`
`Richard Best
`Kristina Littman
`Preethi Krishnamurthy
`Jorge G. Tenreiro
`Dugan Bliss
`John O. Enright
`Daphna A. Waxman
`Jon A. Daniels
`SECURITIES AND EXCHANGE COMMISSION
`New York Regional Office
`200 Vesey Street, Suite 400
`New York, New York 10281-1022
`(212) 336-9145 (Tenreiro)
`Email: TenreiroJ@sec.gov
`
`UNITED STATES DISTRICT COURT
`SOUTHERN DISTRICT OF NEW YORK
`------------------------------------------------------------------------x
`SECURITIES AND EXCHANGE COMMISSION, :
`:
`Plaintiff, :
`:
`- against - :
`:
`RIPPLE LABS, INC., BRADLEY GARLINGHOUSE, :
`and CHRISTIAN A. LARSEN,
`
`
`
`:
`:
`:
`:
`------------------------------------------------------------------------x
`
`Defendants.
`
`
`
`20 Civ. 10823
`
`ECF Case
`
`Complaint
`Jury Trial Demanded
`
`Plaintiff Securities and Exchange Commission (the “SEC”), for its Complaint against
`
`Defendants Ripple Labs, Inc. (“Ripple”), Bradley Garlinghouse (“Garlinghouse”), and Christian A.
`
`Larsen (“Larsen” and, with Ripple and Garlinghouse, “Defendants”), alleges as follows:
`
`SUMMARY
`
`1.
`
`From at least 2013 through the present, Defendants sold over 14.6 billion units of a
`
`digital asset security called “XRP,” in return for cash or other consideration worth over $1.38 billion
`
`U.S. Dollars (“USD”), to fund Ripple’s operations and enrich Larsen and Garlinghouse. Defendants
`
`undertook this distribution without registering their offers and sales of XRP with the SEC as
`
`required by the federal securities laws, and no exemption from this requirement applied.
`
`1
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`Case 1:20-cv-10832-AT Document 1 Filed 12/22/20 Page 2 of 71
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`
`
`2.
`
`Because Ripple never filed a registration statement, it never provided investors with
`
`the material information that every year hundreds of other issuers include in such statements when
`
`soliciting public investment. Instead, Ripple created an information vacuum such that Ripple and
`
`the two insiders with the most control over it—Larsen and Garlinghouse—could sell XRP into a
`
`market that possessed only the information Defendants chose to share about Ripple and XRP.
`
`3.
`
`Ripple engaged in this illegal securities offering from 2013 to the present, even
`
`though Ripple received legal advice as early as 20120 that under certain circumstances XRP could be
`
`considered an “investment contract” and therefore a security under the federal securities laws.
`
`4.
`
`Ripple and Larsen ignored this advice and instead elected to assume the risk of
`
`initiating a large-scale distribution of XRP without registration.
`
`5.
`
`From a financial perspective, the strategy worked. Over a years-long unregistered
`
`offering of securities (the “Offering”), Ripple was able to raise at least $1.38 billion by selling XRP
`
`without providing the type of financial and managerial information typically provided in registration
`
`statements and subsequent periodic and current filings. Ripple used this money to fund its
`
`operations without disclosing how it was doing so, or the full extent of its payments to others to
`
`assist in its efforts to develop a “use” for XRP and maintain XRP secondary trading markets.
`
`6.
`
`Meanwhile, Larsen—Ripple’s initial chief executive officer (“CEO”) and current
`
`chairman of the Board—and Garlinghouse—Ripple’s current CEO—orchestrated these unlawful
`
`sales and personally profited by approximately $600 million from their unregistered sales of XRP.
`
`7.
`
`Garlinghouse did so while repeatedly touting that he was “very long” XRP, meaning
`
`he held a significant position he expected to rise in value, without disclosing his sales of XRP.
`
`8.
`
`Defendants continue to hold substantial amounts of XRP and—with no registration
`
`statement in effect—can continue to monetize their XRP while using the information asymmetry
`
`they created in the market for their own gain, creating substantial risk to investors.
