`
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`
`UNITED STATES DISTRICT COURT
`SOUTHERN DISTRICT OF NEW YORK
`
`SECURITIES AND EXCHANGE
`COMMISSION,
`
`Plaintiff,
`
`-against-
`
`RIPPLE LABS INC., BRADLEY
`GARLINGHOUSE, and CHRISTIAN A.
`LARSEN,
`
`Defendants.
`
`20 Civ. 10832 (AT) (SN)
`
`ORAL ARGUMENT REQUESTED
`
`REPLY MEMORANDUM OF LAW IN SUPPORT OF DEFENDANT BRADLEY
`GARLINGHOUSE’S MOTION TO DISMISS THE AMENDED COMPLAINT
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`Case 1:20-cv-10832-AT-SN Document 224 Filed 06/04/21 Page 2 of 21
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`
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`TABLE OF CONTENTS
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`PAGE
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`TABLE OF AUTHORITIES ..............................................................................................
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`PRELIMINARY STATEMENT ........................................................................................
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`ARGUMENT ......................................................................................................................
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`I. THE SEC HAS NOT PLEADED AND CANNOT PLEAD
`SCIENTER ..................................................................................................................
`
`A. The SEC Mischaracterizes Mr. Garlinghouse’s Arguments
`and Misstates the Legal Standard for Scienter ................................................
`
`B. The AC Does Not and Cannot Plausibly Allege That Mr.
`Garlinghouse Recklessly Disregarded that Ripple’s Sales and
`Offers of XRP Were Improper ........................................................................
`
`II. The SEC Does Not Allege that Mr. Garlinghouse’s Personal Offers or
`Sales of XRP Occurred in the United States ...............................................................
`
`A. Morrison Applies to the SEC’s Section 5 Claims ...........................................
`
`ii
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`1
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`3
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`3
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`3
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`5
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`9
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`9
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`B. Regulation S Does Not Supplant Morrison .....................................................
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`10
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`C. Section 5 “Focuses” on Domestic Sales and Offers for the
`Purpose of the Presumption Against Extraterritoriality ...................................
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`D. The AC Fails To Plead Any Domestic Offers or Sales under
`Section 5 ..........................................................................................................
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`CONCLUSION ...................................................................................................................
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`11
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`13
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`15
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`Case 1:20-cv-10832-AT-SN Document 224 Filed 06/04/21 Page 3 of 21
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`TABLE OF AUTHORITIES
`
`
`
`Cases
`
`Absolute Activist Value Master Fund Ltd. v. Ficeto,
`677 F.3d 60 (2d Cir. 2012)................................................................................................. 12-15
`
`Allison v. Ticor Title Ins. Co.,
`907 F.2d 645 (7th Cir. 1990) ...................................................................................................12
`
`Biro v. Conde Nast,
`807 F.3d 541 (2d Cir. 2015).......................................................................................................9
`
`Chevron, U.S.A., Inc. v. Nat. Res. Def. Council,
`467 U.S. 837 (1984) .................................................................................................................10
`
`ECA & Local 134 IBEW Joint Pension Tr. of Chi. v. JP Morgan Chase Co.,
`553 F.3d 187 (2d Cir. 2009).......................................................................................................8
`
`Ernst & Ernst v. Hochfelder,
`425 U.S. 185 (1976) .................................................................................................................10
`
`Eur. & Overseas Commodity Traders, S.A. v. Banque Paribas London,
`147 F.3d 118 (2d Cir. 1998)............................................................................................... 11-12
`
`Farmer v. Brennan,
`511 U.S. 825 (1994) ...................................................................................................................7
`
`Hamlen v. Gateway Energy Servs. Corp.,
`No. 16 CV 3526 (VB), 2018 WL 1568761 (S.D.N.Y. Mar. 29, 2018) .....................................4
`
`In re Aegean Marine Petrol. Network, Inc. Sec. Litig.,
`18 Civ. 4993 (NRB), 2021 WL 1178216 (S.D.N.Y. Mar. 29, 2021) ........................................5
`
`In re Smart Techs., Inc. S’holder Litig.,
`295 F.R.D. 50 (S.D.N.Y. 2013) ...............................................................................................10
`
`In re Tezos Sec. Litig.,
`No. 17-cv-06779-RS, 2018 WL 4293341 (N.D. Cal. Aug. 7, 2018) .......................................15
`
`Kalnit v. Eichler,
