throbber
Case 3:21-cv-00093-BJD-JBT Document 1 Filed 01/25/21 Page 1 of 118 PageID 1
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`UNITED STATES DISTRICT COURT
`MIDDLE DISTRICT OF FLORIDA
`
`
`TYLER TOOMEY, on behalf of himself
`and all others similarly situated,
`
`Plaintiff,
`
`v.
`
`
`
`RIPPLE LABS, INC., XRP II, LLC, and
`BRADLEY GARLINGHOUSE,
`
` Defendants.
`
`
`
`
`
`
`
`
`
`Civil Action No.
`
`
`
`
`
`
`
`
`
`CLASS ACTION COMPLAINT, DEMAND FOR JURY TRIAL,
`INJUNCTIVE RELIEF SOUGHT
`
`Plaintiff Tyler Toomey (“Plaintiff”) brings this action on behalf of himself and all others
`
`similarly situated against Defendants Ripple Labs, Inc. (“Ripple”), XRP II, LLC, and Bradley
`
`Garlinghouse (collectively “Defendants”). Plaintiff makes the following allegations pursuant to
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`the investigation of his counsel and based upon information and belief, except as to the
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`allegations specifically pertaining to himself, which are based on personal knowledge.
`
`NATURE OF THE ACTION
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`1.
`
`This is a class action lawsuit regarding Defendants’ sale of XRP cryptocurrency
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`tokens to Florida residents in violation of Florida securities laws. Specifically, Defendants sold
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`millions of dollars (or more) of XRP tokens, which are securities under Florida law, to Florida
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`investors without registering the same either with federal or Florida authorities.
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`2.
`
`Recently, the United States Securities and Exchange Commission (“SEC”) filed a
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`lawsuit against Defendants and certain other individuals, Securities And Exchange Commission
`
`v. Ripple Labs, Inc., et al., Case No. 1:20-cv-10832 (S.D.N.Y.), alleging that “[f]rom at least
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`2013 through the present, Defendants sold over 14.6 billion units of a digital asset security called
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`
`
`1
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`

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`Case 3:21-cv-00093-BJD-JBT Document 1 Filed 01/25/21 Page 2 of 118 PageID 2
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`‘XRP,’ in return for cash or other consideration worth over $1.38 billion U.S. Dollars (“USD”),
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`to fund Ripple’s operations [. . .]. Defendant[] undertook this distribution without registering
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`their offers and sales of XRP with the SEC as required by the federal securities laws, and no
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`exemption from this requirement applied.”1 Defendants similarly failed to comply with Florida
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`securities laws by failing to register with the Florida Office of Financial Regulation.
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`3.
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`Under the Florida Securities and Investor Protection Act (the “Act”), “[i]t is
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`unlawful [. . .] for any person to sell or offer to sell a security within this state unless the security
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`is exempt [or] registered pursuant to this chapter.” Fla. Stat. Ann. § 517.07(1). The Act further
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`provides that “[n]o securities that are required to be registered under this chapter shall be sold or
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`offered for sale within this state unless such securities have been registered pursuant to this
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`chapter and unless prior to each sale the purchaser is furnished with a prospectus meeting the
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`requirements of rules adopted by the commission.” Fla. Stat. Ann. § 517.07(2).
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`4.
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`Ripple’s XRP tokens are securities because they qualify as “investment contracts”
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`under Florida law. Fla. Stat. Ann. § 517.021(22)(q).
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`5.
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`Defendants did not provide Florida investors with material information regarding
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`the offering of XRP, as would have been required had Defendants complied with the law.
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`6.
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`Defendants began their unregistered and unlawful sale of XRP in 2013, despite
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`having knowledge as early as 2012 that XRP could be considered an “investment contract” under
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`federal and, by extension, Florida law. Nevertheless, Defendants chose to disregard filing
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`requirements and initiated a vast offering of XRP without registration. Further, Defendants
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`made affirmative representations to the investing public that XRP is not a security, when in fact
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`it is.
`
`
`1 The SEC’s Complaint is attached hereto as Exhibit A.
`2
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`

