`Case 1:20-cv-10832-AT-SN Document 441 Filed 03/11/22 Page 1 of 31
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` UNITED STATES DISTRICT COURT
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`
`USDC SDNY
`DOCUMENT
`ELECTRONICALLY FILED
`DOC #:
`DATE FILED: 3/11/2022
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`20 Civ. 10832 (AT) (SN)
`
`ORDER
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`SOUTHERN DISTRICT OF NEW YORK
`SECURITIES AND EXCHANGE
`COMMISSION,
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`Plaintiff,
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`-against-
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`RIPPLE LABS, INC., BRADLEY
`GARLINGHOUSE,and CHRISTIAN A.
`LARSEN,
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`Defendants.
`ANALISA TORRES,District Judge:
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`Plaintiff, the Securities and Exchange Commission (the “SEC’”), brings this action against
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`Defendants Ripple Labs, Inc. (“Ripple”), and two ofits senior leaders, Bradley Garlinghouse and
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`Christian A. Larsen, alleging that Defendants engaged in the unlawful offer and sale of securities
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`in violation of Section 5 of the Securities Act of 1933 (“Section 5” of the “Securities Act”), 15
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`U.S.C. §§ 77e(a) and (c). See Amend. Compl. § 9, ECF No. 46. The SEC also alleges that
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`Garlinghouse and Larsen (together, the “Individual Defendants”) aided and abetted Ripple’s
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`Section 5 violations. Jd. The Individual Defendants move separately under Federal Rule of
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`Civil Procedure 12(b)(6) to dismiss Plaintiff's complaint for failure to state a claim. Larsen
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`Mot., ECF No. 105; Garlinghouse Mot., ECF No. 110. For the reasons stated below, the
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`Individual Defendants’ motions are DENIED.
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`BACKGROUND
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`The following facts are taken from the amended complaint and “‘are presumed to be true”
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`for the purpose of considering the Individual Defendants’ motions to dismiss for failure to state a
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`claim. Fin. Guar. Ins. Co. v. Putnam Advisory Co., LLC, 783 F.3d 395, 398 (2d Cir. 2015).
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`The SECalleges that, from 2013 to the filing of this action in 2020, Ripple violated
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`Section 5 by selling XRP—which the SEC claims1s an “investment contract” for which
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`Case 1:20-cv-10832-AT-SN Document 441 Filed 03/11/22 Page 2 of 31
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`registration is required—without filing a registration statement. See Amend. Compl. ¶¶ 4, 9, 60,
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`230–31, 241–42, 289–94, 392–93. The SEC contends that Ripple and its executives promoted
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`XRP as an investment into a common enterprise that would increase in value and price based on
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`Ripple’s efforts. See, e.g., id. ¶¶ 104, 111, 230–57, 294. For the purposes of these motions, the
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`Individual Defendants do not contest that the SEC’s allegations plausibly show that Ripple’s sale
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`of XRP violated Section 5. See Larsen Mem. at 1–2, ECF No. 106; Garlinghouse Mem. at 2,
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`ECF No. 111.
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`Ripple was founded in 2012 by Larsen and a co-founder (the “Co-Founder”). See
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`Amend. Compl. ¶¶ 16, 18, 38. Around the time of Ripple’s founding, the Co-Founder began
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`creating the XRP Ledger, a software code that “operates as a peer-to-peer database, spread across
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`a network of computers, that records data respecting transactions, among other things.” Id.
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`¶¶ 38–39. After Ripple’s founding, the Co-Founder and others associated with Ripple created a
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`fixed supply of 100 billion XRP, id. ¶ 45, “a digital asset and the native token on the XRP
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`Ledger,” id. ¶ 48.
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`Larsen served as Ripple’s Chief Executive Officer (“CEO”) from September 2012
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`through December 2016. Id. ¶ 18. When Larsen was hired, Ripple was intended to “continue
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`the XRP Ledger and XRP projects.” Id. ¶ 42. In April 2015, Garlinghouse joined Ripple as its
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`Chief Operating Officer (“COO”). Id. ¶ 17. Then, in January 2017, Garlinghouse took over as
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`CEO, and Larsen began serving as the executive chairman of Ripple’s board of directors. Id.
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`¶¶ 17–18, 74.