`264 F.3d 131 (2d Cir. 2001).......................................................................................................8
`
`
`
`-ii-
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`Case 1:20-cv-10832-AT-SN Document 224 Filed 06/04/21 Page 4 of 21
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`
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`Morrison v. National Australia Bank Ltd.,
`561 U.S. 247 (2010) ......................................................................................................... passim
`
`Myun-Uk Choi v. Tower Rsch. Cap. LCC,
`890 F.3d 60 (2d Cir. 2018).......................................................................................................15
`
`Reilly v. U.S. Physical Therapy, Inc.,
`17 Civ. 2347 (NRB), 2018 WL 3559089 (S.D.N.Y. July 23, 2018) .........................................8
`
`Schentag v. Nebgen,
`No. 1:17-CV-8734-GHW, 2018 WL 3104092 (S.D.N.Y. June 21, 2018) ..............................10
`
`SEC v. Bio Def. Corp.,
`No. 12-11669-DPW, 2019 WL 7578525 (D. Mass. Sept. 6, 2019) .........................................10
`
`SEC v. Cavanagh,
`155 F.3d 129 (2d Cir. 1998).....................................................................................................12
`
`SEC v. Espuelas,
`905 F. Supp. 2d 507 (S.D.N.Y. 2012)........................................................................................5
`
`SEC v. Falstaff,
`629 F.2d 62 (D.C. Cir. 1980) .....................................................................................................5
`
`SEC v. Hurgin,
`484 F. Supp. 3d 98 (S.D.N.Y. 2020)..........................................................................................4
`
`SEC v. Mattessich,
`18 Civ. 5884 (KPF), 2021 WL 797669 (S.D.N.Y. Mar. 1, 2021) .............................................5
`
`SEC v. Morrone,
`997 F.3d 52 (1st Cir. 2021) ........................................................................................................5
`
`SEC v. Paulsen,
`No. 18 Civ. 6718 (PGG), 2020 WL 1911208 (S.D.N.Y. Apr. 18, 2020) ..................................4
`
`SEC v. Revelation Cap. Mgm’t,
`246 F. Supp. 3d 947 (S.D.N.Y. 2017)......................................................................................10
`
`SEC v. Telegram Grp. Inc.,
`No. 19-cv-9439 (PKC), 2020 WL 1547383 (S.D.N.Y. Apr. 1, 2020) .....................................14
`
`SEC v. W.J. Howey Co.,
`328 U.S. 293 (1946) ...................................................................................................................7
`-iii-
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`Case 1:20-cv-10832-AT-SN Document 224 Filed 06/04/21 Page 5 of 21
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`
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`SEC v. Yorkville Advisors, LLC,
`305 F. Supp. 3d 486 (S.D.N.Y. 2018)........................................................................................4
`
`Sinva, Inc. v. Merrill, Lynch, Pierce, Fenner & Smith, Inc.,
`253 F. Supp. 359 (S.D.N.Y. 1966) ............................................................................................6
`
`United States v. Brown,
`578 F.2d 1280 (9th Cir. 1978) ...................................................................................................5
`
`United States v. Leonard,
`529 F.3d 83 (2d Cir. 2008).........................................................................................................5
`
`United States v. Vilar,
`729 F.3d 62 (2d Cir. 2013)................................................................................................. 14-15
`
`Whiteside v. Hover-Davis, Inc.,
`995 F.3d 315 (2d Cir. 2021).......................................................................................................9
`
`Wyche v. Advanced Drainage Sys., Inc.,
`710 F. App’x 471 (2d Cir. 2017) ...............................................................................................8
`
`Statutes
`
`15 U.S.C. § 77a et seq. ..................................................................................................... 3, 9-10, 12
`
`15 U.S.C. § 77e ...................................................................................................................... passim
`
`15 U.S.C. § 77o(b) ...........................................................................................................................4
`
`15 U.S.C. § 78a et seq. .............................................................................................................10, 12
`
`15 U.S.C. § 7001 et seq..................................................................................................................14
`
`Rules
`
`Fed. R. Civ. P. 12(b)(6)....................................................................................................................1
`
`Other Authorities
`
`17 C.F.R. § 230.901 ................................................................................................................. 10-11
`
`17 C.F.R. § 230.903 .......................................................................................................................11
`
`
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`-iv-
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`Case 1:20-cv-10832-AT-SN Document 224 Filed 06/04/21 Page 6 of 21
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`Defendant Bradley Garlinghouse respectfully submits this memorandum of law in further
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`support of his motion to dismiss with prejudice (ECF No. 111) (the “Motion”) the SEC’s amended
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`complaint (ECF No. 46) (the “AC”) for failure to state a claim pursuant to Fed. R. Civ. P. 12(b)(6).
