; and
- the ruling that Ripple’s “Other Distributions” of XRP as a “form of payment for services” . . . was legally insufficient to constitute an “investment of money” under Howey.
The SEC also requested that the Court “stay any remedies litigation and any pretrial proceedings while its interlocutory certification request and any appeal are pending.”
I. Legal Standard
Pursuant to 28 U.S.C. § 1292(b), a district court may certify an order for interlocutory appeal where: (1) “the order involves a controlling question of law,” (2) “as to which there is substantial ground for difference of opinion,” and (3) “an immediate appeal from the order may materially advance the ultimate termination of the litigation.” The moving party bears the burden of establishing the three factors.
Section 1292(b) is “a rare exception to the final judgment rule that generally prohibits piecemeal appeals.” Because interlocutory appeals are strongly disfavored, “only exceptional circumstances will justify a departure from the basic policy of postponing appellate review until after the entry of a final judgment.”
A. Controlling Question of Law
Under § 1292(b), “a question of law must refer to a pure question of law that the reviewing court could decide quickly and cleanly without having to study the record.” A question of law is controlling where: “(1) reversal of the district court’s opinion could result in dismissal of the action, (2) reversal of the district court’s opinion, even though not resulting in dismissal, could significantly affect the conduct of the action, or (3) the certified issue has precedential value for a large number of cases.”
Here, the SEC has not presented a “pure question of law” that could be “decided quickly and cleanly without having to study the record.” To the contrary, the Court “examined the totality of circumstances surrounding Defendants’ different transactions and schemes involving the sale and distribution of XRP,” and ultimately found that the Institutional Sales were sales of securities, but the Programmatic Sales and Other Distributions were not. In doing so, the Court studied an extensive, heavily disputed factual record and detailed expert reports. For example, the SEC’s Rule 56.1 statement contains over 1,600 purported facts — many of which are disputed by Defendants — and cites over 900 exhibits.
The SEC does not argue that the Court applied the wrong legal standard in deciding the cross-motions for summary judgment. (holding that litigant’s argument that court misapplied the law is not a pure question of law). In fact, the Court specifically rejected Defendants’ “essential ingredients” legal test and applied the SEC’s legal standard. Rather, the core of the SEC’s argument is that the Court improperly applied the Howey test to the facts in the undisputed record. As the SEC has repeatedly argued, “Howey must be applied to the facts and circumstances at hand.” (“Whether or not a particular transaction involves the offer and sale of a security . . . will depend on the facts and circumstances, including the economic realities of the transaction.”). “Under these circumstances, such questions do not present issues of pure law and therefore are not appropriate for interlocutory appeal.”
The Court also rejects the SEC’s argument that the questions presented are “controlling” questions of law because the “certified issues have precedential value for a large number of cases.” The Court’s findings come from a direct application of Howey to the unique facts and circumstances of this case. The other enforcement actions cited by the SEC involve different digital assets and different companies, which offered and sold those digital assets under different factual circumstances and economic realities.
In arguing that the Order has “precedential value” for other digital-asset cases, the SEC misconstrues the Court’s holdings. For example, the SEC seeks to appeal the question, “Can an issuer’s offers and sales on crypto asset trading platforms create a reasonable expectation of profits based on the efforts of others?” But the Court did not hold that offers and sales on a digital asset exchange cannot create a reasonable expectation of profits based on the efforts of others. The Court held that based on the totality of the circumstances in this case, including an examination of the facts, circumstances, and economic realities of the transactions, Ripple’s Programmatic Sales could not lead investors to reasonably expect profits from Ripple’s efforts. In so concluding, the Court considered several factors, including:
- “Ripple’s Programmatic Sales were blind bid/ask transactions, and Programmatic Buyers could not have known if their payments of money went to Ripple”;
- “Ripple’s Programmatic Sales represented less than 1% of the global XRP trading volume”;
- “Ripple did not make any promises or offers to the Programmatic Buyers because Ripple did not know who was buying the XRP”;
- “Many Programmatic Buyers were entirely unaware of Ripple’s existence”;
- “The Programmatic Sales were not made pursuant to contracts that contained lockup provisions, resale restrictions, indemnification clauses, or statements of purpose”;
- The SEC failed to provide evidence that “Ripple’s promotional materials . . . were distributed more broadly to the general public, such as to Programmatic Buyers”;
- The SEC failed to provide evidence that objective, reasonable “Programmatic Buyers understood that statements made by Larsen, [Ripple chief cryptographer David] Schwartz, Garlinghouse, and others were representations of Ripple and its efforts”; and
- The SEC failed to provide evidence that an objective, reasonable Programmatic Buyer “could parse through the multiple documents and statements . . . (sometimes inconsistent) across many social media platforms and news sites from a variety of Ripple speakers (with different levels of authority) over an extended eight-year period” to discern “Ripple’s marketing campaign and public statements connecting XRP’s price to its own efforts.”
