From 24th december...
Just before we pop off for the holidays we thought we would bring you some of the highlights of the SEC’s filing against Ripple Labs. Because its 71 pages really were hugely insightful reading. Emphasis ours throughout.
Let’s start with the assertion that the defendants were aware of their venture potentially falling under federal securities law as far back as 2013:
Ripple engaged in this illegal securities offering from 2013 to the present, even though Ripple received legal advice as early as 2012 that under certain circumstances XRP could be considered an “investment contract” and therefore a security under the federal securities laws.
From a financial perspective, the strategy worked. Over a years-long unregistered offering of securities (the “Offering”), Ripple was able to raise at least $1.38 billion by selling XRP without providing the type of financial and managerial information typically provided in registration statements and subsequent periodic and current filings. Ripple used this money to fund its operations without disclosing how it was doing so, or the full extent of its payments to others to assist in its efforts to develop a “use” for XRP and maintain XRP secondary trading markets.
This, meanwhile, is the essence of how the operation worked:
While Ripple touted the potential future use of XRP by certain specialized institutions, a potential use it would deploy investor funds to try to create, Ripple sold XRP widely into the market, specifically to individuals who had no “use” for XRP as Ripple has described such potential “uses” and for the most part when no such uses even existed
Moving on to how Ripple funded its operations with sales of XRP, its native digital currency:
Ripple also lacked the funds to pay for these endeavors and for its general corporate business expenses, which for 2013 and 2014 already exceeded $25 million, without selling XRP.
Ripple’s objectives and its own financial reality thus compelled it to actively seek to offer and sell XRP as widely as possible, while controlling supply and demand in the resale market to manage and control liquidity for an imagined, future “use” case.
In 2017, Defendants also began accelerating Ripple’s sales of XRP because, while Ripple’s expenses continued to increase (reaching nearly $275 million for 2018), its revenue outside of XRP sales did not.
And some more on how its entire business model was basically focused on the selling of XRP:
For example, starting in 2016, Ripple began selling two software suites, xCurrent and xVia, from which it has earned approximately $23 million through 2019, though neither uses XRP or blockchain technology. Ripple raised about $97 million in sales of equity securities through 2018 and an additional $200 million in 2019. In other words, the overwhelming majority of Ripple’s revenue came from its sales of XRP, and Ripple relied on those sales to fund its operations.
From 2014 through the end of 2019, to fund its operations, Ripple sold at least 3.9 billion XRP through Market Sales for approximately $763 million USD.
From 2013 through the end of the third quarter of 2020, Ripple sold at least 4.9 billion XRP through Institutional Sales for approximately $624 million USD, also to fund Ripple’s operations, for a total of at least $1.38 billion USD in Market and Institutional Sales alone.
How the holders of XRP benefited from the controlled distribution of the digital tokens in price terms:
The market price for XRP—and Ripple’s sales prices in the Offering—ranged from a low price of approximately $0.002 per XRP in 2014 to a high price of $3.84 per XRP in early 2018, an increase of nearly 137,000%. XRP traded at approximately $0.58 USD per XRP as of last week.
From 2015 through at least March 2020, while Larsen was an affiliate of Ripple as its CEO and later chairman of the Board, Larsen and his wife sold over 1.7 billion XRP to public investors in the market. Larsen and his wife netted at least $450 million USD from those sales.
From April 2017 through December 2019, while an affiliate of Ripple as CEO, Garlinghouse sold over 321 million XRP he had received from Ripple to public investors in the market, generating approximately $150 million USD from those sales.
And here’s a nice summary of all the sales:
The unregistered third-party middlemen that Ripple organised and paid to help them manage the sales:
The entities Defendants enlisted to help carry out the Market Sales—the specialized traders or the trading platforms—were typically not registered with the SEC in any capacity.
Ripple conducted the Market Sales by paying at least four entities commissions, paid in XRP, for executing Ripple’s XRP sales to the public on digital asset trading platforms.