`
`2
`
`
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`Case 1:20-cv-10832-AT Document 1 Filed 12/22/20 Page 3 of 71
`
`
`
`VIOLATIONS
`
`9.
`
`By engaging in the conduct set forth in this Complaint, Defendants engaged in and
`
`are currently engaging in the unlawful offer and sale of securities in violation of Sections 5(a) and
`
`5(c) of the Securities Act of 1933 (“Securities Act”) [15 U.S.C. §§ 77e(a) and 77e(c)], and Larsen and
`
`Garlinghouse also aided and abetted Ripple’s violations of those provisions.
`
`10.
`
`Unless Defendants are permanently restrained and enjoined, they will continue to
`
`engage in the acts, practices, and courses of business set forth in this Complaint and in acts,
`
`practices, and courses of business of similar type and object.
`
`NATURE OF THE PROCEEDING AND RELIEF SOUGHT
`
`11.
`
`The Commission brings this action pursuant to the authority conferred upon it by
`
`Section 20(b) of the Securities Act [15 U.S.C. § 77t(b)].
`
`12.
`
`The Commission seeks a final judgment: (a) permanently enjoining Defendants from
`
`violating Sections 5(a) and 5(c) of the Securities Act, pursuant to Section 20(b) of the Securities Act
`
`[15 U.S.C. § 77t(b)]; (b) pursuant to Section 21(d)(5) of the Securities Exchange Act of 1934
`
`(“Exchange Act”), (i) ordering Defendants to disgorge their ill-gotten gains and to pay prejudgment
`
`interest thereon and (ii) prohibiting Defendants from participating in any offering of digital asset
`
`securities; and (c) imposing civil money penalties on Defendants pursuant to Section 20(d) of the
`
`Securities Act [15 U.S.C § 77t(d)].
`
`JURISDICTION AND VENUE
`
`13.
`
`This Court has jurisdiction over this action pursuant to Section 22(a) of the
`
`Securities Act [15 U.S.C. § 77v(a)].
`
`14.
`
`Defendants, directly or indirectly, have made use of the means or instruments of
`
`transportation or communication in interstate commerce or of the mails in connection with the
`
`transactions, acts, practices, and courses of business alleged herein.
`
`3
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`Case 1:20-cv-10832-AT Document 1 Filed 12/22/20 Page 4 of 71
`
`
`
`15.
`
`Venue is proper in the Southern District of New York pursuant to Section 22(a) of
`
`the Securities Act [15 U.S.C. § 77v(a)]. Among other acts, Ripple has an office in this District.
`
`Garlinghouse made certain statements at issue in this case while physically present in this District.
`
`All Defendants sold or orchestrated sales of XRP to purchasers residing in this District and enlisted
`
`entities domiciled in this District to sell the securities at issue in this case.
`
`DEFENDANTS
`
`16.
`
`Ripple, f/k/a Open Coin, Inc., is a Delaware corporation founded in September
`
`2012, with its principal place of business in San Francisco, California, and an office in Manhattan.
`
`17.
`
`Garlinghouse, age 49, is a California resident who was Ripple’s chief operating
`
`officer (“COO”) from April 2015 through December 2016, and who has served as its CEO from
`
`January 2017 to the present.
`
`18.
`
`Larsen, age 60, is a California resident who co-founded Ripple and served as its
`
`CEO from September 2012 through December 2016, and who today serves as executive chairman
`
`of Ripple’s Board of Directors. Larsen received nine billion XRP shortly after Ripple’s founding. In
`
`2005 Larsen co-founded, and through 2011 served as the CEO of, a company sued by the SEC in
`
`November 2008 for violating Sections 5(a) and (c) of the Securities Act.
`
`RELATED ENTITY AND INDIVIDUALS
`
`19.