The Court also concluded that although the record may have demonstrated that “many Programmatic Buyers purchased XRP with an expectation of profit,” the SEC failed to provide evidence that such Programmatic Buyers’ “speculative motive derived from the entrepreneurial or managerial efforts of others.” The Court’s holding did not turn on the fact that Ripple’s “offers and sales were on crypto asset trading platforms.”
Likewise, the Court’s holding as to Ripple’s Other Distributions was based on applying Howey to the facts and circumstances of this case. The Court did not conclude that “distributing an asset in exchange for services” cannot “constitute an investment of money.” Indeed, Howey’s first prong, that there be an “investment of money,” may include “goods or services,” provided that “the purchaser gave up some tangible and definable consideration.”
Applying that standard, the Court concluded that “the record shows that recipients of the Other Distributions did not pay money or ‘some tangible and definable consideration’ to Ripple.” For example, the Other Distributions included grants to “third parties as part of Ripple’s Xpring initiative to develop new applications for XRP and the XRP Ledger.” Ripple does not own the XRP Ledger, which is “based on open-source software; anyone can use the ledger, submit transactions, host a node to contribute to the validation of transactions, propose changes to the source code, or develop applications that run on the ledger.” The SEC failed to provide evidence that the development of “use cases” for the XRP Ledger constitutes “tangible and definable” consideration to Ripple. The Court also rejected the SEC’s argument that XRP provided to Ripple employees as compensation and bonuses satisfies Howey’s first prong where the SEC did not identify or explain what “tangible and definable” employee labor was provided in exchange for XRP.
Accordingly, the SEC has failed to meet its burden to show that the two holdings that it moves to certify for interlocutory appeal “involve . . . controlling questions of law.”
B. Substantial Ground for Difference of Opinion
A substantial ground for difference of opinion exists where “(1) there is conflicting authority on the issue, or (2) the issue is particularly difficult and of first impression for the Second Circuit.” “Mere conjecture that courts would disagree on the issue” is insufficient. Instead, “there must be substantial doubt that the district court’s order was correct.”
As to the Programmatic Sales, the SEC cites a recent decision in SEC v. Terraform Labs, for the proposition that “there is a substantial ground for difference of opinion on whether issuer offers and sales over crypto asset trading platforms can give rise to an investment contract under Howey.” Not so. Notwithstanding that the SEC misstates the Court’s holding, the Order does not conflict with the Terraform court’s reasoning. The Terraform court did not engage with the Court’s reasoning in the Order. Nor was it required to, given the different procedural postures of the two cases.
The Terraform court was required—as it must at the motion to dismiss stage—to accept as true “all well-pleaded allegations” and to draw “all reasonable inferences . . . in the SEC’s favor.” For instance, the Terraform court accepted as true that 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”; and “the defendants said that sales from purchases of all crypto-assets—no matter where the coins were purchased—would be fed back into the . . . blockchain and would generate additional profits for all crypto-asset holders.” The Terraform court then presumed that the defendants’ representations would “have reached individuals who purchased their crypto-assets on secondary markets . . . and 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.”
As stated above, the Order did not turn on the fact that Programmatic Sales were “sold through secondary market transactions to retail investors.” Rather, the Court concluded, based on the totality of circumstances, that an objective, reasonable Programmatic Buyer was not led to expect profits from the efforts of Ripple. Unlike in Terraform, the reasonable Programmatic Buyer would not believe that “sales from purchases of all XRP . . . would be fed back into Ripple and the XRP Ledger and would generate additional profits for all XRP holders.” Similarly, the undisputed record makes clear that many of Ripple’s key promotional materials — such as the “Ripple Primer,” which states that Ripple “hopes to make money from XRP if the world finds the Ripple network useful,” and the “Gateways” brochure, which states that “Ripple’s business model is based on the success of XRP,” — were only distributed to Institutional Buyers, and not more broadly to Programmatic Buyers. In other words, after a close examination of the extensive factual record and expert reports, the Court concluded that the Programmatic Buyers did not “have every bit as good a reason as the Institutional Buyers to believe that Defendants would take their capital contributions and use the capital to generate profits on their behalf.”