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`I.
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`Larsen as CEO
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`In 2012, before Ripple began distributing XRP, Larsen and other Ripple executives
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`received two legal memoranda from a law firm. Id. ¶¶ 51–52, 56. These memoranda analyzed
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`2
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`Case 1:20-cv-10832-AT-SN Document 441 Filed 03/11/22 Page 3 of 31
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`the risks associated with Ripple’s distribution and monetization of XRP. Id. ¶¶ 51–53. The law
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`firm warned that there was some risk XRP would be considered an investment contract by the
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`SEC, and would, therefore, be subject to federal securities laws. Id. ¶ 53. Specifically, the
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`memoranda stated that Ripple would face an increased risk of XRP being deemed a security if
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`individuals purchased XRP as a speculative investment, or if Ripple employees promoted the
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`idea that XRP could increase in price. See id.; see also ECF Nos. 108-1, 108-2.1 The
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`memoranda also explained that XRP would likely not be classified as currency, Amend. Compl.
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`¶ 54, an opinion reiterated in a memorandum Ripple’s accountants sent to Larsen in 2013, id.
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`¶ 400.
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`By at least 2013, Larsen was aware of the contents of the memoranda and the possibility
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`that the SEC would consider XRP a security. See id. ¶ 56. In in a May 2014 email, Larsen
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`acknowledged that he received a large quantity of XRP because the legal memoranda advised
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`that XRP may be deemed a security, and he was being compensated for “personally assum[ing]
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`th[e] risk” of being classified as an issuer of securities. Id. ¶¶ 57–58; see also ECF No. 179-3.2
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`From 2013 to 2014, Ripple and Larsen made efforts to create a market for XRP by
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`having Ripple distribute approximately 12.5 billion XRP to programmers through “bounty
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`programs” that paid them for reporting problems in the XRP Ledger’s code. Amend. Compl.
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`¶ 61. Ripple also distributed small amounts of XRP to anonymous developers and others to help
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`establish a trading market for XRP. Id. During that time, Ripple began to make public
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`1 The Court shall consider the legal memoranda and other such documents relied on in the complaint because they
`are “integral” to the amended complaint. See Chambers v. Time Warner, Inc., 282 F.3d 147, 153 (2d Cir. 2002); see
`also Amend. Compl. ¶¶ 51–60. But, in doing so, the Court continues to draw all reasonable inferences in the SEC’s
`favor. See Khoja v. Orexigen Therapeutics, Inc., 899 F.3d 988, 1003 (9th Cir. 2018).
`2 See supra n.1.
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`3
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`Case 1:20-cv-10832-AT-SN Document 441 Filed 03/11/22 Page 4 of 31
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`statements with respect to XRP that gave investors reason to believe that Ripple’s efforts would
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`produce profits. Id. ¶¶ 62–64.
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`In August 2013, Ripple started selling XRP in exchange for fiat currencies and other
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`digital assets, such as bitcoin. Id. ¶ 72. Both Ripple and Larsen intended for their distribution of
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`XRP to achieve “[n]etwork [g]rowth” and raise funds for Ripple’s operations. Id. ¶ 65. As
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`Larsen explained, Ripple was “keeping 25% of . . . XRP . . . to cover the bills, and using the rest
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`of it to incent market makers, gateways, [and] consumers to come onto the protocol.” Id. ¶ 300.
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`Larsen planned the initial stage of Ripple’s XRP offering by approving the timing and amount of
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`the offers and sales to: (1) purchasers in the open market (“Market Sales”); (2) investment
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`funds, wealthy individuals, or other sophisticated investors (“Institutional Sales”); and (3) others
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`enlisted to assist Ripple’s efforts to develop an XRP market (the “Other XRP Distributions”). Id.
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`¶ 73; see also id. ¶¶ 205, 207. As CEO, Larsen initiated and approved Ripple’s Market Sales of
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`XRP. Id. ¶ 92; see also id. ¶ 100. He had final decision-making authority over which trading
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`venues to use for Market Sales and how much XRP to sell in a particular venue. Id. ¶ 98; see
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`also id. ¶ 101. And, Larsen strategized with other Ripple employees to adjust their selling plan
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`to “stabilize and/or increase the XRP price.” Id. ¶ 101; see also id. ¶¶ 205–06.