`
`XRP II, LLC, f/k/a XRP Fund, LLC (“XRP II”), is Ripple’s wholly-owned
`
`subsidiary. It was founded in approximately 2013, has been organized as a New York limited
`
`liability company since at least 2015, and is the entity through which Ripple offered and sold most of
`
`its XRP in the Offering. XRP II is registered as a money service business with the United States
`
`Financial Crimes Enforcement Network (“FinCEN”) and as a virtual currency business with the
`
`New York State Department of Financial Services (“NYDFS”).
`
`4
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`Case 1:20-cv-10832-AT Document 1 Filed 12/22/20 Page 5 of 71
`
`
`
`20.
`
`Co-Founder, age 45, is a California resident who co-founded Ripple and received
`
`nine billion XRP shortly after Ripple’s founding.
`
`21.
`
`Cryptographer-1, age 51, is a California resident who served as Ripple’s chief
`
`cryptographer until July 2018 and is currently Ripple’s chief technology officer.
`
`22.
`
`Ripple Agent-1, age 55, is a California resident who co-founded Ripple and received
`
`two billion XRP shortly after Ripple’s founding.
`
`23.
`
`Ripple Agent-2, age 42, is a Florida resident who served as Ripple’s “Head of XRP
`
`Markets” from November 2016 through April 2020.
`
`24.
`
`Ripple Agent-3, age 36, is a California resident who served as Ripple’s executive
`
`vice president of business development from February 2013 to January 2015, and its senior vice
`
`president of business development from February 2015 through May 2018.
`
`STATUTORY AND LEGAL FRAMEWORK
`
`25.
`
`Congress enacted the Securities Act to regulate the offer and sale of securities. In
`
`contrast to ordinary commercial principles of caveat emptor, Congress enacted a regime of full and
`
`fair disclosure, requiring a company (an issuer) and its control persons who offer and sell securities
`
`to the investing public to provide sufficient, accurate information to allow investors to make
`
`informed decisions before they invest.
`
`26.
`
`Sections 5(a) and 5(c) of the Securities Act require that an issuer of securities like
`
`Ripple, and its control persons and affiliates like Larsen and Garlinghouse, register offers and sales
`
`of those securities with the SEC when they offer and sell securities to the public, absent certain
`
`exemptions that do not apply to Defendants’ transactions. Registration statements relating to an
`
`offering of securities thus provide public investors with material information about the issuer and
`
`the offering, including financial and managerial information, how the issuer will use offering
`
`proceeds, and the risks and trends that affect the enterprise and an investment in its securities.
`
`5
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`Case 1:20-cv-10832-AT Document 1 Filed 12/22/20 Page 6 of 71
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`
`
`27.
`
`Section 5 of the Securities Act is all embracing; it prohibits any unregistered
`
`securities offering. Through exemption provisions like Section 4 of the Securities Act [15 U.S.C.
`
`§ 77d], however, Congress distinguished between (1) sales by issuers of their securities into public
`
`markets, which require registration, and (2) ordinary trading transactions in the market by investors,
`
`once the securities have come to rest with them, which typically are exempted from registration.
`
`28.
`
`Congress sought to provide the protections afforded by registration both where
`
`securities are sold directly to the public by the issuer, and where they are publicly sold through an
`
`intermediary who buys the stock from the issuer with a view to public resale, i.e., “underwriters.” 15
`
`U.S.C. § 77b(a)(11). Congress enacted a broad definition of underwriter to include all persons who
`
`might operate as conduits for securities being placed into the hands of the investing public.
`
`29.
`
`An issuer’s sales of securities may be exempt from registration provided they are not
`
`part of a public offering. Securities distributions, or public offerings, by issuers, with or without the
`
`use of underwriters, are not exempt from registration and must be registered under Section 5.
`
`Exemptions and safe harbors from registration are structured to exempt transactions where the
`
`purpose and protections of registration have been otherwise satisfied. The party claiming an
`
`exemption bears the burden of showing the transaction is entitled to one.
`
`30.
`
`After an issuer registers the offer and sale of its securities under the Securities Act,
`
`the Exchange Act requires it to make periodic and current public disclosures, including annual,
`
`quarterly, and current reports that provide similar disclosure, including a description of the issuer’s
`
`business, management’s discussion and analysis, disclosure of significant events, and financial
`
`information. These filings are necessary to achieve the statutory goal of enabling investors in the
`
`offering, as well as would-be purchasers in secondary transactions, to make informed decisions.