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`Case 3:21-cv-00093-BJD-JBT Document 1 Filed 01/25/21 Page 3 of 118 PageID 3
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`7.
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`Defendants continued to sell unregistered XRP to consumers from 2013 through
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`the present. However, after the filing of the SEC suit, several major cryptocurrency exchanges
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`have elected to delist XRP, ostensibly to avoid liability for selling an unregistered security. This
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`includes major exchanges Coinbase, Binance.US, OkCoin, and most recently Blockchain.com.2
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`8.
`
`Through this strategy, Ripple has raised well over a billion dollars through the
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`sale of XRP, which has been used to fund the company’s operations, as well as substantially
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`enriching Ripple’s executives, to the tune of $600 million.
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`9.
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`Defendants still hold substantial XRP that they can continue to monetize, while
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`creating substantial risk to investors. As such, injunctive relief is appropriate.
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`10.
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`Based on the foregoing, and the allegations set forth below, Plaintiff brings this
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`action for violation of the Florida Securities and Investor Protection Act, violation of Florida’s
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`Deceptive and Unfair Trade Practices Act, Fla. Stat. Ann. §§ 501.201, et seq. (“FDUTPA”),
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`fraudulent misrepresentation, negligent misrepresentation, unjust enrichment, and money had
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`and received.
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`11.
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`As a result of Defendants’ conduct, Plaintiff and Class members have suffered
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`damages.
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`PARTIES
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`12.
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`Plaintiff Tyler Toomey is a citizen of Florida who resides in Jacksonville, Florida.
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`Plaintiff purchased 135 XRP on or around November 24, 2020 for $97.80. Plaintiff sold his
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`XRP first in a transaction on or around December 7, 2020 wherein he sold 33.1 XRP for $20,
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`and second in a transaction on or around December 28, 2020 wherein he sold 101.9 XRP for
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`0.0383 Ethereum ($28.56). Thus, Plaintiff sustained a loss of $48.56, or just over 50% of his
`
`
`2 https://cointelegraph.com/news/blockchain-com-follows-other-exchanges-in-delisting-xrp (last
`visited 1/7/21).
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`
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`3
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`