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`PRELIMINARY STATEMENT
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`The SEC’s Opposition (ECF No. 183) (“Opp.”) is an elaborately-staged yet ultimately
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`futile effort to obscure the pleading deficiencies identified in Mr. Garlinghouse’s motion to
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`dismiss. The SEC still fails – after two attempts – to plead core elements of its claims, and now
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`seeks to move the goalposts by asking this Court to convert aiding and abetting into a strict liability
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`offense (it is not), ignore binding Supreme Court and Second Circuit precedent, accept a
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`mischaracterization of its own regulation and its application, and rely on misleading quotes from
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`documents that facially defeat, rather than support, its theory of the case against Mr. Garlinghouse.
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`The SEC brought an exceedingly aggressive and unprecedented – and ultimately legally
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`flawed – case against Ripple in December 2020 on the basis that XRP should have been registered
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`as a security back in 2013 and remains a security today. This whole litigation is largely about that
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`question, which is far from straightforward even now. The agency’s decision to take a further leap
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`by charging Ripple’s current CEO, Mr. Garlinghouse, with a scienter-based offense that would
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`require that he knew or recklessly disregarded that he was helping Ripple violate the law or
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`otherwise act improperly from the moment he set foot at the company in 2015 as its Chief
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`Operating Officer, defies plausibility. To prevail, the SEC would have to show, at a minimum,
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`that it was obvious to Mr. Garlinghouse in 2015 and thereafter that Ripple’s sales of XRP were
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`improper. Yet the only even potential impropriety the SEC alleges is that Ripple’s sales violated
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`Section 5 of the Securities Act. Thus, to state a claim for aiding and abetting, the SEC must plead
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`that Mr. Garlinghouse knew or that it was obvious to him years ago that Ripple was issuing
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`Case 1:20-cv-10832-AT-SN Document 224 Filed 06/04/21 Page 7 of 21
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`securities when it sold XRP.
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`The AC does not just fail to make these allegations, but it establishes that it was
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`demonstrably not obvious to Mr. Garlinghouse, or for that matter to any of the market makers,
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`exchanges or other regulators who for years concluded that XRP was not a security. Nor was it
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`obvious to the SEC, which surely would have acted before December 22, 2020 to stop an “obvious”
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`unregistered securities offering. So it is no surprise that, despite reviewing thousands of emails
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`and other private internal communications and deposing Mr. Garlinghouse, the AC pleads nothing
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`that would support an inference that Mr. Garlinghouse’s subjective view was any different than
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`the public statements he made consistently explaining not only that XRP was not a security but
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`why it was not. The SEC is left only with allegations that Mr. Garlinghouse recognized the general
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`risk that sales of certain digital assets could be classified as securities, and that he sought to ensure
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`that Ripple’s communications about XRP sales did not convey a misimpression about what Ripple
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`was selling when it sold XRP. That is not aiding and abetting under the correct legal standard.
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`The SEC has no answer for its inability to plead that Mr. Garlinghouse knew or was
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`reckless as to whether Ripple’s XRP sales violated the securities laws or were otherwise improper.