`
`31.
`
`The definition of a “security” under the Securities Act includes a wide range of
`
`investment vehicles, including “investment contracts.” Investment contracts are instruments
`
`6
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`Case 1:20-cv-10832-AT Document 1 Filed 12/22/20 Page 7 of 71
`
`
`
`through which a person invests money in a common enterprise and reasonably expects profits or
`
`returns derived from the entrepreneurial or managerial efforts of others. Courts have found that
`
`novel or unique investment vehicles constitute investment contracts, including interests in orange
`
`groves, animal breeding programs, railroads, mobile phones, and enterprises that exist only on the
`
`Internet. As the United States Supreme Court noted in SEC v. W.J. Howey Co., Congress defined
`
`“security” broadly to embody a “flexible rather than a static principle, one that is capable of
`
`adaptation to meet the countless and variable schemes devised by those who seek the use of the
`
`money of others on the promise of profits.” 328 U.S. 293, 299 (1946).
`
`BACKGROUND ON DIGITAL ASSETS AND DISTRIBUTED LEDGERS
`
`32.
`
`The term “digital asset” or “digital token” generally refers to an asset issued and/or
`
`transferred using distributed ledger or blockchain technology, including assets sometimes referred to
`
`as “cryptocurrencies,” “virtual currencies,” digital “coins,” and digital “tokens.”
`
`33.
`
`A blockchain or distributed ledger is a peer-to-peer database spread across a network
`
`of computers that records all transactions in theoretically unchangeable, digitally recorded data
`
`packages. The system relies on cryptographic techniques for secure recording of transactions.
`
`34.
`
`Blockchains typically employ a consensus mechanism to “validate” transactions,
`
`which, among other things, aims to achieve agreement on a data value or on the state of the ledger.
`
`35.
`
`Digital tokens may be traded on digital asset trading platforms in exchange for other
`
`digital assets or fiat currency (legal tender issued by a country), at times by being allocated to
`
`investors’ accounts in the records of the platform (i.e., “off-chain”), without necessarily being
`
`transferred from one blockchain address to another (i.e., “on-chain”).
`
`36.
`
`Some digital assets may be “native tokens” to a particular blockchain—meaning that
`
`they are represented on their own blockchain, though other digital assets may also be represented on
`
`that same blockchain. Native tokens typically serve a number of technical functions on a distributed
`
`7
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`Case 1:20-cv-10832-AT Document 1 Filed 12/22/20 Page 8 of 71
`
`
`
`ledger, such as helping secure the ledger from manipulation or other forms of attacks. Like other
`
`“digital tokens,” native tokens may also be sold and traded for consideration.
`
`37.
`
`On July 25, 2017, the SEC issued the Report of Investigation Pursuant to Section 21(a) of the
`
`Securities Exchange Act of 1934: The DAO, advising “those who would use . . . distributed ledger or
`
`blockchain-enabled means for capital raising[] to take appropriate steps to ensure compliance with
`
`the U.S. federal securities laws,” and finding that the offering of digital assets at issue in that report
`
`were investment contracts and, therefore, securities.
`
`FACTS
`
`I.
`
`
`
`The Creation of XRP
`
`A.
`
`Larsen and Co-Founder Established Ripple
`
`38.
`
`In approximately late 2011 or early 2012, Co-Founder began working on the idea
`
`and code for what would become the “XRP Ledger” (a/k/a “Ripple Protocol”). Around that time,
`
`he recruited Cryptographer-1 and Ripple Agent-1 to assist him in programming the XRP Ledger.
`
`39.
`
`The XRP Ledger—software code—operates as a peer-to-peer database, spread
`
`across a network of computers, that records data respecting transactions, among other things.
`
`40.
