Terraform Labs vs SEC: Judge Rejects Ripple’s Case Arguments

Table of Contents

• Terraform Labs Fails to Follow the Road taken by Ripple against SEC
• What Does It Mean for Ripple? 

Judge Rakoff has denied a motion to dismiss the Terraform Labs lawsuit against the SEC and expressed disagreement with the recent ruling in Ripple’s case.

Terraform Labs Fails to Follow the Road taken by Ripple against SEC

Last month, Ripple Labs celebrated its partial but remarkable victory in the 3-year-long battle against the US Securities and Exchange Commission (SEC). Judge Analisa Torres partially ruled in favor of Ripple, stating that XRP should not be considered a security in regard to programmatic sales and “other distributions” (although it is considered a security in regard to institutional sales). 

Facing a similar lawsuit, another crypto company Terraform Labs tried to take advantage of the Ripple’s case ruling and filed a motion for the dismissal of the suit using the Ripple’s victory as an argument. 

However, Judge Jed Rakoff of the U.S. District Court for the Southern District of New York denied the motion and firmly confirmed that the civil case against Terraform and its founder Do Kwon would move forward. 

Moreover, Judge Rakoff rejected to consider the categorization of sales used in the Ripple case, thus criticizing the approach taken by Judge Torres:

"It may also be mentioned that the Court declines to draw a distinction between these coins based on their manner of sale, such that coins sold directly to institutional investors are considered securities and those sold through secondary market transactions to retail investors are not. In doing so, the Court rejects the approach recently adopted by another judge of this District in a similar case," wrote Judge Rakoff.

What Does It Mean for Ripple? 

Even though Judge Rakoff’s criticism doesn’t overturn Judge Torres’ decision in the Ripple case, it might increase the chances of the SEC filing an appeal. 

Last week, a law expert James Murphy outlined four major paths that the SEC could take next. He believes that the SEC is much more likely to file a request for an interlocutory appeal than settle. 

Meanwhile, Ripple CTO David Schwart reacted to Judge Rakoff’s ruling on his Twitter observing that the reasoning seems to be unusual and doesn’t apply to typical cryptocurrencies. Schwart then suggested the worst-case and the best-case future scenarios regarding Ripple Labs: 

“1) The worst case for fans of the decision in Ripple: The court is saying it disagrees with the Ripple decision because it applies additional tests that are not part of the Howey test and so it won't apply/follow the ruling here.

2) The best case for fans of the decision in Ripple: The court is saying it disagrees with the argument that it should follow the Ripple decision because the reasoning relied on in Ripple makes sense not because it directly implicates the Howey factors but because it indirectly implicates them due to facts not applicable in this case.”

Disclaimer: This article is provided for informational purposes only. It is not offered or intended to be used as legal, tax, investment, financial, or other advice.