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Ripple Under Fire in Court by Investor with SEC backing

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August 14, 2019 | 

560 Views | 

Darryn Pollock | 

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Ripple, and its XRP token, are facing heavy criticism and attacks in a courtroom as an investor, Bradley Sostack, has added some firepower to his class action lawsuit. He alleges that the company misled investors and proceeded to sell XRP as an unregistered security, in violation of federal law.

This allegation has received some considerable backing now as his updated complaint cites guidance issued by the United States Securities and Exchange Commission (SEC) with the claim being that under these guidelines, XRP can be considered security-like. 

If this does become the case, and it is proven that XRP is a security in the eyes of the US legal system, it will have huge ramifications for the bank-focused cryptocurrency. This class action suit has been ongoing for about a year, however, and received very little transaction, but now, Ripple need to respond by mid September. 

Is XRP a security?

This latest amendment to the lawsuit from Sostack packs a much bigger punch. Not only has it been backed up by SEC guidelines, but it also contains several new arguments and already it has seen more action being taken place. This is the first complaint of this nature that has called on Ripple to respond.

“That filing will be the first time in the already-long history of this litigation that Ripple will substantively respond to the allegations around XRP,” Jake Chervinsky, general counsel at crypto lending startup Compound Finance, told Coindesk.

However, this move comes off the back of a number of predecessors who have claimed all along that XRP is a security. In May 2018, another investor Ryan Coffey filed the first of several lawsuits seeking class-action status against Ripple Labs, subsidiary XRP II, CEO Brad Garlinghouse and other individuals.

But this latest case, with its additions, looks to be the strongest one yet against Ripple with Chervinsky making note that the claims can be held in both state and federal law. 

“This is important because California uses the ‘risk capital test’ in addition to the federal Howey test to determine whether a transaction qualifies as a security,” he explained. “The risk capital test is broader than the Howey test, meaning the plaintiffs could lose their federal securities claims and still win their state securities claims.”

How the SEC fits in

The SEC published the guidance in April, providing for the first time a specific roadmap for how it might assess digital assets and so, this class action will look to impart this test on determining if XRP is a security, and it is likely to be taken seriously by the court, but not necessarily be binding. 

“Although the framework on its own doesn’t have precedential value – meaning the court is not required to follow it – it will be very interesting to see how the court handles the utility of the framework in moving forward in determining whether XRP is a security,” Rebecca Rettig, a partner at the law firm of Fisher Broyles, told Coindesk

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