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`And so it seeks to persuade the Court that something less is required. The Court should decline
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`the invitation. The SEC itself has acknowledged in other cases, and the case law is clear, that
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`secondary actors are liable for aiding and abetting only where their conduct is knowing or reckless.
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`That the SEC cannot plead knowledge or recklessness – in a case involving the sale of an entirely
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`new species of asset (cryptocurrency) and where the lack of regulatory clarity is well documented –
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`is no justification for lowering the standard for liability. It is confirmation that the SEC’s aiding
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`and abetting claim never should have been brought and cannot proceed.
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`The SEC’s Section 5 claim against Mr. Garlinghouse also fails because the AC identifies
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`-2-
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`Case 1:20-cv-10832-AT-SN Document 224 Filed 06/04/21 Page 8 of 21
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`no allegations of domestic offers or sales of XRP. The SEC cannot avoid the characteristics of the
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`transactions it is challenging by simply declining to allege any facts about them. The law is well-
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`established – only properly pleaded domestic offers and sales can support potential Section 5
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`liability. To mask these pleading deficiencies, the SEC tries to turn the law on its head by arguing
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`that this Court should be the first to accept that the territorial scope of the Securities Act is defined
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`not by the Supreme Court’s decision in Morrison v. National Australia Bank Ltd., 561 U.S. 247
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`(2010), but rather by the SEC’s own Regulation S, which was adopted 20 years before Morrison.
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`Worse, the SEC misreads Regulation S, which explicitly anticipated that non-domestic offers and
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`sales were beyond the reach of Section 5. Finally, the SEC’s fallback argument – that every single
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`offer and sale, even those executed by a foreign market maker on foreign exchanges, falls within
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`the territorial reach of the Securities Act if any conduct occurred in the U.S. – is precisely what
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`Morrison and its progeny in this Circuit foreclosed.
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`ARGUMENT
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`I. THE SEC HAS NOT PLEADED AND CANNOT PLEAD SCIENTER
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`A.
`
`The SEC Mischaracterizes Mr. Garlinghouse’s Arguments and Misstates the
`Legal Standard for Scienter
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`The Opposition mischaracterizes Mr. Garlinghouse’s argument for dismissal of the aiding
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`and abetting claim. Mr. Garlinghouse does not argue “that the SEC must allege that Defendants
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`knew that XRP was in fact a security as a matter of law.” Opp. at 28. Rather, the SEC must plead
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`that Mr. Garlinghouse knew or recklessly disregarded that Ripple’s offers and sales of XRP were
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`improper. Mot. at 18-20. The SEC has accepted this “improper” requirement in prior federal
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`litigation, see Mot. at 19, in its own administrative proceedings, id., and in this very case, see Op.
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`& Order, ECF No. 103, at 3 (Apr. 9, 2021) (holding, on a discovery motion the SEC did not appeal,
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`that “the SEC must show that the Individual Defendants knew or recklessly disregarded that
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`-3-
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`Case 1:20-cv-10832-AT-SN Document 224 Filed 06/04/21 Page 9 of 21
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`Ripple’s offerings and sales of XRP required registration as securities and that those transactions
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`were improper.”) (emphasis added).1
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`The SEC recognizes that the AC does not plead that Mr. Garlinghouse knowingly or
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`recklessly associated himself with anything improper, so instead the SEC now argues that it need
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`only plead “knowledge of the circumstances that constitute the primary violation.” Opp. at 25.
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`That would transform aiding and abetting into a strict liability violation by allowing the SEC to
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`premise an aiding and abetting claim solely on Mr. Garlinghouse’s knowledge that Ripple was
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`selling an unregistered digital asset (XRP), without also pleading that he knew or was reckless that
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`there was anything wrong with doing so. That is not the law. See 15 U.S.C. § 77o(b) (requiring
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`that a defendant act “knowingly or recklessly”); see SEC v. Yorkville Advisors, LLC, 305 F. Supp.