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`Case 3:21-cv-00093-BJD-JBT Document 1 Filed 01/25/21 Page 4 of 118 PageID 4
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`initial investment.
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`13.
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`Defendant Ripple Labs, Inc. is a Delaware corporation with a principal place of
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`business at 315 Montgomery Street 2nd Floor San Francisco, California 94104.
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`14.
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`Defendant XRP II, LLC is Ripple’s wholly-owned subsidiary. It was founded in
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`approximately 2013, has been organized as a New York limited liability company since at least
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`2015, and is the entity through which Ripple offered and sold most of its XRP.
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`15.
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`Defendant Bradley Garlinghouse is the Chief Executive Officer of Ripple.
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`Defendant Garlinghouse became CEO of Ripple in or around January 2017. Defendant
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`Garlinghouse was Ripple’s President and Chief Operating Officer from approximately April
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`2015 through December 2016. Defendant Garlinghouse is a resident of San Mateo, California.
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`Garlinghouse exercised control over Ripple and directed and/or authorized, directly or indirectly,
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`the sale and solicitation of XRP to the public.
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`JURISDICTION AND VENUE
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`16.
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`This Court has jurisdiction over this action pursuant to 28 U.S.C. § 1332(d)(2)(A),
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`as modified by the Class Action Fairness Act of 2005, because at least one member of the Class,
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`as defined below (the “Class”), is a citizen of a different state than Defendants, there are more
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`than 100 members of the Class, and the aggregate amount in controversy exceeds $5,000,000
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`exclusive of interest and costs.
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`17.
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`Venue is proper in this Court pursuant to 28 U.S.C. § 1391 because many of the
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`acts and transactions giving rise to this action occurred in this District.
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`18.
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`Defendants are subject to personal jurisdiction in this District because they (a) are
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`authorized to conduct business in Florida and have intentionally availed themselves of the laws
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`
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`4
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`Case 3:21-cv-00093-BJD-JBT Document 1 Filed 01/25/21 Page 5 of 118 PageID 5
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`and markets within Florida through the promotion, marketing, distribution, and sale of the XRP
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`tokens at issue in this District; and (b) because Plaintiffs purchased XRP tokens in Florida.
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`FACTS COMMON TO ALL CLAIMS
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`A. Background On Crypto-Assets
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`19.
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`XPR is a digital token created by Ripple which falls into the general realm of
`
`crypto-assets, colloquially referred to as “cryptocurrencies.” But as discussed below, XRP is
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`really an unregistered security sold to Plaintiff and Class members in violation of Florida law.
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`20.
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`Bitcoin was the first major crypto-asset which grew in popularity due to three
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`main features: 1) it offers a secure medium of exchange, 2) supply is controlled, and 3) it is
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`decentralized.
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`21.
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`Bitcoin offers a secure medium of exchange because it can be securely transferred
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`to only one person at a time through a digital ledger system known as a “blockchain.” The
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`blockchain ledger system tracks the ownership of every Bitcoin in existence. Every Bitcoin user
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`has a digital address, tantamount to a bank account number, that is used to receive Bitcoin. The
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`blockchain lists every address and amount of Bitcoin associated with that address. The history of
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`every transaction involving each Bitcoin is set forth on the blockchain, which can be used to
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`verify each transaction.
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`22.
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`Bitcoin both maintains the blockchain and controls supply through a process
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`called “mining.” Miners essentially work as auditors of the blockchain to verify Bitcoin
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`transactions. This is a complex and process done through sophisticated computer programs.
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`Miners who verify the transactions are rewarded with new Bitcoin. Because the verification
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`process gets more and more difficult as more and more Bitcoin is produced and more
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`transactions take place, it becomes harder to mine. This natural check ensures that there are no
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`
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`5
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`Case 3:21-cv-00093-BJD-JBT Document 1 Filed 01/25/21 Page 6 of 118 PageID 6
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`sharp increases in supply. Additionally, the number of Bitcoin that miners receive for their work
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`is halved approximately every four years. This continues until all Bitcoin is mined, at which
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`point miners will simply receive a fee paid by network users. This is why Bitcoin is sometimes
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`referred to as “digital gold.”3
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`23.
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`Bitcoin is also decentralized. There is no “Bitcoin, Inc.” or company behind
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`Bitcoin on a centralized server that can issue more Bitcoin on a whim. Instead, Bitcoin relies on
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`a peer-to-peer network in which each user is, in theory, an equivalent owner and contributor to
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`the network. These peer-to-peer transactions also leave out the middleman (for example, a bank)
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`and allow users to transact directly. As such, the success of Bitcoin does not depend on any
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`centralized entity.
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`24.
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`After Bitcoin, there has been a sharp rise in the number of crypto-assets, some of
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`which have features similar to Bitcoin and some of which differ significantly.
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`25.
`
`26.
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`For example, XRP has very few of the defining characteristics of Bitcoin.
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`The first major difference is that XRP is not “mined,” it was simply created by
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`Defendants out of thin air. As such, supply is completely controlled by Defendants.4 Also
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`unlike Bitcoin, XRP transactions are powered through a centralized blockchain (the XRP ledger)
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`mostly inaccessible to retail investors.5
`
`27.
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`This means that Defendants have complete control over the supply of XRP that is
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`sold into the market place. There is no safeguard, other than those imposed by Defendants, to
`
`
`3 https://www.reuters.com/article/crypto-currencies-jpm/bitcoin-emergence-as-digital-gold-
`could-lift-price-to-146000-says-jpm-idUSL8N2JG2MM (last visited 1/7/21).
`4 https://www.investopedia.com/news/why-some-claim-ripple-isnt-real-cryptocurrency-
`0/#:~:text=Ripple%20has%20no%20mining%20or,it%20more%20reliable%20and%20fast.&tex
`t=In%20cryptocurrency%2C%20miners%20are%20incentivized,issues%20that%20Ripple%20d
`eems%20untenable. (last visited 1/7/21).
`5 Id.
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`6
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`Case 3:21-cv-00093-BJD-JBT Document 1 Filed 01/25/21 Page 7 of 118 PageID 7
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`prevent sharp increases in the amount of XRP, rendering it a very speculative and risky
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`investment. In short, Defendants can issue XRP on a whim.
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`B. The Creation of XRP
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`28.
`
`In approximately late 2011 to 2012, Ripple founders began work on the XRP
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`Ledger, which is software code that operates as a peer-to-peer database, spread across a network
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`of computers, that records data respecting transactions, among other things.
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`29.
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`Ripple was formally founded in 2012.
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`30. When the XRP Ledger was completed in December 2012, a fixed supply of 100
`
`billion XRP was created.
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`31.
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`Ripple executives transferred 80 billion XRP to Ripple and 20 billion to
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`themselves. As such, Ripple and its co-founders controlled 100% of the XRP in existence at its
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`inception.
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`32.
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`XRP is a crypto-asset and a “native token” on the XRP Ledger. A “native token”
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`is a token that is represented on its own blockchain.
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`33.
`
`Ripple originally called XRP “Ripple Credits” and, for several years thereafter,
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`participants in the digital asset space simply referred to the digital asset as “Ripples.”
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`34.
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`Ripple could do little with its billions of XRP at the time of its inception,
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`however, because the XRP tokens lacked any intrinsic value. Ripple had limited funds to pursue
`
`any operations it may have sought to undertake. Ripple determined to create a market for and sell
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`XRP to the public to monetize its holdings and finance its operations.
`
`C. Ripple Made Unregistered Offers And Sales Of XRP To Fund Its Operations And
`Monetize Its Holdings Of XRP
`
`35.
`
`By 2013, Ripple made a concerted effort to create a market for XRP.
`
`
`
`7
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`Case 3:21-cv-00093-BJD-JBT Document 1 Filed 01/25/21 Page 8 of 118 PageID 8
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`36.
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`As part of Ripple’s campaign to accomplish its twin aims of creating a market for
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`XRP (increasing speculative demand and trading volume) and monetizing its holdings of XRP to
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`finance its operations, Defendants made public statements aimed at investors to create in the
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`investors an expectation of profit, while simultaneously engaging in a web of transactions
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`designed to create a market for XRP.
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`1. Defendants And Affiliates Tout XRP As A Valuable Investment Vehicle
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`37.
`
`Throughout
`
`the duration of
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`the XRP offering, Defendants have made
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`representations to investors marketing XRP as a lucrative speculative investment.
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`38.
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`In or around May 2013, Ripple circulated a promotional document to investors in
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`which it explained that its “business model is based on the success of its native currency,” that it
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`would “keep between 25% to 30%” of XRP, and noted the “record highs” of prices other digital
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`assets had achieved as something Ripple hoped to emulate for XRP.
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`39.
`
`On May 12, 2013, a Ripple agent posted on Bitcoin Forum, a popular digital asset
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`forum: “As a corporation, we are legally obligated to maximize shareholder value. With our
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`current business model, that means acting to increase the value and liquidity of XRP. We believe
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`this will happen if the Ripple network is widely adopted as a payment system. . . . One would
`
`expect increased demand to increase price.”
`
`40.
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`Ripple touts XRP on its website, stating that “XRP is traded on more than 100
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`markets and exchanges worldwide that are not affiliated with Ripple.”6
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`41.
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`In a 2017 Market Report, Ripple discussed a conference called “Swell” which
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`was a promotional event designed to bolster the value of XRP, which succeeded.7 Ripple noted
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`in the Market Report that anticipation regarding the “Swell” event “spurred a meaningful spike
`
`
`6 https://ripple.com/xrp/buy-xrp/ (last visited 1/18/21).
`7 https://ripple.com/xrp/q3-2017-xrp-markets-report/ (last visited 1/18/21).
`8
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`
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`

