A Decade-Old Memo Puts Ripple on the Hotseat in its SEC Battle

The longstanding legal battle between the Securities and Exchange Commission and Ripple Labs got an interesting update on Feb. 18 that could put downward pressure on the price of Ripple (XRP-USD).

A concept token for XRP (XRP) with stacks of tokens in the background.
Source: Shutterstock

According to a Bloomberg report, a couple of legal memos that were sent to the company in February 2012 suggests that Ripple co-founder Christian Larsen and CEO Brad Garlinghouse were so concerned about their proposed initial token offering being viewed by regulators as a sale of unregistered securities that it sought advice from Perkins Coie LLP, a Seattle-based law firm.

As my InvestorPlace colleague, Josh Enomoto, wrote recently, until the Ripple/SEC spat is resolved, XRP-USD is a “toxic asset.”

These latest unsealed legal documents do not paint a pretty picture for Ripple holders. Down 26% over the past three months, it’s probably not a great time to buy XRP-USD.

So, what’s Ripple Labs to do? Here’s a couple of ideas.

Ripple Could Settle With SEC

One of the memos from 2012 suggests that the powers that be at Ripple Labs knew they were skirting the law with their token offering, one that made Larsen and Garlinghouse approximately $600 million in profits.

“Perkins Coie LLP attorneys advised Ripple not to sell the proposed coins, as various conditions could subject them to being regulated as securities or commodities,” Bloomberg reported on Feb. 18.

Bloomberg Intelligence Senior Litigation Analyst Elliott Stein went so far as to suggest that the SEC will win its lawsuit against Ripple. Clearly, that would not be good news in the near term for cryptocurrency prices.

However, if Ripple Labs reached a financial settlement with the agency that allows it to work with the SEC to register XRP-USD as a regulated security, the long-term benefit could be worth it.

In October, Credit Suisse agreed to pay $475 million — $100 million to the SEC — to American and British authorities for fraudulently misleading investors over two bond offerings.

“When it comes to cross-border securities law violations, the SEC will continue to work collaboratively with overseas law enforcement and regulatory agencies to fulfill its Enforcement mission,” said Gurbir S. Grewal, director of the SEC’s Division of Enforcement.

I don’t think there’s any question that the agency views cryptocurrencies as cross-border securities and well within their jurisdiction. That’s why it launched the lawsuit against Ripple Labs in the first place.

To settle with the SEC would allow Ripple Labs to carry on with its global core business of processing payments without the taint of XRP-USD.

There’s Another Possibility

Ripple Labs’ second possibility is to continue to fight the SEC, knowing that vindication could blow the price of XRP-USD sky high.

Estimates put the amount of XRP-USD that Ripple Labs owns at 60 billion, or approximately 60% of the 100 billion in circulation. At current prices, that’s about $45 billion. Were the token at its 52-week high of $1.9656, then that holding would be up to $118 billion.

In addition, supporters will say it makes little sense to settle with the SEC if it didn’t do anything wrong. With this much money on the line, it can afford to fight this indefinitely.

A second memo from Perkins Coie suggested that XRP-USD might not qualify as a security under federal law. As a result, Ripple’s General Counsel, Stu Alderoty, believes that the agency’s failure to act sooner constitutes a tacit admission that it too had doubts about Ripple being a security.

As InvestorPlace’s Alex Sirois wrote in December, Ripple’s utility as “a potential successor to legacy payment systems including SWIFT” suggests it’s only a matter of time before XRP-USD moves higher. SWIFT, of course, has been in the news of late, mostly in conversations about possible Russia financial sanctions.

My colleague is convinced Ripple would be vindicated, sending the token’s price through the roof. It seems the people at Ripple Labs feel the same.

While I, too, appreciate Ripple’s utility, the latest legal documents to come to light suggest that there’s still some question whether or not Ripple Labs intentionally skirted securities laws in 2013 and beyond.

If you think it’s a slam dunk, you might want to think again. This thing’s a toss-up.

On the date of publication, Will Ashworth did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.

Will Ashworth has written about investments full-time since 2008. Publications where he’s appeared include InvestorPlace, The Motley Fool Canada, Investopedia, Kiplinger, and several others in both the U.S. and Canada. He particularly enjoys creating model portfolios that stand the test of time. He lives in Halifax, Nova Scotia.


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