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`The goal of Ripple’s XRP sales was achieving as widespread a distribution of XRP as
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`possible, which was necessary to promote an “aftermarket” of buyers and sellers of XRP. Id.
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`¶ 89. In a public interview, Larsen explained that one of Ripple’s “key roles is making sure that
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`[Ripple] distribute[s] [XRP] as broadly in a way that adds as much utility and liquidity as [it]
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`possibly can.” Id. ¶ 265. He stated that he thought the incentives of Ripple and XRP purchasers
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`“are very well aligned” because, “for [Ripple] to do well [it] [has] to do a very good job in
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`4
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`protecting the value of XRP and the value of the network.” Id. Larsen described protecting the
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`value of XRP as the “guiding principle” of Ripple’s distribution. Id.
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`When Garlinghouse joined Ripple as COO, he began assisting in Ripple’s distribution of
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`XRP. He worked with Larsen to coordinate the distribution strategy to increase XRP’s price.
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`See id. ¶¶ 101, 205, 207, 211. Garlinghouse also began to oversee, direct, and lead Ripple’s
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`efforts to make XRP available for purchasers to buy and sell on digital asset trading platforms
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`incorporated in the United States and abroad. Id. ¶¶ 154–59. And, he participated in weekly
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`XRP sales meetings where he exercised decision-making authority over the timing and amount
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`of Ripple’s XRP sales. Id. ¶ 424.
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`Since at least 2013, Ripple and Larsen tried to make Institutional Sales “to obtain
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`essential funding for Ripple’s operations and develop a speculative trading market in XRP.” Id.
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`¶ 102; see also id. ¶¶ 104, 110–24. Garlinghouse participated in these efforts when he was hired
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`as COO. See id. ¶ 110. Larsen and Garlinghouse both played significant roles in negotiating and
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`approving Ripple’s Institutional Sales as well as other offers and sales of XRP to institutional
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`investors. Id. In 2015, Garlinghouse negotiated an institutional investor’s purchase of XRP in
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`connection with the investor’s formation of a private investment fund “whose sole purpose
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`would have been to speculate on XRP as an investment.” Id. ¶ 111. Both Garlinghouse and
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`Larsen received drafts of the potential offering documents for that fund. Id. During those
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`negotiations, Larsen received an email from the fund’s attorney advising him of some concerns
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`about XRP being regulated as a security even though it was considered a “virtual currency” in
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`some contexts. See id. ¶ 401. In 2016, Larsen and Garlinghouse approved a sale to an
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`institutional investor described as an “institutional reseller.” Id. ¶ 116. This institutional
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`investor explained to Garlinghouse that he purchased XRP because Larsen had indicated to him
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`that “XRP was central to Ripple’s success.” Id. ¶ 118.
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`As CEO, Larsen engaged in other efforts to further Ripple’s distribution of XRP. In
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`2015, Larsen co-founded RippleWorks, an entity that invests in XRP-related projects “to further
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`Ripple’s goals of achieving widespread trading of XRP in the market.” Id. ¶¶ 137–38.
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`Garlinghouse was also aware of RippleWorks’ activities. See id. ¶ 141.
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`In May 2015, Ripple agreed to settle charges brought by the United Stated Department of
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`Justice and the United States Financial Crimes Enforcement Network for failing to register as a
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`“Money Services Business” under the Bank Secrecy Act and for failing to comply with other
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`regulatory requirements with respect to XRP sales. Id. ¶ 379. The settlement agreement called
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`XRP a “virtual currency.” Id.
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`II.