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`Case 3:21-cv-00093-BJD-JBT Document 1 Filed 01/25/21 Page 9 of 118 PageID 9
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`in XRP, pushing it up 100 percent, from $0.15 to $0.30 on $4.56 billion of volume, all without a
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`corresponding rally in [Bitcoin] or [Ether (another crypto-asset)]. In fact, XRP’s 23 percent Q-o-
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`Q volume increase, as well as the overall volume record set during the quarter, can largely be
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`attributed to activity during the three-day period between August 22 -24.”8
`
`42.
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`The Market Report further noted that Defendants’ goals going forward involved
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`growing over-the counter XRP markets: “In Q3, two of our most important objectives were to
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`bolster our XRP lending and help grow over the counter (OTC) XRP markets. Our work in OTC
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`markets was quite successful. We were able to diversify our pipeline of OTC buyers and
`
`establish relationships with most of the key OTC market makers in the space. We’ll look to
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`leverage this momentum as we continue to help build out OTC liquidity in Q4.”9
`
`43.
`
`Around the same time, Coindesk, whose parent company Digital Currency Group
`
`holds an ownership stake in Ripple, published an article advertising that XRP had surpassed $1
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`for the first time, and touted XRP as a potentially lucrative investment vehicle: “XRP is trading
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`at $1.05. The cryptocurrency has gained 36 percent in the last 24 hours and is up 74 percent
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`week-on-week. Its market cap currently stands at $41 billion, also a new record high.”10
`
`44.
`
`Defendant Garlinghouse has also been active in advertising XRP as a lucrative
`
`investment vehicle. For example, in a 2017 interview with BNN, when asked if he is personally
`
`invested in XRP, Defendant Garlinghouse stated “I’m long XRP, I’m very, very long11 XRP as a
`
`
`
`8 Id.
`9 Id.
`10 https://www.coindesk.com/ripple-price-passes-historic-1-milestone (last visited 1/18/21).
`11 To be “long” on a security means that the investor owns and is expecting that the security will
`rise in value in the future. https://www.investor.gov/introduction-investing/investing-
`basics/how-stock-markets-work/stock-purchases-and-sales-long-and#:~:text=Glossary-
`,Stock%20Purchases%20and%20Sales%3A%20Long%20and%20Short,is%20a%20%E2%80%9
`Cshort%E2%80%9D%20position. (last visited 1/25/21).
`9
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`
`
`