`
`During the process to achieve consensus with respect to a new proposed state of the
`
`XRP Ledger, each server on the network evaluates proposed transactions from a subset of servers it
`
`trusts not to defraud it, also known as the server’s “UNL” or “Unique Node List.” While each
`
`server defines its own trusted servers, the XRP Ledger requires a high degree of overlap between the
`
`trusted nodes chosen by each server. Ripple thus publishes its own proposed UNL.
`
`41.
`
`Approximately 40% of the nodes validating transactions on the XRP Ledger are
`
`operated by organizations or entities based in the United States, including Ripple itself.
`
`42.
`
`In 2012, Co-Founder hired Larsen to be the CEO of a newly formed company that
`
`would continue the XRP Ledger and XRP projects.
`
`8
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`Case 1:20-cv-10832-AT Document 1 Filed 12/22/20 Page 9 of 71
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`
`
`43.
`
`As CEO, Larsen ran Ripple’s day-to-day operations and was responsible for all
`
`aspects of company products and strategy and for the growth of and investment in the company.
`
`Larsen solicited and participated in meetings with current and prospective Ripple equity and XRP
`
`investors and regularly updated Ripple’s Board of Directors and shareholders.
`
`44.
`
`45.
`
`In September 2012, Co-Founder, Larsen, and Ripple Agent-1 founded Ripple.
`
`Upon the completion of the XRP Ledger in December 2012, and as its code was
`
`being deployed to the servers that would run it, Co-Founder, Ripple Agent-1, and Cryptographer-1
`
`created—at little cost—the final version of what today is a fixed supply of 100 billion XRP.
`
`46.
`
`Co-Founder, Larsen, and Ripple Agent-1 then transferred 80 billion XRP to Ripple
`
`and the remaining 20 billion XRP to themselves—9 billion XRP each to Co-Founder and Larsen
`
`and 2 billion XRP to Ripple Agent-1—as compensation for Ripple’s founders. After this transfer,
`
`Ripple and its founders controlled 100% of XRP.
`
`47.
`
`As Cryptographer-1—a well-respected and known Ripple spokesperson—stated in a
`
`recent tweet (on Twitter): “The people who created XRP are pretty much the same as the people
`
`who created Ripple and they created Ripple originally to, among other things, distribute XRP.”
`
`48.
`
`49.
`
`XRP, also software code, is a digital asset and the native token on the XRP Ledger.
`
`Ripple and Larsen originally called XRP “Ripple Credits” and, for several years
`
`thereafter, participants in the digital asset space simply referred to the digital asset as “Ripples.”
`
`50.
`
`Ripple could do little with its billions of XRP at that time, however, and Ripple had
`
`limited funds to pursue any operations it may have sought to undertake. Ripple determined to
`
`create a market for and sell XRP to the public to monetize its holdings and finance its operations.
`
`B.
`
`Ripple’s Lawyers Warned Ripple and Larsen that XRP Could Be a Security
`
`51.
`
`Ripple sought the advice of an international law firm regarding certain state and
`
`federal legal risks associated with the distribution and monetization of XRP.
`
`9
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`
`
`52.
`
`The law firm provided two memos—one on February 8, 2012 and another on
`
`October 19, 2012 (the “Legal Memos”)—that analyzed these risks. The first memo was addressed
`
`to the Co-Founder and another individual, and the second to Larsen, the Co-Founder, and Ripple.
`
`53.
`
`The Legal Memos warned that there was some risk that XRP would be considered
`
`an “investment contract” (and thus a security) under the federal securities laws depending on various
`
`factors. These included, among other things, how Ripple promoted and marketed XRP to potential
`
`purchasers, the motivation of such purchasers, and Ripple’s other activities with respect to XRP. If
`
`individuals purchased XRP “to engage in speculative investment trading” or if Ripple employees
`
`promoted XRP as potentially increasing in price, the Legal Memos warned that Ripple would face an
`
`increased risk that XRP units would be considered investment contracts (and thus securities).
`
`54.
`
`Both memos warned that XRP was unlikely to be considered “currency” under the
`
`Exchange Act because, unlike “traditional currencies,” XRP was not backed by a central government
`
`and was not legal tender.