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`3d 486, 511 (S.D.N.Y. 2018) (“[T]he plaintiff must at least demonstrate recklessness to satisfy the
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`knowledge requirement. . . . Mere negligence does not suffice.”).2
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`The SEC has no answer to the cases holding that aiding and abetting liability can only arise
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`where the defendant recognizes or is reckless as to the impropriety of the alleged conduct. Mot.
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`at 18-19 (citing SEC v. Paulsen, No. 18 Civ. 6718 (PGG), 2020 WL 1911208, at *5 (S.D.N.Y.
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`Apr. 18, 2020); SEC v. Espuelas, 905 F. Supp. 2d 507, 518 (S.D.N.Y. 2012)). Indeed, as the SEC
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`itself acknowledged in litigating Paulsen, the legal standard requires that a defendant “knew,
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`consciously avoided knowing, or was reckless in not knowing that his role was part of an overall
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`activity that was improper.” SEC’s Post-Trial Memorandum at 2, SEC v. Paulsen, No. 18 Civ.
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`1 See Hamlen v. Gateway Energy Servs. Corp., No. 16 CV 3526 (VB), 2018 WL 1568761, at *2
`(S.D.N.Y. Mar. 29, 2018) (prior determination of a legal issue by a magistrate judge was law of
`the case on later motion to dismiss before the district judge).
`2 The SEC’s quotation of SEC v. Hurgin, 484 F. Supp. 3d 98, 112-13 (S.D.N.Y. 2020), for the
`proposition that “scienter . . . arguments are not appropriate for resolution on a motion to dismiss”
`is misleading. The full quote is “Hurgin argues that the Commission cannot establish that he acted
`with scienter, but his arguments are not appropriate for resolution on a motion to dismiss.” Id.
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`-4-
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`Case 1:20-cv-10832-AT-SN Document 224 Filed 06/04/21 Page 10 of 21
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`6718 (PGG) (S.D.N.Y. Aug. 14, 2020), ECF No. 148; see also Espuelas, 905 F. Supp. 2d at 518
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`(requiring that defendant had sufficient knowledge “to appreciate that [his activity] under the
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`circumstances was improper”).
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`Instead, the SEC argues that out-of-circuit authority or criminal fraud cases somehow
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`command a different result here. They do not. SEC v. Falstaff, 629 F.2d 62 (D.C. Cir. 1980),
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`which the SEC relies on heavily, is entirely consistent with the “improper” requirement, as
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`recognized by courts in this District. See SEC v. Mattessich, 18 Civ. 5884 (KPF), 2021 WL
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`797669, at *9 (S.D.N.Y. Mar. 1, 2021) (citing Falstaff and holding that defendant must have
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`“kn[o]w[n] that his particular arrangement ran afoul of [prohibitions on the payment of undisclosed
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`commission compensation]” to incur aiding and abetting liability). And criminal fraud cases
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`establish only that a defendant charged with fraud is understood to have associated himself with
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`impropriety by virtue of signing up to a fraud, whether or not he is aware that the object of the
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`fraud is a security. United States v. Brown, 578 F.2d 1280 (9th Cir. 1978); United States v.
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`Leonard, 529 F.3d 83 (2d Cir. 2008). By contrast, in this civil case, the only mens rea that the
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`SEC alleges would distinguish between sales of XRP being proper and improper would be the
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`knowledge that registration as a securities offering was required.
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`B.
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`The AC Does Not and Cannot Plausibly Allege That Mr. Garlinghouse
`Recklessly Disregarded that Ripple’s Sales and Offers of XRP Were
`Improper
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`None of the allegations about Mr. Garlinghouse in the AC meet the “improper”
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`requirement. Amid irrelevant allegations about others, the SEC’s arguments relating to Mr.
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`Garlinghouse consist only of short statements essentially regurgitating the allegations of the AC.