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`Garlinghouse as CEO
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`In January 2017, Garlinghouse took over as Ripple’s CEO. Id. ¶ 17. Larson remained
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`executive chairman of Ripple’s board of directors. Id. ¶¶ 18, 74. Garlinghouse, Larsen, and two
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`other individuals made up the “XRP Sales Committee,” a four-member committee that made
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`XRP distribution decisions at Ripple. Id. ¶ 75. Garlinghouse, as CEO, approved the timing and
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`amounts of offers and sales of XRP, id. ¶ 76; see also id. ¶¶ 199, 205, and had final decision-
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`making authority over which trading venues to use for Market Sales and how much XRP to sell
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`in a particular venue, id. ¶ 98. As chairman of the board, Larsen was consulted on offers and
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`sales, id. ¶ 76, and participated in decisions regarding Ripple’s sales strategy, id. ¶ 199. In
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`February 2017, Larsen expressed the view that “most volume in the [cryptocurrency] space is
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`speculation in advance of enterprise and eventually consumer flows.” Id. ¶ 398. Garlinghouse
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`also understood the importance of speculative investing, as he “instructed certain Ripple
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`employees to ‘proactively’ attempt to increase speculative trading value with positive XRP
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`news.” Id. ¶ 212. In addition, Garlinghouse was informed by a Ripple employee that Ripple’s
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`goal was to “drive XRP speculative trading volume.” Id. ¶ 352.
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`In 2017 and 2018, Larsen and Garlinghouse worked together to convince digital asset
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`platforms to list XRP. See id. ¶¶ 160, 168. As CEO, Garlinghouse was heavily involved in
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`attempts to partner with such platforms. Id. ¶¶ 165–66. Garlinghouse expressed that Ripple
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`viewed these efforts as an example of Ripple “doi[ng] whatever [it] can to invest in the success
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`of the XRP ecosystem,” which was “consistent with what [he had] also proactively said”
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`publicly about Ripple’s efforts. Id. ¶ 166. Garlinghouse also made statements suggesting that he
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`was aware that some digital asset platforms may refuse to list XRP because they were concerned
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`it was a security, and he helped prepare talking points intended to dispel the notion that XRP was
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`a security or that a digital asset platform had refused to make XRP available to the public out of
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`concerns that XRP was a security. Id. ¶ 167.
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`Larsen and Garlinghouse also worked together to further Ripple’s sales to institutional
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`investors. In 2017, Larsen assisted with arranging a sale of 14.8 billion XRP to an institutional
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`investor. Id. ¶¶ 113–14. In 2018, Garlinghouse signed an agreement with an institutional
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`investor that described itself as “operat[ing] sales and exchange service[s] of crypto-assets to
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`offer safe and secure transactions of crypto-assets for as many people as possible.” Id. ¶ 120
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`(alterations in original).
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`To assuage investor concerns, on May 16, 2017, Ripple announced that it would place 55
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`billion XRP, or most of its current holdings, into a “cryptographically-secured escrow” that
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`would restrict Ripple to accessing only one billion XRP every month (the “XRP Escrow”). Id.
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`¶ 223. Garlinghouse established the XRP Escrow, id. ¶ 426, and explained that it was meant to
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`address the concerns of XRP investors about Ripple’s ability to sell its billions of XRP into the
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`market “at any time,” id. ¶ 221; see also id. ¶¶ 253, 336. The escrow plan was intended, in part,
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`to “secur[e] speculative liquidity” in XRP and “drive a material increase in XRP trading
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`volume/liquidity.” Id. ¶ 225 (alteration in original). Both Larsen and Garlinghouse were
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`instrumental in the formation of the XRP Escrow by developing and approving the idea. Id.
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`¶ 224. Ripple and Garlinghouse publicly touted the formation of the XRP Escrow “as proof that
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`Ripple and XRP holders shared a common interest in the success of Ripple’s efforts as to XRP
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`and as one of Ripple’s many efforts to manage the trading market for XRP.” Id. ¶ 228; see also
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`id. ¶ 253.
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`Garlinghouse was also involved in Ripple’s efforts to promote XRP’s use on a platform
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`intended to allow money-transmitting businesses to buy XRP in one jurisdiction, and transfer and
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`sell it in another location for the local fiat currency. See id. ¶¶ 131, 362, 369, 370. Although
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`Ripple receives only de minimis fees from the cross-border payment platform, Garlinghouse
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`views “the value creation of [that platform] as driving the liquidity in the XRP markets.” Id.
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`¶ 374.