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`Case 3:21-cv-00093-BJD-JBT Document 1 Filed 01/25/21 Page 10 of 118 PageID 10
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`percentage of my personal balance sheet.”12 Defendant Garlinghouse further stated that he is
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`“not long on some of the other [digital] assets, because it is not clear to me what’s the real utility,
`
`what problem are they really solving.” He ended by reiterating, “if you’re solving a real problem,
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`if it’s a scaled problem, then I think you have a huge opportunity to continue to grow that. We
`
`have been really fortunate obviously, I remain very, very, very long XRP, there is an expression
`
`in the industry HODL13, instead of hold, it’s HODL . . . I’m on the HODL side.”
`
`45.
`
`Defendant Garlinghouse later “tweeted” that “Bloomberg welcomes $XRP to
`
`@theterminal and gets it right - #2 market cap behind $BTC at ~$80BB!”14 Once again, this was
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`an attempt by Defendant Garlinghouse, acting on behalf of Ripple, to bolster XRP as an
`
`investment vehicle. This is one example of several posts on the subject.
`
`46.
`
`Ripple itself added to the marketing, “tweeting” on March 24, 2017 that “[t]he
`
`price of #XRP continues to surge showing that people are looking for #bitcoin alternatives.”15
`
`This is one example of several posts in which Ripple marketed XRP as an investment vehicle.
`
`47.
`
`Defendant Garlinghouse has also directly tied the success and value of XRP to the
`
`success of the Ripple enterprise. For example, on September 11, 2017, Garlinghouse stated in an
`
`interview with CNBC: “People are looking at the success Ripple has been having as a company,
`
`and I think that’s increased the value of XRP.”
`
`
`12 See @JonErlichman, TWITTER (Dec. 14, 2017, 9:11 AM), https://twitter.com/jonerlichman/
`status/94135496422752261.
`13 “HODL is a term derived from a misspelling of "hold" that refers to buy-and-hold strategies in
`the context of bitcoin and other cryptocurrencies.” See
`https://www.investopedia.com/terms/h/hodl.asp (last visited 1/19/21).
`14 @bgarlinghouse, TWITTER (Dec. 14, 2017, 10:33 AM),
`https://twitter.com/bgarlinghouse/status/
`941375649549246464.
`15 @Ripple, TWITTER (Mar. 24, 2017, 11:53 AM),
`https://twitter.com/Ripple/status/845347809830
`195200.
`
`
`
`10
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`Case 3:21-cv-00093-BJD-JBT Document 1 Filed 01/25/21 Page 11 of 118 PageID 11
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`2. Defendants’ Transactions Involving XRP
`
`48.
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`To effectuate their plan, Defendants sold and/or distributed XRP through various
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`chains of distribution, summarized below.
`
`49.
`
`First, from 2013 through 2014, Ripple made efforts to create a market for XRP by
`
`having Ripple distribute approximately 12.5 billion XRP through “bounty programs” that paid
`
`programmers compensation for reporting problems in the XRP Ledger’s code. As part of these
`
`calculated steps, Ripple distributed small amounts of XRP (typically between 100 and 1,000
`
`XRP per transaction) to anonymous developers and others to establish a trading market for XRP.
`
`50.
`
`Second, beginning in at least 2013, Ripple, largely through Defendant XRP II,
`
`LLC, also made large offerings of XRP to investment funds and sophisticated investors. In total,
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`Defendants sold approximately 4.9 billion XRP (worth approximately $624 million) to
`
`institutional investors. The purpose of this sale of XRP was to fund Ripple’s operations and
`
`develop a speculative trading market in XRP.
`
`51.
`
`These sales to institutional investors were part of Defendants’ strategy to generate
`
`speculative interest in XRP from public investors. As Ripple stated in a document published on
`
`its website on January 24, 2017, Ripple’s Institutional Sales of XRP were “indicative of [XRP’s]
`
`broader capital market potential.”
`
`52.
`
` The agreements between Defendants and institutional buyers of XRP 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.
`
`
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`11
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`