`
`55.
`
`The October 2012 Legal Memo also advised Ripple and Larsen to contact the SEC
`
`to obtain clarity as to whether XRP was a security under the federal securities laws.
`
`56.
`
`57.
`
`By at least 2013, Larsen was aware of the contents of the Legal Memos.
`
`On May 26, 2014, Larsen explained in an email to an individual formerly associated
`
`with Ripple that the international law firm that wrote the Legal Memos advised “that investors and
`
`employees could not receive XRP” because that “could risk SEC designation [as] a security.” Larsen
`
`also explained that the XRP he received upon Ripple’s founding was “comp[ensation] for . . .
`
`personally assuming th[e] risk” of being deemed the issuers of securities—namely, XRP.
`
`58.
`
`In other words, as Larsen himself explained, he was paid at the outset in an asset
`
`(potentially worth hundreds of millions of dollars) to assume a risk he knew existed—that the sale of
`
`the asset could constitute an offering of securities for which he would be held responsible.
`
`10
`
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`Case 1:20-cv-10832-AT Document 1 Filed 12/22/20 Page 11 of 71
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`
`
`59.
`
`Despite this knowledge and Larsen’s familiarity with Section 5 from the SEC
`
`enforcement action that his previous company had settled in 2008 while Larsen was its CEO, Ripple
`
`and Larsen failed to heed some of the legal advice and warnings in the Legal Memos. Neither
`
`contacted the SEC to obtain clarity about the legal status of XRP before engaging in a large-scale
`
`distribution. Moreover, as described in more detail below, Ripple and Larsen (and later
`
`Garlinghouse) offered, sold and promoted XRP as an investment—precisely the type of conduct the
`
`Legal Memos had warned could lead to a determination that XRP was a security.
`
`60.
`
`In addition, Ripple and Larsen (and later Garlinghouse) never filed a registration
`
`statement with the SEC prior to offering or selling XRP. Nor did they limit their sales of XRP to
`
`transactions that fit within legal exemptions to the registration requirements of the Securities Act.
`
`In other words, Ripple and Larsen embarked on a large-scale unregistered public distribution of
`
`XRP and—with the goal of immense profits—simply assumed the risk that they were violating the
`
`federal securities laws.
`
`C.
`
`Ripple Began to Distribute XRP
`
`61.
`
`From 2013 through 2014, Ripple and Larsen 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.
`
`62.
`
`At the same time, Ripple began to make public statements with respect to XRP (then
`
`Ripple Credits) that began to create in investors an expectation of profit based on Ripple’s efforts.
`
`63.
`
`For example, in a promotional document Ripple circulated to potential investors
`
`around May 2013, Ripple explained that its “business model is based on the success of its native
`
`11
`
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`Case 1:20-cv-10832-AT Document 1 Filed 12/22/20 Page 12 of 71
`
`
`
`currency,” that it would “keep between 25% to 30%” of XRP, and noted the “record highs” of
`
`prices other digital assets had achieved as something Ripple hoped to emulate for XRP.
`
`64.
`
`On May 12, 2013, Cryptographer-1 posted on Bitcoin Forum, a popular digital asset
`
`forum: “As a corporation, we are legally obligated to maximize shareholder value. With our current
`
`business model, that means acting to increase the value and liquidity of XRP. We believe this will
`
`happen if the Ripple network is widely adopted as a payment system. . . . One would expect
`
`increased demand to increase price.”
`
`II.
`
`Ripple Made Unregistered Offers and Sales in Connection with XRP Distributions
`
`A.
`
`Ripple’s Plan to Distribute XRP
`
`65.
`
`By at least late 2013, Ripple and Larsen viewed the “Goal of Distribution” for XRP
`
`as achieving “Network Growth” and “Rais[ing] funds for Ripple Labs operations,” as reflected in at
`
`least one internal Ripple document titled the “XRP Distribution Framework.”
`
`66.
