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SEC v. Ripple: Motion to Dismiss Letter, Garlington and Larson Out?

By March 4, 2021No Comments


Hello and welcome to Legal Briefs – late night crypto edition. Yes, I was lying down in bed getting ready to sleep watching Between Two Ferns on Youtube when “ding” I was notified that the individual Defendants Garlinghouse and Larsen had filed their Motions to Dismiss the lawsuit letters and as tired as I was – I couldn’t help but take a look. And I read it and I got so excited about it I had to get up and knock out this vlog. I am such a legal nerd – sometimes I’m surprised she said “yes.”

So, we have what is essentially the outline of a Mt to Dismsiss by Garlinghouse and Larsen and it is a doozy.

Remember, as always, don’t take what I say as legal advice – if you need help defending yourself, ask this guy:

His name anyone? If you’re British you don’t get to play.
He’s really your first best line of defense

And that’s really what a Motion to Dismiss is – it’s your first line of defense to a lawsuit. A lawsuit can end in basically 4 ways: 1. A settlement 2. A successful motion to dismiss 3. Summary judgment where the Judge decides and 4. A trial – usually with a jury.

PLEASE keep in mind that if the Defendant loses this motion all that means is that the lawsuit alleges enough facts to continue in the process. You can and you OFTEN lose motions to dismiss and end up winning the lawsuit and I will explain in a second.

So here we have a motion to Dismiss and it’s in letter form because the Judge requires a maximum 4 page letter and then she will tell the party when and how to file the actual pleading itself. And look at how much of the 4 pages attorney Solomon takes … every, single, available space. He must be on Twitter.

So, this Motion to Dismiss is being made under Rule 12(b)(6) and in order to win a motion to dismiss under this rule you must show that EVEN IF all the allegations in the lawsuit are taken as true, even then, the lawsuit doesn’t show a plausible case. So for example, if the lawsuit alleges that Brad Garlinghouse painted the sky green on January 1, 2020, for purposes of a motion to dismiss, Brad painted the sky green. It’s only later in the lawsuit that we can even argue whether he did or not.

So, let’s take a look at the argument the individual defendants are making.
The first argument is at the bottom of page #1 and it is the weakest. This argument is that the Defendant sales of XRP were not sales of securities. And it says:
The reason why I say this the weakest argument is because I think that the lawsuit is strong enough factually, IF everything it says is true that the judge should make the decision. And that Doesn’t MEAN that Garlinghouse or Ripple will lose on the issue at summary judgment – completely different things, just that I think there’s enough to make it past this stage. And as evidence that I am correct make a note that Ripple did NOT file a Mt to Dismiss on this issue. If it was a strong argument at this stage Ripple would have tried it as well – but it didn’t, it answered.

But let’s take a look at the Second argument and this is what got me out of bed and outlining this vlog. It’s exciting and it’s strong and it’s about scienter.

So here the Defendant points out that the lawsuit against Ripple doesn’t require the SEC show that Ripple knew it was selling a security. But the SEC has to show that the officers and execs at Ripple actual KNEW what they were doing was wrong. And this higher standard makes sense because can you imagine you go to work at a company and are doing your thing and a month later you get sued for doing your job? That’s not right and that’s why the SEC has to show that Garlinghouse KNEW that he was selling an unregistered security. And why is the SEC not going to be able to prove that absent a smoking gun? Because the Federal Govt. didn’t have know it. Read on.

So, Garlinghouse goes to work at Ripple and one of the first things he gets embroiled in is some legal issues with FinCEN where FinCEN , a department of the US Treasury, ends up finding that XRP is a CURRENCY. Repeat: the US. Govt. said in 2015 that XRP is a currency – which is like the opposite of a security. And then again in 2020 FinCEN said the same thing. And now we know not only this but also that the investigation by the SEC took 30 months before the lawsuit was filed and if it’s such an obvious thing that XRP is a security that Garlinghouse and Larsen should know right away- why did it take SEC and its 100 lawyers 30 months to figure it out? And now we ALSO know from the pre-trial conference that an exchange approached the SEC and asked the SEC if XRP was a security and the SEC shrugged its shoulders and said ‘Dunno yet” – but the Defendants are supposed to know.

I mean, the whole thing starts to look ridiculous for the SEC and that’s why if I was the SEC I would make a hail Mary at this point because I would know I need a smoking gun and the only POSSIBLE sloking gun out there would be a letter from a lawyer to Ripple and addressed to Garlinghouse and Larsen that says “Dear Ripple Execs, XRP is a security no doubt about it and you must stop selling it.” And that is why those advisory letters from lawyers are so important but I don’t think the SEC is going to get them and I don’t think they are the smoking gun the SEC hopes they are.

And for those reasons I think the Judge drops all counts requiring knowledge of wrongdoing. I normally wouldn’t say that but I really think the SEC has a big problem here on THIS issue and I think the individual defendant aiding and abetting Counts are OUT. Out in a good way, not baseball way. I could be wrong but as you know – I’m rarely wrong. And If I’m wrong and they aren’t out with this Motion to Dismiss, I think they win at Summary Judgment.

And finally, something even more interesting to me and something that absolutely is going to be a big issue for Ripple as well is the final and third jurisdictional argument which is COMPLICATED As heck and makes me happy I am not a securities lawyer. But this is a big issue for the main event, the Ripple part of the lawsuit and here the main argument is that the SEC has no jurisdiction over the sales of XRP because it failed to allege that the transactions occurred in the U.S.

Let’s look at page 4.

So, remember that the SEC amended its Complaint and added those facts we just read – knowing that it had a problem and was going to be facing a Motion to Dismiss. And I’m not sure they added enough facts and that’s what the motion to dismiss alleges. They do add that two of the platforms on which the sales took place were incorporate in New York but that is not what the law says is important. Read on.

So there you have it – the law requires that that the location where the sales became “irrevocable” be in the United States – and that is not alleged in the lawsuit. The counter-argument could be that a trier of fact could infer that it was irrevocable in New York and I don’t honestly know how I’d rule on this one. It’s interesting but I’d like to see the SEC’s reply letter.

BUT I think it’s very important to the Ripple lawsuit as well because I hope to see Ripple fight over each and every sale on this basis with this argument. Does a U.S. Court have jurisdiction? That will be a mess and messes are generally good for the Defendant – ask OJ.

In any case, that’s it and thanks for putting up with my legal geek-out. My sincere hope is that you also have something in your life that gets you so excited that it pulls you out of a hilarious Between two Ferns episode and makes you want to talk about it. Good night.

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