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`Case 3:21-cv-00093-BJD-JBT Document 1 Filed 01/25/21 Page 12 of 118 PageID 12
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`53.
`
`In other words, Ripple expected that most, if not all, institutional buyers would
`
`sell their XRP into public markets and tried to protect XRP’s trading price by limiting the
`
`amounts 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.
`
`54.
`
`Third, Defendants sold XRP on the open market. In total, Defendant sold
`
`approximately 3.9 billion XRP on the open market, valued at approximately $763 million.
`
`55.
`
`Ripple conducted the open 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.
`
`56.
`
`As will be discussed in depth below, Defendants conducted these open market
`
`sales in large part by paying commissions, denominated in XRP, for executing Ripple’s XRP
`
`sales to the public on digital asset trading platforms.
`
`57.
`
`To bolster open market sales, 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.
`
`58. While acting as Ripple’s CEO, Defendant Garlinghouse had final decision-
`
`making authority over which trading venues to use for the open 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.
`
`
`
`12
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`Case 3:21-cv-00093-BJD-JBT Document 1 Filed 01/25/21 Page 13 of 118 PageID 13
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`59.
`
`At Ripple’s direction, the intermediary sellers ensured that the open market sales
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`were programmatically set not to exceed a certain percentage of XRP’s overall daily trading
`
`volume, and Ripple referred to the open market sales as “programmatic sales.”
`
`60.
`
`Fourth, Defendants enlisted others to assist Ripple in developing a market for
`
`XRP, compensating them with XRP. In total, Defendants paid out approximately 4.05 billion
`
`XRP to such individuals, valued at approximately $500 million. 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).
`
`61.
`
`62.
`
`This fourth category of XRP distribution itself encompasses five subcategories.
`
`The first subcategory is XRP offered as executive compensation distributions.
`
`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. On December 13, 2016,
`
`Ripple granted Defendant Garlinghouse 500 million XRP as part of a compensation agreement.
`
`Ripple granted Defendant Garlinghouse an additional 250 million XRP on May 29, 2019. These
`
`XRP grants to Defendant Garlinghouse totaled approximately $246 million.
`
`63.
`
`Defendant Garlinghouse, between April 2017 and December 2019, sold
`
`approximately 321 million XRP to public investors, worth approximately $150 million.
`
`Defendant Garlinghouse sold his XRP through digital asset trading platforms and/or other
`
`intermediaries.
`
`64.
`
`The second subcategory is XRP provided for on-demand liquidity distributions.
`
`As described below, in late 2018 Ripple began to market a product (“On-Demand Liquidity” or
`
`“ODL,” also called “xRapid”) for money transmitting businesses to buy XRP in one jurisdiction,
`
`
`
`13
`
`