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`As CEO, Garlinghouse made numerous statements regarding Ripple’s relationship to
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`XRP and its efforts to increase XRP’s liquidity and price. Id. ¶ 253. In a June 2017 email, he
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`said that Ripple had a “proven track record of being [a] good steward[] for XRP.” Id. He
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`explained that a decrease in the price of XRP “would certainly be bad for Ripple,” id., and
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`reminded Ripple’s equity investors and advisors that Ripple remained “committed to making
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`XRP the best digital asset for payments,” id. ¶ 254. In December 2017, Garlinghouse gave a
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`public interview in which he explained that Ripple prioritized the volume of XRP sales and XRP
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`liquidity, id. ¶ 256, and he posted on Twitter that “[a] healthy $XRP market and healthy $XRP
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`ecosystem is CRITICALLY important to [him],” id. ¶ 303. And, in January 2018, Garlinghouse
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`posted on Twitter that “fostering a healthy $XRP ecosystem is a top priority @Ripple.” Id.
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`¶¶ 306–07. Moreover, in a February 2020 interview at the New York Stock Exchange,
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`Garlinghouse explained that Ripple’s efforts to create a “use” for XRP should correlate with a
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`potential increase in XRP price. Id. ¶ 261. In that same interview, Garlinghouse stated that
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`markets would move “from that speculation that has driven the crypto market to utility.” Id.
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`¶ 262.
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`Garlinghouse also expressed that Ripple was “focused on driving utility from” XRP, and
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`that, if Ripple was successful, it would be “good for the liquidity of the whole ecosystem.” Id.
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`In a May 2017 article published on Ripple’s website, Garlinghouse further explained that
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`Ripple’s “goal in distributing XRP is to incentivize actions that build trust, utility and liquidity.”
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`Id. ¶ 266; see also ECF No. 114-8.3 And, in a December 2017 interview, Garlinghouse claimed
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`that XRP’s price had recently risen because of Ripple’s efforts to solve “a real problem . . .
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`around cross-border payments,” which made people “excited.” Id. ¶ 278. Moreover, in another
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`interview in March 2018, Garlinghouse reminded investors that “[t]here’s no party more
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`interested in the success of the XRP ecosystem than Ripple . . . because we own a lot of XRP.”
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`Id. ¶ 279. He stated that Ripple had made investments and forged partnerships “in order to make
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`sure that XRP is the most useful asset out there for solving a cross border payment problem.” Id.
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`During his time as CEO, Garlinghouse made many other public statements about
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`Ripple’s clear interest and investment in promoting the price of XRP and its distribution, see id.
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`¶¶ 308–11, 326, 338, 356, and the ways in which Ripple’s efforts would drive up the price of
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`XRP, see id. ¶¶ 318, 325, 343, 346, 348. Garlinghouse also made statements that evinced a
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`3 See supra n.1.
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`belief that XRP’s purchasers viewed their holdings as a speculative investment. Id. ¶¶ 330, 334,
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`337, 344, 347, 421. For example, he said that digital assets, like XRP, “aren’t currencies,”
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`because “[v]ery few people . . . have used . . . XRP to buy something.” Id. ¶ 386. And, he once
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`stated that Ripple’s activities have “driven market interest in buying XRP as a speculative
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`investment.” Id. ¶ 344.
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`During his tenure at Ripple, Garlinghouse received some warnings that XRP may be
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`classified as a security. In March 2017, Ripple’s chief compliance officer advised Garlinghouse
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`that “XRP certainly has some ‘securities-type’ characteristics.” Id. ¶ 407; see also ECF No. 226-
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`1.4 The officer warned Garlinghouse that Ripple “need[s] to hone [its] playbook/messaging” to
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`avoid such a classification. Amend. Compl. ¶ 407; see also ECF No. 226-1. That same officer
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`later advised Garlinghouse that Ripple needed to ensure the language it used in employee offer
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`letters “doesn’t put [Ripple] at risk of XRP sounding like a security.” Amend. Compl. ¶ 408; see
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`also ECF No. 226-3.5
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`Moreover, in July 2017, the SEC issued the Report of Investigation Pursuant to Section
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`21(a) of the Securities Exchange Act of 1934: The DAO (the “DAO Report”), which advised
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`“those who would use . . . distributed ledger or blockchain-enabled means for capital raising[] to
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`take appropriate steps to ensure compliance with the U.S. federal securities laws.” Amend.
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`Compl. ¶ 37.6 The DAO Report found that the particular digital assets at issue were investment
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`contracts and, therefore, were properly considered securities. Id. After the DAO Report’s
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`publication, Garlinghouse made comments on Ripple’s website indicating that he read the report.
