XRP partial victory threatened as SEC vs Terraform Labs ruling offers a stinging rebuke of the Ripple decision

• Judge Jed Rakoff rejected the distinction made in the Ripple case between public and institutional sales.
• The decision, which allowed the SEC to proceed in its case against Terraform Labs and Do Kwon, gives the regulator cause for appeal in the XRP case.
• Former SEC official John Read Stark says this is the first among many assertions against Judge Torres's ruling.

XRP community members are still reaping the benefits of the July 13 decision by Judge Analisa Torres after she made a two-way ruling in the Ripple versus SEC case. Though partial, the decision boded better for and was also better received by the XRP camp than the regulator and chair, Gary Gensler. Evidence of this is indicated by the 70% gains investors continue to reel from.

Also Read: Top 3 Price Predictions Bitcoin, Ethereum, Ripple: Soggy BTC to move soon.

XRP victory could face certain appeal as SEC finds plausible cause

XRP community may have their celebrations cut short after the Southern District of New York Judge Jed Rakoff gave the US Securities and Exchange Commission (SEC) a reason to appeal Judge Torres' recent decision. Terraform Labs appealed to the court to dismiss its case against the SEC following Judge Torres's decision about XRP being a security only when sold to institutional investors.

As a rebuttal, the SEC urged Judge Rakoff, overseeing the case, not to conform to Judge Torres' reasoning. The financial regulator wanted the Judge to exercise an independent mind as they devised ways to appeal the July 13 determination.

In a recent development, the court determined that Terraform Labs and its founder Do Kwon should proceed to face fraud charges. Referring to Judge Torres’ decision, an excerpt from the Judge's 50-paged Opinion and Order:

. . . the Court rejects the approach recently adopted by another judge of this District in a similar case, SEC v. Ripple Labs Inc., 2023 WL 4507900 (SDNY July 13, 2023). There, that court found that "[w]hereas ... [i]nstitutional [b]uyers reasonably expected that [the defendant crypto-asset company] would use the capital it received from its sales to improve the [crypto-asset] ecosystem and thereby increase the price of [the crypto-asset]," those who purchased their coins through secondary transactions had no reasonable basis to expect the same. Id. at *11-12.

Crypto X and experts like former SEC official John Reed Stark deem the decision a rejection of "the distinction made in the Ripple case between public and institutional sales."

Specifically, he says the statement now gives the SEC a stronger case in its plan to appeal Judge Torres' July 13 determination. In his words:

My take… Rakoff's decision might be the first, but will certainly not be the last, rejection of the Ripple decision.

Also Read: SEC contradicts Judge Torres' decision on XRP not being a security, seeks to appeal parts of the ruling

Judge Rakoff's logic for contradicting Judge Torres

Judge Rakoff has questioned Judge Torres' logic that whichever profit expectations the non-institutional investors had could not be attributed to Ripple's efforts like the case for institutional investors. According to Judge Rakoff, the Howey Test does not make such a distinction between institutional investors and the public, and for good reason, adding:

That a purchaser bought the coins directly from the defendants or, instead, in a secondary re-sale transaction has no impact on whether a reasonable individual would objectively view the defendants' actions and statements as evincing a promise of profits based on their efforts.

Nevertheless, the court alludes to Terraform Labs having publicly advertised to encourage institutional and retail clientele to buy their tokens on the promise of profit. Further, the defendants enticed the pubic and institutional investors with "managerial and technical skills" to help them maximize returns. Accordingly, sales for token purchases would be channeled back to the Terraform ecosystem regardless of the source, thereby generating extra profits for token holders, comprising both institutional and non-institutional.

Simply put, secondary-market purchasers had every bit as good a reason to believe that the defendants would take their capital contributions and use it to generate profits on their behalf.

The Judge also refused to comply with Terraform Labs' accusation about the SEC overreaching its mandate under the "major questions doctrine. " The doctrine in question is a stance by the Supreme Court ruling barring regulatory bodies, the  SEC included, from overarching its authority, unless during "extraordinary circumstances involving industries of “vast economic and political significance."

Noteworthy, several victims of the SEC have already called it out for this position, as has the crypto community, with hopes that the regulator steadies its hand.

Ripple lawyer John Deaton draws a distinction

On his part, pro-XRP attorney John E. Deaton has drawn a line between the two cases, saying that while Judge Torres applied the Howey factors to indisputable facts at summary judgment, Judge Rakoff ruled on a motion to dismiss.

Secondly, Deaton also observes that in the Ripple case, the Judge struck the views of the regulator's expert witness concerning retail investors. Therefore, the SEC could not prove that retail investors were reliant. Accordingly, Deaton maintains confidence in Judge Torres' ruling, saying such are the dynamics of litigation.

 Meanwhile, Ripple CTO David Schwartz has reiterated Deaton’s distinguishing argument in an X post.