`

`Case 3:21-cv-00093-BJD-JBT Document 1 Filed 01/25/21 Page 14 of 118 PageID 14
`
`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. 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.
`
`65.
`
`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 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.
`
`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.
`
`66.
`
`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.
`
`67.
`
`The third subcategory is XRP sold into the market by related entities. First, in
`
`2015 and 2017, Ripple issued at least 2 billion XRP as contributions to “RippleWorks,” an entity
`
`Ripple’s former CEO 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. On February 1,
`
`2017, Ripple committed an additional one billion XRP to RippleWorks. 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.
`
`68.
`
`Second, from approximately April 2018 through August 2020, Ripple publicly
`
`marketed an initiative it called “xPring,” through which it distributed over 776 million XRP to at
`
`least 27 different entities or projects with the shared expectation that the entities would resell
`
`
`
`14
`
`

`

`Case 3:21-cv-00093-BJD-JBT Document 1 Filed 01/25/21 Page 15 of 118 PageID 15
`
`XRP to further Ripple’s 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. 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 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.
`
`69.
`
`The fourth subcategory is the sale of XRP options. 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.
`
`70.
`
`The fifth subcategory is payments made to digital asset trading platforms to
`
`support XRP’s trading market. In 2017 and 2018, Ripple also 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 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.
`
`71.
`
`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.
`
`
`
`15
`
`

`

`Case 3:21-cv-00093-BJD-JBT Document 1 Filed 01/25/21 Page 16 of 118 PageID 16
`
`72.
`
`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.
`
`73.
`
`Ripple made these efforts because it believed that increased trading volume for
`
`XRP on digital asset trading platforms would create “momentum” for XRP.
`
`74.
`
`Ripple tried repeatedly and unsuccessfully to persuade that digital asset trading
`
`firm to “list XRP on [its] exchange” by offering to “cover implementation costs, paying rebates,
`
`[and] brokering intros to large XRP holders for custody.”
`
`75.
`
`Two major examples are trading platforms Coinbase and Gemini, which are
`
`popular because they allow customers to purchase crypto-assets with U.S. dollars. Ripple
`
`attempted to pay both exchanges to list XRP because it would likely substantially increase the
`
`value of XRP.16 Indeed, XRP rose based on the mere speculation that it would be listed on
`
`Coinbase and Gemini.17
`
`76.
`
`In total, Defendants sold approximately $14.6 billion worth of XRP.
`
`D. Defendant Ripple’s Income Is Disproportionately Derived From Sales Of XRP
`
`77.
`
`Defendant Ripple offers software products and enterprise solutions for sale,
`
`known as xCurrent, xRapid, and xVia, but its primary source of income is sales of XRP to
`
`investors. Indeed, revenue from these software products pale in comparison to the revenue
`
`Ripple derives from sales of XRP.
`
`78.
`
`79.
`
`Ripple’s sales of XRP have allowed it to meet its ballooning expenses.
`
`For example, Ripple’s expenses in 2013 and 2014 alone amounted to
`
`approximately $25 million. In 2017, Defendants began accelerating Ripple’s sales of XRP
`
`
`16 https://www.bloomberg.com/news/articles/2018-04-04/ripple-is-said-to-struggle-to-buy-u-s-
`listing-for-popular-coin (last visited 1/18/21).
`17 Id.
`
`
`
`16
`
`

`

`Case 3:21-cv-00093-BJD-JBT Document 1 Filed 01/25/21 Page 17 of 118 PageID 17
`
`because, while Ripple’s expenses continued to increase (reaching nearly $275 million for 2018),
`
`its revenue outside of XRP sales did not.
`
`80.
`
`Starting in 2016, Ripple began selling two software suites, xCurrent and xVia,
`
`from which it has earned approximately $23 million through 2019, though neither uses XRP or
`
`blockchain technology. Ripple raised about $97 mi

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