`
`Ripple began its efforts by attempting to increase speculative demand and trading
`
`volume for XRP though, at first, it did not articulate a single specific strategy about which type of
`
`entities or persons it would target to encourage adoption of XRP for any particular non-investment
`
`use. As Cryptographer-1 put it in 2013, Ripple was working on “multiple avenues” at the time.
`
`67.
`
`Starting in at least 2015, however, Ripple decided that it would seek to make XRP a
`
`“universal [digital] asset” for banks and other financial institutions to effect money transfers.
`
`68.
`
`According to Ripple’s plans, to create acceptance for the universal digital asset,
`
`Ripple first had to create an active, liquid XRP secondary trading market. It therefore continued its
`
`efforts to develop a use for XRP while increasing sales of XRP into the market. Under the plan, a
`
`future “user” of XRP as a universal asset (i.e., a bank) would use the speculative trading market to
`
`effect money transfers.
`
`12
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`
`
`69.
`
`In other words, Ripple’s stated business plan made Ripple’s conduct alleged here a
`
`foregone conclusion—Ripple made it part of its “strategy” to sell XRP to as many speculative
`
`investors as possible. While Ripple touted the potential future use of XRP by certain specialized
`
`institutions, a potential use it would deploy investor funds to try to create, Ripple sold XRP widely
`
`into the market, specifically to individuals who had no “use” for XRP as Ripple has described such
`
`potential “uses” and for the most part when no such uses even existed.
`
`70.
`
`Ripple also lacked the funds to pay for these endeavors and for its general corporate
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`business expenses, which for 2013 and 2014 already exceeded $25 million, without selling XRP.
`
`71.
`
`Ripple’s objectives and its own financial reality thus compelled it to actively seek to
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`offer and sell XRP as widely as possible, while controlling supply and demand in the resale market to
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`manage and control liquidity for an imagined, future “use” case.
`
`72.
`
`In August 2013, Ripple started making unregistered offers and sales of XRP in
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`exchange for fiat currencies or digital assets such as bitcoin.
`
`73.
`
`Larsen orchestrated the initial stage of Ripple’s Offering of XRP by approving the
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`timing and amount of offers and sales to: (1) purchasers in the open market (“Market Sales”); (2)
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`investment funds, wealthy individuals, or other sophisticated investors (“Institutional Sales”); and (3)
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`others enlisted to assist Ripple’s efforts to develop an XRP market (the “Other XRP Distributions”).
`
`74.
`
`Garlinghouse joined Ripple as COO in April 2015 and substantially assisted its
`
`ongoing unregistered Offering by, among other things, being responsible for its operations. In
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`January 2017, Garlinghouse became CEO and Larsen retained his role as chairman of the Board.
`
`75.
`
`After the change in corporate structure, both Garlinghouse and Larsen remained key
`
`decision makers and participants in Ripple’s ongoing Offering. As CEO, Garlinghouse approved
`
`the timing and amounts of unregistered offers and sales of XRP, and, as chairman of the Board,
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`Larsen was consulted on such offers and sales. Both continue to communicate with potential and
`
`13
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`Case 1:20-cv-10832-AT Document 1 Filed 12/22/20 Page 14 of 71
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`
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`actual XRP investors and Ripple equity shareholders and to participate in certain projects Ripple is
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`pursuing with respect to XRP. Both have continued selling XRP into public markets.
`
`76.
`
`In 2017, Defendants also began accelerating Ripple’s sales of XRP because, while
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`Ripple’s expenses continued to increase (reaching nearly $275 million for 2018), its revenue outside
`
`of XRP sales did not.
`
`77.
`
`For example, starting in 2016, Ripple began selling two software suites, xCurrent and
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`xVia, from which it has earned approximately $23 million through 2019, though neither uses XRP or
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`blockchain technology. Ripple raised about $97 million in sales of equity securities through 2018
`
`and an additional $200 million in 2019. In other words, the overwhelming majority of Ripple’s
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`revenue came from its sales of XRP, and Ripple relied on those sales to fund its operations.
`
`B.
`
`Overview of Ripple’s XRP Distribution
`
`78.
