Ripple Fights California Securities Lawsuit Over CEO’s Alleged Misleading Statement

California District Court Judge Phyllis Hamilton approved a lawsuit against Ripple following Brad Garlinghouse's statement.

The court denied Ripple's motion for summary judgment in the lawsuit, alleging that the company's CEO, Garlinghouse, violated California securities laws. This allegation stems from Garlinghouse's allegedly misleading statements in an interview with BNN Bloomberg in 2017.

A jury will have to decide whether Ripple CEO's statement is misleading

June 20 order, Judge Hamilton concluded that retail sales of XRP could be securities contracts. Additionally, Ripple will appear before a jury to determine whether its CEO's statements in 2017 were misleading.

The lawsuit highlighted five central claims, four of which revolve around Ripple's inability to register XRP as a security under federal and state laws.

One of the claims specifically mentioned a violation of California Corporate Code 25501 against Bradley Garlinghouse for misleading statements related to XRP sales.

In a December 2017 interview to Canadian BNN Bloomberg, Ripple's Garlinghouse noted its long position on XRP. He said he was “very long” on XRP, implying that he had held a larger percentage of his XRP coins for a long time.

However, the lawsuit alleged that Garlinghouse's statement regarding his XRP HODLing was false, as the CEO sold millions of XRP tokens throughout 2017.

Meanwhile, Ripple CLO Stuart Alderoty said he was happy that the court had dismissed other class action lawsuits. According to legal counsel, Ripple only needs to worry about the state's claim which it will address at trial.

Federal judge rules that XRP could be a security

In the court's latest order, Judge Hamilton noted that Ripple wanted the court to reject the misleading statement. Ripple argued that XRP is not a security following the Howey Test, as determined by Judge Torres' July 2023 ruling in the SEC lawsuit.

However, the judge rejected Ripple's argument in his order, citing that XRP could be a security when sold to retail investors.

According to Judge Hamilton, reasonable retail investors would expect to benefit from Ripple's efforts to promote XRP for cross-border payments. This is one of the determining factors of the Howey criterion.

Despite Judge Hamilton's dismissal, Ripple's CLO Alderoty argued that Judge Torres' decision in the SEC lawsuit was uncontested. The verdict remains a milestone in the cryptocurrency industry and, for many, sets a precedent for similar cryptocurrency cases.

However, contrary to the expectations of crypto enthusiasts, Judge Torres' decision does not hold up as much water. In the SEC Lawsuit v. Terraform Labs, Judge Jed Rakoff challenged the decision when Terraform Labs cited him in its motion to dismiss.

In August 2023, Judge Rakoff rejected the July 13 decision that favors Ripple's XRP as non-security when sold on secondary markets. Despite citing the landmark Ripple/SEC decision, Terraform Labs lost the case to the SEC and paid a $4.5 billion fine for the settlement.

While the Ripple/SEC summary judgment is still pending and other federal judges have denied the landmark ruling, XRP's status as a non-security remains uncertain.