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`See In re Aegean Marine Petrol. Network, Inc. Sec. Litig., 18 Civ. 4993 (NRB), 2021 WL 1178216,
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`at *35 (S.D.N.Y. Mar. 29, 2021) (“Scienter must be separately pled and individually supportable
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`as to each defendant; scienter is not amenable to group pleading.”). Stripped of the SEC’s
`-5-
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`Case 1:20-cv-10832-AT-SN Document 224 Filed 06/04/21 Page 11 of 21
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`argumentative gloss, these statements show nothing more than that Mr. Garlinghouse was
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`generally following regulatory developments in the cryptocurrency space and taking efforts to
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`ensure that Ripple’s conduct was proper in a highly-uncertain regulatory environment. See Mot.
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`at 13-18. Many of the SEC’s allegations relate to events that occurred or information received
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`prior to his even joining the company. And, despite the extensive pre-complaint discovery
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`afforded to the SEC, the AC does not allege any statement by Mr. Garlinghouse even suggesting
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`he believed that XRP was a security.
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`None of the SEC’s four categories of allegations about Mr. Garlinghouse, Opp. at 27-28;
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`see also id. at 11-15, is “separately pled and individually supportable” to state a claim that Mr.
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`Garlinghouse aided and abetted Ripple’s alleged Section 5 violation.
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`First, allegations that Mr. Garlinghouse knew that Ripple did not register its offers and
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`sales would be relevant only if Mr. Garlinghouse knew or was reckless that offers and sales of
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`XRP actually were a securities offering or were otherwise improper.
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`Second, while the SEC cites 45 paragraphs of the AC for the proposition that Mr.
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`Garlinghouse “promoted XRP as [investment contracts],” Opp. at 27, that is not what the AC
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`actually alleges. Rather, the AC alleges that Mr. Garlinghouse knew that Ripple was selling XRP,
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`and that some were buying XRP because they thought the price would rise. But, as the SEC itself
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`concedes, allegations that an asset was purchased for speculative purposes does not establish that
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`it is a security. Opp. at 33 n.10 (disclaiming the argument that “XRP was an investment contract
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`. . . simply because it was purchased for speculation”); see also Sinva, Inc. v. Merrill, Lynch, Pierce,
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`Fenner & Smith, Inc., 253 F. Supp. 359, 367 (S.D.N.Y. 1966) (“The mere presence of a speculative
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`motive on the part of the purchaser or seller does not evidence the existence of an ‘investment
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`contract’ within the meaning of the securities acts.”). People buy all sorts of things – from
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`-6-
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`Case 1:20-cv-10832-AT-SN Document 224 Filed 06/04/21 Page 12 of 21
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`diamonds to collectibles – in the expectation that their value will increase; not all (or even most)
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`of those things are securities. Cf. 15 U.S.C. § 77e; see SEC v. W.J. Howey Co., 328 U.S. 293, 301
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`(1946). The SEC repeatedly confuses Mr. Garlinghouse’s alleged knowledge that XRP was an
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`asset with value and utility with supposed knowledge that it was a security.3
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`Third, the SEC alleges that Mr. Garlinghouse was aware of the risk that “such offers and
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`sales could be improper under certain circumstances.” Opp. at 27 (emphasis added). But it is not
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`enough to allege that this conduct “could be improper”; to adequately plead recklessness, the SEC
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`must plausibly allege that there was “an unjustifiably high risk of harm that is either known or so
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`obvious that it should be known.” Farmer v. Brennan, 511 U.S. 825, 836 (1994). In any event,
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`the SEC ignores that the very documents it relies on to establish those allegations show that, in
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`words and deeds, Mr. Garlinghouse distinguished Ripple and XRP from those sales of other digital
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`tokens that he understood could be securities offerings. See Mot. at 13-14 (citing cases holding
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`that a defendant’s recognition of generalized risks does not constitute recklessness). While the
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`Opposition asserts that Mr. Garlinghouse “was . . . warned by advisors” that “offers and sales [of
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`XRP] could be improper under certain circumstances,” Opp. at 27, it misrepresents the documents
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`the AC actually relies upon:
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` The SEC asserts that Mr. Garlinghouse received “warnings” that XRP had “securities-
`type” characteristics, Opp. at 13, 30 (quoting AC ¶ 407), but the quoted document makes
`clear “Ripple’s position that XRP is not a security,” and that the focus of the email was to
`ensure that XRP would not be incorrectly perceived as a security, see Ex. K; AC ¶ 407
`(“[W]e do need to hone our playbook/messaging.”).
