SEC Initiates Intent to Challenge Court's Verdict on XRP Sales in Ripple Lawsuit

On Wednesday, the Securities and Exchange Commission (SEC) conveyed its intention to contest a recent court ruling regarding the classification of the cryptocurrency XRP as a security.

The court had determined that XRP might not inherently qualify as a security.

In a legal document, the SEC expressed its desire to validate the court's decision that the activities involving XRP, such as the orchestrated sales to XRP buyers on crypto trading platforms and the distributions made by Ripple in exchange for labor and services, did not involve the issuance or trading of securities.

The SEC believes that a review of this decision is necessary at this stage. Such a review, known as an interlocutory appeal, seeks the scrutiny of appellate courts regarding decisions made during an ongoing case.

The SEC argued that this review is important due to the potential impact on various other SEC actions, which could be influenced by the resolution of the issues raised in the review.

The SEC's decision to indicate its counteraction to the court's ruling follows a judgment made by Judge Analisa Torres in the prior month. The judge determined that the structured sales of XRP by Ripple Labs to the general public and distributions to employees did not constitute the unregistered sale of securities.

It was clarified that structured sales denote the scheduled XRP sales conducted by Ripple on cryptocurrency exchanges. Despite this ruling, Judge Torres did establish that the sale of XRP to institutional entities did qualify as the unregistered sale of securities.

According to Decrypt, Jeremy Hogan, a partner at Hogan & Hogan, stated that the SEC's appeal would not question whether XRP is indeed a security. Instead, the appeal would primarily address the SEC's concerns regarding its losses in relation to structured and individual XRP sales.

The SEC clarified that its court filing on Wednesday aimed to outline the rationale for seeking permission to divert from the established course of the case. Preceding the SEC's filing, Judge Torres scheduled the trial for the spring of 2024.

Ripple's protracted legal battle against the SEC has taken a fresh twist, marking another chapter in the ongoing conflict that originated with the agency's 2020 lawsuit against the company. In this legal confrontation, the SEC leveled allegations against Ripple, its CEO Brad Garlinghouse, and its executive chairman Chris Larsen, asserting that they illicitly raised $1.3 billion by vending XRP, an alleged unregistered security.

Indications have emerged suggesting that the SEC wasn't entirely pleased with Judge Torres' verdict. Gary Gensler, the Chair of the SEC, expressed his disappointment with certain aspects of the ruling in the past month. Furthermore, the SEC criticized the judgment as "wrongly decided" in its legal action against Terraform Labs and the CEO of Terra, Do Kwon, just the following week.

John Deaton, the founder of Crypto Law, noted that an appeal from the SEC shouldn't be seen as a drawback to Ripple's legal triumph. Deaton explained that the wheels of justice move slowly, and during this period, Judge Torres' ruling remains the legal standard. Deaton also pointed out that there exist additional arguments challenging the classification of XRP sales as securities under the Howey Test, a legal benchmark set by the Supreme Court to determine whether something qualifies as an "investment contract" and thus a type of security under federal law.

However, discrepancies within the Southern District of New York have come to light, particularly where Judge Jed Rakoff declined to extend Torres' reasoning to the SEC's case against Terraform Labs and Kwon.

The SEC emphasized that an "intra-district split that has already developed" underscores the presence of "significant grounds for differences of opinion."

This, the SEC argued, forms part of its rationale for seeking an interlocutory appeal, which refers to the pursuit of an appellate court's assessment of decisions made while a lawsuit is still ongoing.