`
`79.
`
`Ripple’s planned distribution of XRP succeeded.
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`From 2014 through the end of 2019, to fund its operations, Ripple sold at least 3.9
`
`billion XRP through Market Sales for approximately $763 million USD.
`
`80.
`
`From 2013 through the end of the third quarter of 2020, Ripple sold at least 4.9
`
`billion XRP through Institutional Sales for approximately $624 million USD, also to fund Ripple’s
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`operations, for a total of at least $1.38 billion USD in Market and Institutional Sales alone.
`
`81.
`
`The market price for XRP—and Ripple’s sales prices in the Offering—ranged from
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`a low price of approximately $0.002 per XRP in 2014 to a high price of $3.84 per XRP in early 2018,
`
`an increase of nearly 137,000%. XRP traded at approximately $0.58 USD per XRP as of last week.
`
`82.
`
`Ripple also undertook to achieve its goal of widespread distribution of XRP by
`
`exchanging XRP for non-cash consideration, such as labor and market-making services. Through
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`the Other XRP Distributions, Ripple paid third parties to assist in its efforts to accomplish as
`
`widespread a distribution of XRP as possible and to attempt to develop a “use” for XRP.
`
`14
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`Case 1:20-cv-10832-AT Document 1 Filed 12/22/20 Page 15 of 71
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`
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`83.
`
`Since 2014, Defendants have disbursed at least 4.05 billion XRP (valued at at least
`
`$500 million USD when the XRP was distributed) through Other XRP Distributions.
`
`84.
`
`In addition, Larsen (beginning in 2015) and Garlinghouse (beginning in 2017)
`
`directly participated in the Offering by offering and selling their own holdings of XRP into the same
`
`market as Ripple’s Market Sales, typically following the same manner of sale.
`
`85.
`
`From 2015 through at least March 2020, while Larsen was an affiliate of Ripple as its
`
`CEO and later chairman of the Board, Larsen and his wife sold over 1.7 billion XRP to public
`
`investors in the market. Larsen and his wife netted at least $450 million USD from those sales.
`
`86.
`
`From April 2017 through December 2019, while an affiliate of Ripple as CEO,
`
`Garlinghouse sold over 321 million XRP he had received from Ripple to public investors in the
`
`market, generating approximately $150 million USD from those sales.
`
`87.
`
`Defendants offered and sold XRP to any person, without restricting offers or sales
`
`to persons who had a “use” for XRP (particularly given that little to no “use” existed until Ripple
`
`subsidized some “use” operations in recent months, as described below) and without restricting
`
`anyone’s ability to resell their XRP to investors within the United States or elsewhere.
`
`88. With respect to all four types of distribution (Market Sales, Institutional Sales, Other
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`XRP Distributions, and Individual Defendants’ XRP Sales), Defendants understood that XRP
`
`purchasers routinely resold XRP to other investors in the United States and other countries. These
`
`resales aligned with Defendants’ own goals of achieving as widespread a distribution of XRP as
`
`possible, which was necessary to promote an aftermarket of buyers and sellers of XRP.
`
`89.
`
`Defendants sold approximately 14.6 billion XRP, as summarized in Table 1, below.
`
`
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`
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`15
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`Case 1:20-cv-10832-AT Document 1 Filed 12/22/20 Page 16 of 71
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`Type of Sales
`
`Market Sales
`
`Institutional Sales
`
`Other XRP Distributions
`
`Individual Defendants’ XRP Sales – Larsen
`
`Individual Defendants’ XRP Sales – Garlinghouse
`
`Total Offering
`
`
`
`Approximate Amount of
`XRP Sold & Distributed
`3.9 billion
`
`4.9 billion
`
`4.1 billion
`
`1.7 billion
`
`321 million*
`
`14.6 billion
`
` * Counted in “Other XRP Distributions” Only
`Table 1: Total Defendants’ XRP Sales & Distributions in the Offering
`
`C.
`
`Defendants’ Market Sales of XRP
`
`90.
`
`91.
`
`As CEO, Larsen init