`
` The SEC relies on notes taken by a potential investor in Ripple equity to assert that Mr.
`Garlinghouse said he could “not guarantee” that XRP was not a security. Opp. at 15, 30.
`
`
`3 The SEC insinuates that Mr. Garlinghouse’s statement that he was “long XRP” was somehow
`misleading or deceptive (neither of which is pleaded); but Mr. Garlinghouse by any measure was
`and is “long XRP” – he received part of his employment compensation in XRP, and he held and
`holds significant amounts of XRP. AC ¶¶ 87, 181. The SEC cannot and does not point to any
`statement by Mr. Garlinghouse denying that he sold XRP.
`-7-
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`Case 1:20-cv-10832-AT-SN Document 224 Filed 06/04/21 Page 13 of 21
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`The SEC omits the exculpatory portion of these notes, which state in full that Mr.
`Garlinghouse “feels optimistic that the SEC will rule” that XRP will not be classified as a
`security but “cannot guarantee that,” and that “it should be [a] pretty straight forward
`decision” that XRP is not a security. See Ex. L; AC ¶ 420.
`
` Similarly, the SEC misleadingly asserts that Mr. Garlinghouse “also was concerned with
`‘verbiage’ in communications that could make ‘XRP sound[] like a security,’” Opp. at 30-
`31 (quoting AC ¶ 408), but the quoted document is an email from the head of Ripple HR
`to Mr. Garlinghouse noting in the context of offer letters to new employees that their
`“verbiage doesn’t put us at risk of XRP sounding like a security,” see Ex. M.
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`And while the SEC contends that Mr. Garlinghouse “knew that the status of XRP under the
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`securities laws was of keen interest to the digital asset platforms,” Opp. at 28, it omits that over
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`200 digital asset platforms concluded XRP was not a security because they listed XRP on their
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`platforms, see Mot. at 14; see also Op. & Order, ECF No. 210, at 5 (May 30, 2021).
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`Fourth, the SEC argues that the mere fact that Mr. Garlinghouse’s “financial interests were
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`aligned with Ripple’s” is enough to plausibly allege scienter. Opp. at 26-28. But a long line of
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`Second Circuit authority has rejected compensation-based motives as a basis for alleging a
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`corporate officer defendant’s scienter. See ECA & Local 134 IBEW Joint Pension Tr. of Chi. v.
`
`JP Morgan Chase Co., 553 F.3d 187, 198, 201 (2d Cir. 2009) (“Motives that are common to most
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`corporate officers, such as . . . the desire to keep stock prices high to increase officer compensation,
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`do not constitute ‘motive’ for purposes of [the scienter] inquiry.”); Kalnit v. Eichler, 264 F.3d 131,
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`139-40 (2d Cir. 2001) (citing cases holding the same).4
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`The SEC’s demand that the Court not weigh its factual allegations, Opp. at 31-34, is
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`misplaced and incorrect. Mr. Garlinghouse is not asking the Court to resolve fact disputes – he is
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`4 Characterizing Mr. Garlinghouse’s compensation as a “concrete and personal benefit” in no way
`distinguishes his situation from any other corporate executive in America. See Wyche v. Advanced
`Drainage Sys., Inc., 710 F. App’x 471, 473 (2d Cir. 2017) (“Bonus compensation is not the type
`of ‘concrete and personal’ benefit upon which a finding of motive to commit securities fraud can
`be based”) (quoting Kalnit, 264 F.3d at 139); Reilly v. U.S. Physical Therapy, Inc., 17 Civ. 2347
`(NRB), 2018 WL 3559089, at *12 (S.D.N.Y. July 23, 2018) (“[E]ven multi-million dollar bonuses
`that plaintiffs alleged were directly tied to misstatements were insufficient evidence of motive.”).