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`4 See supra n.1.
`5 See supra n.1.
`6 The Court shall consider the entirety of the DAO Report, SEC, No. 81207, Report of Investigation Pursuant to
`Section 21(a) of the Securities Exchange Act of 1934: The DAO (2017),
`https://www.sec.gov/litigation/investreport/34-81207.pdf, because it is a proper subject of judicial notice, see United
`States v. Strock, 982 F.3d 51, 63 (2d Cir. 2020).
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`Id. ¶ 409. In December 2017, Ripple’s public relations firm notified Garlinghouse that the SEC
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`Chairman recently said that “[m]erely calling a token a ‘utility’ token or structuring it to provide
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`some utility does not prevent the token[] from being a security.” Id. ¶ 411. The firm decided to
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`provide that notification to Garlinghouse because there “had been a concern to have XRP
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`considered a security.” Id.
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`In January 2018, when seeking to list XRP on a digital asset platform, Garlinghouse
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`submitted an application in which he acknowledged “that whether or not a digital asset may be
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`considered a security is an important consideration for many in the digital asset ecosystem” and
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`that Ripple had “received a legal memorandum from a reputable law firm” regarding the status
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`of XRP under the federal securities laws. Id. ¶ 414. Approximately four U.S.-based digital asset
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`platforms asked Ripple for a legal opinion as to the status of XRP under the federal securities
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`laws, and Garlinghouse was informed that, after Ripple failed to provide such an opinion, at least
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`one platform declined to list XRP because of concerns XRP would be deemed a security. Id.
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`¶¶ 415, 418. Garlinghouse also acknowledged that “Bloomberg put out there that [certain
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`platforms] are hesitant to list XRP because of concerns about it being a security.” Id. ¶ 419.
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`And, Garlinghouse, along with Larsen, met with a potential investor and “spoke for a while on
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`the outstanding issue of whether XRP gets classified as a security.” Id. ¶ 420. In that
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`conversation, Garlinghouse noted that, although he was “optimistic” XRP would not be
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`considered a security, he could “[]not guarantee that.” Id. (alteration in original); see also ECF
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`No. 226-2.7
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`7 See supra n.1.
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`III.
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`Larsen’s and Garlinghouse’s Personal Sales of XRP
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`In addition to facilitating Ripple’s distribution of XRP, Larsen and Garlinghouse sold
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`their personal XRP in a way that was intended to strike a balance between maximizing profits
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`while not depressing the price of XRP. Amend. Compl. ¶ 173; see also id. ¶¶ 85–87, 191.
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`Larsen and his wife have sold over 1.7 billion XRP for at least $450 million. Id. ¶ 86.
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`Garlinghouse has sold over 357 million XRP for approximately $159 million. Id. ¶ 87. Larsen
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`described his personal sale of XRP as “constructive” to the overall XRP market because of the
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`“widely held view that over time, it[’s] better to have widely held assets.” Id. ¶ 179.
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`Garlinghouse, in discussing his personal XRP holdings, made representations that he considered
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`XRP to be an investment vehicle, id. ¶¶ 42, 347, and, on multiple occasions, stated that he was
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`“long XRP,” id. ¶ 347.
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`From 2017 to at least 2020, Larsen and Garlinghouse offered and sold their XRP. These
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`transactions were consummated on various digital asset trading platforms, including four
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`incorporated in the United States and one incorporated abroad, but with a principal place of
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`business in New York. Id. ¶¶ 177, 186. At least two of the platforms incorporated in the United
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`States were also U.S.-based. Id. ¶¶ 162, 415–16. Larsen and Garlinghouse also opened accounts
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`with one platform’s U.S.-based wholly owned subsidiary. Id. ¶¶ 177, 186. At times,
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`transactions on these digital asset trading platforms occurred when XRP was “allocated to
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`investors’ accounts in the records of the platform.” See id. ¶ 35; see also id. ¶ 154. Larsen and
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`Garlinghouse also engaged the services of a global digital asset trading firm with an office in the
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`United States to make offers and sales of their XRP. Id. ¶¶ 96, 174, 183. Both Larsen and
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`Garlinghouse directed their XRP offers and sales from within the United States, id. ¶ 176; see
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`also id. ¶ 185, and made XRP offers and sales to persons in the United States, id. ¶ 178; see also
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`id. ¶ 187.