How the middlemen were directed to control the price:
At Ripple’s direction, the intermediaries such as the Market Maker ensured that Market Sales were programmatically set not to exceed a certain percentage of XRP’s overall daily trading volume, and Ripple referred to the Market Sales as “programmatic sales.”
How they incentivised institutional holders with pre-arranged discounted terms relative to public market prices (the public market that the securities were loaded off into):
Ripple made many of the XRP Institutional Sales at a discount from XRP market prices. At least seven of the institutional investors—including some described below—bought XRP at discounts between 4% and 30% to the market price
More about how Ripple paid money-transmitting businesses with XRP to use its product:
As described below, in late 2018 Ripple began to market a product (“On-Demand Liquidity” or “ODL,” also called “xRapid”) for money transmitting businesses to buy XRP in one jurisdiction, transfer it to a separate destination, and sell XRP for the local fiat currency, to effect cross-border payments. To encourage adoption of ODL, Ripple paid XRP to both the money transmitting businesses and certain market makers that supported the product for their efforts.
From approximately December 2018 through July 2020, Ripple issued at least 324 million XRP as fees, rebates, and incentives to entities associated with ODL, without restricting the ability of these entities to resell the XRP received as incentives into public markets. This XRP was valued at approximately $67 million at the time of Ripple’s payments.
These entities typically have resold all the XRP they have received from Ripple to investors in the public markets, typically on the same day that they received the XRP from Ripple.
How Ripple managed comms to maximise XRP value:
On November 1, 2017, Ripple Agent-3 informed Ripple Agent-2 that Ripple was looking to “accelerate/prioritize XRP-beneficial announcements,” including potentially the formation of the XRP Fund.
On November 11, 2017, a Ripple marketing executive asked Garlinghouse and Ripple Agent-3 in an email if they could use an upcoming investment conference in Manhattan to “push” the XRP Fund or the RippleWorks CEO “to close so we can announce.” The next day, Ripple Agent-3 informed Garlinghouse that Ripple was “following up with [the RippleWorks CEO] with some provisions [for the XRP Fund] to prevent harmful XRP behaviour.”
How Ripple emulated a central bank in how it regulated those it distributed its tokens to:
For example, a November 1, 2018, two-year “Services and Marketing Agreement” with one entity promised “certain development services to promote technologies of interest to Ripple.” The agreement provided that the entity would receive a bi-monthly “development service fee” of 5 million XRP and could identify additional parties that could receive XRP as incentives— provided that these additional parties agreed to abide by Ripple-mandated parameters for their XRP trading volumes. By August 2020, Ripple had paid the entity at least 364 million XRP, of which the entity had distributed 178 million to other parties, typically approved by Ripple.
How the fee it paid holders of XRP emulated a type of interest rate:
In 2017 and 2018, Ripple also entered into agreements with at least ten digital asset trading platforms—none of which were registered with the SEC in any capacity, and at least two of which have principal places of business in the United States—providing for listing and trading incentives with respect to XRP. Ripple paid these platforms a fee, typically in XRP, to permit the buying and selling of XRP on their systems and sometimes incentives for achieving volume metrics.
How Ripple incentivised trading platforms to list its tokens:
Ripple tried repeatedly and unsuccessfully to persuade that digital asset trading firm to “list XRP on [its] exchange” by offering to “cover implementation costs, paying rebates, [and] brokering intros to large XRP holders for custody.” Undaunted by these initial failures, Ripple Agent-3 emailed the two owners of the firm directly in July 2017, copying Garlinghouse, and asked: “Does a $1M cash payment move the needle for a Q3 listing?”
How Ripple emulated a central bank in how it managed price and volatility in the price of XRP:
These efforts also included timing the prices and amounts of XRP sales to achieve what Ripple viewed as desirable trading volume or price levels and fluctuations with respect to XRP. Ripple sought to maximize the amount it could earn from the XRP Market Sales while minimizing volatility and any downward pressure on XRP’s market price caused by Ripple’s constant injections of new XRP into the market to raise operating funds.
