XRP Lawsuit Analysis: Legal Expert John Deaton Debunks Judge Rakoff's Critique of Judge Torres

XRP Lawsuit Analysis: Legal Expert John Deaton Debunks Judge Rakoff's Critique of Judge Torres

August 5, 2023

The ongoing SEC v. Ripple Labs lawsuit revolves around whether digital asset XRP should be classified as a security. The U.S. Securities and Exchange Commission (SEC) alleges that Ripple Labs and its executives unlawfully sold XRP as an unregistered security.

On 13 July 2023, Judge Analisa Torres of the U.S. District Court for the Southern District of New York ruled in the case, granting and denying summary judgment motions from both the SEC and Ripple. A key takeaway from her ruling was that XRP, as a digital token, does not inherently meet the Howey requirements of an investment contract, suggesting that the court does not view XRP as a security unless when sold to institutional investors.

On 31 July 2023, Judge Jed S. Rakoff made a significant ruling in a somewhat similar case — SEC v. Terraform Labs — that contradicted Judge Torres’ approach in the Ripple case. He dismissed the idea of distinguishing between coins based on their manner of sale, a stance that could have broader implications for the crypto space.

On 1 August 2023, prominent American attorney John Deaton, who has been closely monitoring the SEC v. Ripple lawsuit since it was initiated in December 2020, shared his thoughts on Judge Rakoff’s comments on Judge Torres’ ruling in a series of posts on X.

Deaton began by discussing Judge Rakoff’s ruling in the Terraform Labs case. He pointed out that the defendants in the Terraform case had embarked on a marketing campaign that suggested all sales from their crypto assets would be funneled back into the overall project. This, Deaton noted, is not generally consistent with other cryptocurrencies, specifically XRP.

Deaton then questioned whether Judge Rakoff’s finding that secondary market purchasers relied on the defendants’ statements and thus expected profits was vastly different from what Judge Torres said. He argued that it was not. According to Deaton, Judge Torres did not say that secondary sales could never be securities. Instead, according to Deaton, in the Ripple case, the SEC simply failed to establish that prong by credible evidence.

Deaton also took issue with what he perceived as Judge Rakoff’s misunderstanding of Judge Torres’ ruling. He suggested that Judge Rakoff may have reacted to the perceived inconsistent result between the treatment of institutional investors and retail investors after Torres applied the Howey test to the facts.

Deaton further argued that the alleged policy behind the Securities Act is to protect retail investors, not institutional investors. However, he stressed that it was not Judge Torres’ job to ensure that the results, after fairly applying the Howey factors, are consistent with policy considerations behind the 1934 Securities Act.

In a series of posts on X (formerly known as Twitter), Deaton challenged the idea that the level of sophistication of the investors should be a factor in applying the Howey test. He argued that Judge Torres’ job was to apply the test to each type of XRP transaction alleged by the SEC to violate the law without considering the level of sophistication of the investors.

Deaton concluded his series of posts by suggesting that Judge Rakoff was wrong when he said Torres focused on the type of investors: institutional versus secondary market investors. According to Deaton, the truth is that Torres didn’t consider the level of sophistication of the different types of investors. That’s why we have the decision we have, he argued.

Featured Image Credit: Photo / illustration by vjkombajn via Pixabay

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