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`I.
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`Legal Standard
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`ANALYSIS
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`To survive a Rule 12(b)(6) motion to dismiss, “a complaint must contain sufficient
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`factual matter, accepted as true, to ‘state a claim to relief that is plausible on its face.’” Ashcroft
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`v. Iqbal, 556 U.S. 662, 678 (2009) (quoting Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570
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`(2007)). “A claim has facial plausibility when the plaintiff pleads factual content that allows the
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`court to draw the reasonable inference that the defendant is liable for the misconduct alleged.”
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`Id. A plaintiff is not required to provide “detailed factual allegations,” but he must assert “more
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`than labels and conclusions.” Twombly, 550 U.S. at 555. Additionally, “where a particular state
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`of mind is a necessary element of a claim, [a plaintiff’s] pleading of that state of mind must be
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`plausible and supported by factual allegations.” Biro v. Conde Nast, 963 F. Supp. 2d 255, 278
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`(S.D.N.Y. 2013) (citing Iqbal, 556 U.S. at 686–87), aff’d, 807 F.3d 541 (2d Cir. 2015), and aff’d,
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`622 F. App’x 67 (2d Cir. 2015). On a Rule 12(b)(6) motion, the court may consider only the
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`complaint, documents attached to the complaint, matters of which a court can take judicial
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`notice, and documents that the plaintiff knew about and relied upon when drafting the complaint.
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`See Chambers v. Time Warner, Inc., 282 F.3d 147, 153 (2d Cir. 2002).
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`II.
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`Application
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`A. Aiding and Abetting Liability
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`To hold a defendant liable as an aider and abettor in a civil enforcement action, the SEC
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`must plead and ultimately prove “(1) the existence of a securities law violation by the primary
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`(as opposed to the aiding and abetting) party; (2) knowledge of this violation on the part of the
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`13
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`Case 1:20-cv-10832-AT-SN Document 441 Filed 03/11/22 Page 14 of 31
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`aider and abettor; and (3) substantial assistance by the aider and abettor in the achievement of the
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`primary violation.” SEC v. Apuzzo, 689 F.3d 204, 206 (2d Cir. 2012) (quotation marks omitted).
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`After the Dodd-Frank Act took effect in 2010, the SEC may also satisfy the “knowledge”
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`requirement by showing that the defendant was “reckless” in relation to the primary party’s
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`violation. See SEC v. Yorkville Advisors, LLC, 305 F. Supp. 3d 486, 511 (S.D.N.Y. 2018); see
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`also Dodd-Frank Wall St. Reform & Consumer Protection Act, Pub. L. 111-203, 124 Stat. 1376,
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`§ 929O (2010) (codified at 15 U.S.C. § 78(t)(e)). Courts cannot consider the three requirements
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`in isolation from one another because “[s]atisfaction of the knowledge requirement will depend
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`on the theory of primary liability, and there may be a nexus between the degree of knowledge
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`and the requirement that the alleged aider and abettor render substantial assistance.” SEC v.
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`Espuelas, 905 F. Supp. 2d 507, 517 (S.D.N.Y. 2012) (“Espuelas III”) (quoting SEC v. DiBella,
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`587 F.3d 553, 566 (2d Cir. 2009)). Indeed, courts have found that “‘[a] high degree of
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`substantial assistance may lessen the SEC’s burden in proving scienter’ and vice versa.” SEC v.
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`Wey, 246 F. Supp. 3d 894, 928–29 (S.D.N.Y. 2017) (quoting Apuzzo, 689 F.3d at 215).
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`Here, the SEC alleges that the Individual Defendants aided and abetted Ripple’s violation
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`of Section 5 by assisting in Ripple’s unregistered sale of XRP. See Amend. Compl. ¶¶ 436–40.
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`For the purposes of their motions, neither Larsen nor Garlinghouse argue that Ripple did not
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`violate Section 5 by making unregistered sales of XRP. See Larsen Mem. at 1–3; Garlinghouse
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`Mem. at 1–4. Therefore, the Court assumes that the SEC has adequately alleged the first
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`requirement—the existence of a securities law violation by the primary party. In order to prove
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`the remaining requirements, the SEC must show that the Individual Defendants “joined the
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`specific venture and shared in it, and that [their] efforts contributed to its success.” DiBella, 587
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`F.3d at 566 (citation omitted).