Ripple internally described these strategies as aimed at maximizing the amount of money Ripple could raise in the Offering or at achieving “more speculative [XRP] volume.” At times, Ripple publicly described its efforts as meant to protect the public’s investments in XRP.
Then there’s this extraordinary detail about how Ripple execs used buybacks to firm up the price of XRP:
On April 11, 2016, Ripple also directed the Market Maker to buy XRP in the open market with the goal of “[t]arget[ing] $0.008 incrementally over the course of 2 days” while “[c]ap[ping] activity at 5% of daily trading volume[,]” among other things.
A Ripple vice president of finance (the “VP of Finance”) then asked Garlinghouse and Ripple Agent-3 “if [they] discussed whether we should turn off the buying now with this news and the higher volume?” Ripple Agent-3 responded: “The thesis . . . is to show a period of consistent buying from an account that is known to be a consistent seller. The intended impact of the buying is not to move the price but rather to provide confidence in the market, which in turn will move the price.”
Following this exchange, Ripple did not “turn off the buying” of XRP.
The following month, September 2016, Ripple directed the Market Maker to place XRP buy and sell orders around the time of announcements Ripple made that month referring to Ripple’s achievements, though neither announcement concerned XRP.
How Ripple execs analysed the market impact of XRP purchases:
On September 20, 2016, the VP of Finance emailed the Market Maker and said that, after consultation with Garlinghouse and Larsen, Ripple wanted to “better understand[ ] the impact of our purchases [of XRP] over the past week” and that Ripple’s “[c]urrent thinking [was] that we should use our full $300k [designated for XRP purchases] in the first 24 hours post announcement.”
The next day, the Market Maker provided the VP of Finance and Ripple Agent-3 with data showing “the positive relationship between hourly price changes of XRP and the hourly Net XRP purchases,” while noting the lack of data to provide a “statistically significant result.”
On Friday, September 23, 2016, the VP of Finance, after consulting with Garlinghouse and Larsen and obtaining Garlinghouse’s “go ahead,” directed the Market Maker to “keep the buying light [the day after the announcement] and then do the bigger slug starting Sunday.” The Market Maker agreed.
On Monday, September 26, 2016, the Market Maker reported to Ripple that it had “spent approximately $200K of the second tranche” and recommended a strategy “to make aggressive markets” going forward, to which the VP of Finance agreed.
On October 15, 2016, the VP of Finance informed the Market Maker that, after an upcoming announcement, Ripple “would like to go to sales at 1%” of trading volume and asked the Market Maker to “be thoughtful / opportunistic around the timing of implementing 1%” because Ripple did not “want to depress the rally but rather capitalize on the additional volume.” He further instructed the Marker Maker “to take more money off the table,” if there was a chance to do so.
How execs made efforts to protect the XRP market, especially when it was out of sync with other crypto market moves:
Internally, Ripple executives frequently expressed concern over XRP’s price and planned proactive steps to protect the market.
For example, in an August 12, 2017 e-mail to Ripple Agent-2 and Ripple Agent-3, Garlinghouse raised concerns about XRP being “squarely left out” of a recent market “rally” and asked whether Ripple’s recent XRP sales were “impacting the market?” He instructed certain Ripple employees to “proactively” attempt to increase speculative trading value with positive XRP news. 188. Similarly, in September 2019, Ripple’s “Head of Global Institutional Markets” reminded certain Ripple employees that Ripple viewed itself as “Responsible Stewards of XRP.” She expressed concerns about the impact on XRP’s price from increased XRP supply and recommended “buy[ing] [XRP] back” because she was very “worried about xrp at 0.20” and was “DREAD[ING]” an upcoming report—referring to quarterly reports Ripple began publishing in January 2017 (the “Markets Reports”)—if Ripple didn’t “take swift, creative action now (!)”