For substantially the same reasons, the Court rejects the SEC’s remaining argument that “courts have accordingly found Section 5 violations where unregistered crypto asset transactions occur not between the issuer and the investor, but through intermediaries, including on trading platforms.” In each of the cases cited by the SEC, the district court applied the Howey test to the facts and circumstances of that particular case. The SEC does not contend that courts substantially differ as to the proper legal standard to be applied.
Likewise, the Court rejects the argument that there is substantial ground for difference of opinion about the Court’s holding as to the Other Distributions. The SEC cites one out-of-circuit digital-asset case for the proposition that courts “have held that issuers sold investment contracts in exchange for non-cash consideration such as labor, service, or other assets.” But in that case, the parties did not dispute Howey’s first prong. (“Here, only the third component of the Howey test is in dispute.”). The Court cannot draw any conclusions about the LBRY court’s reasoning as to an issue that was never litigated. Therefore, the SEC fails to point to any digital-asset cases which conflict with the Court’s holding as to the Other Distributions and, thus, cannot show beyond “mere conjecture that courts would disagree on the issue.”
Accordingly, the SEC fails to meet its burden to show “substantial ground for difference of opinion” as to the two holdings that it moves to certify for interlocutory appeal.
C. Materially Advance the Ultimate Termination of the Litigation
In determining whether certification will materially advance the ultimate termination of the litigation, “courts must consider the institutional efficiency of both the district court and the appellate court.”
Here, the SEC fails to meet its burden to demonstrate that interlocutory appeal would “materially advance the ultimate termination of the litigation.” As stated above, if the Second Circuit were to reverse the Order and remand the case, the Court would be in the position of considering many complicated legal and factual issues in the first instance, such as whether Ripple’s Programmatic Sales satisfy Howey’s second prong that there exists a common enterprise or Defendants’ fair notice defenses as to the Programmatic Sales and Other Distributions. Then, any party that disagreed with the Court’s subsequent summary judgment order could move again for interlocutory appeal. Therefore, any interlocutory appeal “would instead likely prolong the action as it would be subject to multiple bites at the apple for appellate review.”
Further, resource-intensive litigation remains in this matter before final judgment, including a remedial phase which could raise questions about “injunctive relief, disgorgement, and civil monetary penalties,” additional Daubert briefing, pretrial litigation (including motions in limine), and trial. Thus, complicated factual and legal issues remain to be adjudicated before final judgment. Under these circumstances, the litigation may be most expeditiously advanced by “proceeding in the ordinary course to judgment, and permitting a single round of appellate review on a complete record.”
The Court is aware that litigation may be extensive regardless of whether interlocutory appeal is granted. But here, the SEC has failed to meet its burden to show that such an appeal would “materially advance the ultimate termination of the litigation.”
For the reasons stated above, the SEC’s motion for certification of interlocutory appeal is DENIED, and the SEC’s request for a stay is DENIED as moot. The Clerk of Court is directed to terminate the motion at ECF No. 892.
Trial in this matter is set to begin on April 23, 2024, at 9:00 a.m. in Courtroom 15D of the United States Courthouse, 500 Pearl Street, New York, New York 10007. The deadlines as set forth in the Court’s Pretrial Scheduling Order remain in effect. Accordingly:
- By December 4, 2023, the parties shall submit any motions in limine. Oppositions to any motions in limine shall be submitted by December 18, 2023.
- By December 4, 2023, the parties shall submit all required pretrial filings, including their proposed joint pretrial order, requests to charge, verdict form, and voir dire questions in accordance with Paragraphs V.B, V.C, and V.D of the Court’s Individual Practices in Civil Cases. The parties shall also email copies of these submissions to Torres_NYSDChambers@nysd.uscourts.gov as Word Documents.
- By December 4, 2023, the parties shall deliver to the Court one copy of each documentary exhibit sought to be admitted, pre-marked (i.e., labeled with exhibit stickers) and assembled sequentially in a loose-leaf binder or in separate manila folders labeled with the exhibit numbers and placed in a suitable container for ready reference in accordance with Paragraph V.C.v of the Court’s Individual
Practices in Civil Cases.
- On April 16, 2024, at 2:00 p.m., counsel for all parties shall appear for a final pretrial conference in Courtroom 15D of the United States Courthouse, 500 Pearl Street, New York, New York 10007.
- Prior to the final pretrial conference, counsel for both parties, along with the parties themselves, shall meet in person for at least one hour to discuss settlement of this matter.
Dated: October 3, 2023
New York, New York