`-8-
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`Case 1:20-cv-10832-AT-SN Document 224 Filed 06/04/21 Page 14 of 21
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`asking the Court to look at the AC’s allegations made after more than 30 months of investigation
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`and to evaluate whether they plausibly allege that he knowingly or recklessly joined Ripple to help
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`further an illegal scheme. See Whiteside v. Hover-Davis, Inc., 995 F.3d 315, 323-25 (2d Cir. 2021)
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`(granting 12(b)(6) motion where plaintiff’s “allegations do not permit a plausible inference that
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`Defendants willfully violated the statute – whether by actual knowledge or . . . by reckless
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`disregard” where it “pleads facts that are merely consistent with Defendants’ purported willfulness
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`and . . . stops short of the line between possibility and plausibility.”); see also Biro v. Conde Nast,
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`807 F.3d 541, 545 (2d Cir. 2015) (“Rule 8’s plausibility standard applies to pleading intent.”).
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`II. THE SEC DOES NOT ALLEGE THAT MR. GARLINGHOUSE’S PERSONAL
`OFFERS OR SALES OF XRP OCCURRED IN THE UNITED STATES
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`Under Supreme Court precedent, the SEC has the burden to plausibly allege that Mr.
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`Garlinghouse engaged in domestic offers or sales of XRP. Morrison, 561 U.S. at 268-69. The
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`SEC alleges that there was “a discrete violation of Section 5 with each unregistered offer and each
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`unregistered sale,” Opp. at 59,5 but it does not allege a single domestic offer or sale by Mr.
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`Garlinghouse.
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`A. Morrison Applies to the SEC’s Section 5 Claims
`The SEC’s primary argument is simply to reject controlling precedent it finds unhelpful,
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`arguing that the transactional test in Morrison does not apply to Section 5 claims. Opp. at 48. The
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`SEC cites no court in any jurisdiction that has reached this conclusion, and fails to identify a single
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`case that held Morrison does not apply to any section of the Securities Act. See 561 U.S. at 268
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`(“The same focus on domestic transactions is evident in the Securities Act of 1933, 48 Stat. 74,
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`5 See also Hr’g Tr. 45:10-12 (Mar. 19, 2021) (“So their sales, every time [Mr. Garlinghouse and
`Mr. Larsen] sold and failed to register the transaction, unless they point to an exemption, they
`violated Section 5 individually, irrespective of Ripple’s violation.”).
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`-9-
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`enacted by the same Congress as the Exchange Act, and forming part of the same comprehensive
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`regulation of securities trading.”). It also ignores cases in this District and elsewhere uniformly
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`applying Morrison to Securities Act claims, including Section 5 claims.6
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`Regulation S Does Not Supplant Morrison
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`B.
`The SEC’s secondary argument is that Morrison does not apply because its own
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`administrative regulation – Regulation S – provides the “proper criteria” for determining “what
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`constitutes domestic ‘offer[s]’ and/or ‘sale[s]’ of securities under Section 5.” Opp. at 37. But the
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`SEC cannot expand the territorial scope of a statute by regulation, so if Regulation S leads to a
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`different conclusion than would result from applying Morrison to Section 5 of the Securities Act,
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`the regulation would have to yield. See Chevron, U.S.A., Inc. v. Nat. Res. Def. Council, 467 U.S.
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`837, 842-43 (1984); Ernst & Ernst v. Hochfelder, 425 U.S. 185, 214 (1976) (“Thus, despite the
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`broad view of the Rule advanced by the Commission in this case, its scope cannot exceed the
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`power granted the Commission by Congress under [Section] 10(b).”).
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`In any event, the plain text of Regulation S defeats the SEC’s argument. The SEC relies
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`on two different sections of Regulation S:
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` Section 901 is a “general statement” that “the terms offer, offer to sell, sell, sale,
`and offer to buy shall be deemed to include offers and sales that occur within the
`United States and shall be deemed not to include offers and sales that occur outside
`the United States.” 17 C.F.R. § 230.901.
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`6 See Mot. at 20-21; SEC v. Bio Def.