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`14
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`Case 1:20-cv-10832-AT-SN Document 441 Filed 03/11/22 Page 15 of 31
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`1. Knowledge
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`The Individual Defendants argue that the SEC fails to sufficiently allege they had
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`knowledge of Ripple’s alleged violations of Section 5. See Larsen Mem. at 1–3; Garlinghouse
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`Mem. at 1–4.8 The Court disagrees.
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`Under 15 U.S.C. § 77o(b), liability can be imposed on a person who aids and abets a
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`violation of Section 5 if that person “knowingly or recklessly provides substantial assistance to
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`another person in violation of [Section 5].” In order to show that the Individual Defendants had
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`knowledge of Ripple’s alleged Section 5 violations, the SEC must show their general awareness
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`of their overall role in Ripple’s illegal scheme. See SEC v. Paulsen, No. 18 Civ. 6718, 2020 WL
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`1911208, at *5 (S.D.N.Y. Apr. 18, 2020) (“Paulsen I”) (citation omitted). Notably, the SEC
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`need not demonstrate that the Individual Defendants were aware that Ripple’s scheme was
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`illegal. See SEC v. Mattessich, 407 F. Supp. 3d 264, 272–73 (S.D.N.Y. 2019). Rather, the SEC
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`must show that the Individual Defendants knew, or recklessly disregarded, the facts that made
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`Ripple’s scheme illegal. See id. As the D.C. Circuit explained:
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`Knowledge means awareness of the underlying facts, not the labels that the law
`places on those facts. Except in very rare instances, no area of the law[,] not even
`the criminal law[,] demands that a defendant have thought his actions were illegal.
`A knowledge of what one is doing and the consequences of those actions suffices.
`
`
`SEC v. Falstaff Brewing Corp., 629 F.2d 62, 77 (D.C. Cir. 1980); cf. Bryan v. United States, 524
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`U.S. 184, 192 (1998) (explaining that “the knowledge requisite [for a] knowing violation of a
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`statute is factual knowledge as distinguished from knowledge of the law” (citation omitted)).9
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`8 A violation of Section 5 is a strict liability offense, which means that the SEC need not “prove scienter or
`negligence by [Ripple]” to establish its liability. See SEC v. Genovese, No. 17 Civ. 5821, 2021 WL 1164654, at *2
`(S.D.N.Y. Mar. 26, 2021) (citing SEC v. Universal Major Indus. Corp., 546 F.2d 1044, 1046 (2d Cir. 1976)).
`9 Cases assessing the mens rea requirement for aiding and abetting strict liability offenses in the criminal context
`support such an interpretation. In criminal cases, courts generally find that the government must show “that the
`putative aider and abettor knew the facts that make the principal’s conduct [unlawful].” United States v. Ford, 821
`F.3d 63, 74 (1st Cir. 2016). And, “if the conduct of an aider and abettor is sufficient to impose criminal liability, a
`fortiori it is sufficient to impose civil liability in a government enforcement action.” Apuzzo, 689 F.3d at 212.
`15
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`Case 1:20-cv-10832-AT-SN Document 441 Filed 03/11/22 Page 16 of 31
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`Next, the Individual Defendants argue that, even if the SEC need not show that they
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`knew or recklessly disregarded that Ripple’s actions violated Section 5, the SEC must show that
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`they knew or recklessly disregarded that Ripple’s actions were somehow otherwise “improper.”
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`See Larsen Mem. at 1, 12; Garlinghouse Mem. at 18–19. Again, the Court disagrees.
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`The Court rejects the Individual Defendants’ arguments primarily because a standard that
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`requires showing knowledge of “improper” activity would result in the imposition of a
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`“willfulness” requirement that is absent from 15 U.S.C. § 77o(b).10 In the securities law context,
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`the Second Circuit has explained that the “willfulness” requirement for imposition of criminal
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`liability requires a showing that the defendant had “knowledge that the conduct [was] unlawful,”
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`see United Stat