Later, in approximately June 2020, Ripple employees prepared and delivered an internal presentation for Garlinghouse and Larsen in which the employees highlighted that “XRP began underperforming [Bitcoin]” since early May 2020, partly because of Ripple’s sales of XRP. The employees proposed “supply limiting tactics,” such as Ripple’s buying back XRP.
How fretting about the price led to “supply limiting tactics”:
Later, in approximately June 2020, Ripple employees prepared and delivered an internal presentation for Garlinghouse and Larsen in which the employees highlighted that “XRP began underperforming [Bitcoin]” since early May 2020, partly because of Ripple’s sales of XRP. The employees proposed “supply limiting tactics,” such as Ripple’s buying back XRP. 194. Garlinghouse approved the “buy back” option. 195. Following Garlinghouse’s decision, Ripple disclosed on November 5, 2020, in its Markets Report for the third quarter of 2020, that it had purchased $45 million worth of XRP in order to “support healthy markets” and that it may continue to engage in this activity in the future.
How all of the above activity required public disclosure to be legal:
If Ripple had filed a registration statement and quarterly and annual reports—as it would have been required to do—Ripple’s sales would have been publicly disclosed. They were not.
How Ripple execs created an Escrow fund to assuage concerns about too much selling:
To assuage investor concerns, on May 16, 2017, Ripple announced that it would place 55 billion XRP (most of its current holdings) into a cryptographically-secured escrow that would restrict Ripple to accessing only one billion XRP every month (the “XRP Escrow”).
The Proposal to Escrow Ripple’s XRP concluded that the XRP Escrow would be successful if it resulted in “immediate increase in volume and price appreciation” for XRP as one of the “[r]ewards” to counter-balance the increased “[r]isk” of “Cash flow shortfall” for Ripple
Ripple and Garlinghouse publicly touted the formation of the XRP Escrow as proof that Ripple and XRP holders shared a common interest in the success of Ripple’s efforts as to XRP and as one of Ripple’s many efforts to manage the trading market for XRP.
In other words, by announcing the XRP Escrow, Defendants sought to encourage investors to buy and sell XRP without fear that Ripple could cause XRP’s price to crash—as though the XRP market was a functional market subject to ordinary supply and demand independent of the issuer. In doing so, Defendants reminded investors of a fact they already knew—that Ripple was committed to undertaking efforts to increase XRP trading volume while supporting XRP’s price.
And some thoughts about who really can exercise influence over offering proceeds:
Investors in XRP do not exercise any control or authority over how Offering proceeds have been or will be spent. Ripple possesses sole discretion to decide how to do so. 262. Because certain Ripple executives publicize that they hold XRP, and some (including Garlinghouse) state that they hold it as an investment, it is reasonable for a holder of XRP to expect these individuals to undertake efforts to increase the value and price of XRP.
How the SEC clocked HODL:
Later, he reiterated, “I remain very, very, very long XRP, . . . I’m on the HODL side,” referring to a digital asset industry term meaning to be long on an asset for long-term gains.
How nobody was using XRP to actually transact:
On June 21, 2018, Garlinghouse explained in a public speech that nobody was using XRP to effect cross-border transactions as of that date. Instead, he said that Ripple “expect[ed] this year for at least one bank to use XRP in their payment flows, to use xRapid [ODL].”
Ripple did not commercially launch ODL until October 2018. 338. Since its launch, ODL has gained very little traction, in part due to certain costs of using the platform. From October 2018 through July 26, 2020, only fifteen money transmitters (none of which are banks) signed on to potentially use ODL, and ODL transactions comprised no more than 1.6% of XRP’s trading volume during any one quarter (and often substantially less).
What onboarding there was was subsidised by Ripple:
Much of the onboarding onto ODL was not organic or market-driven. Rather, it was subsidized by Ripple. Though Ripple touts ODL as a cheaper alternative to traditional payment rails, at least one money transmitter (the “Money Transmitter”) found it to be much more expensive and therefore not a product it wished to use without significant compensation from Ripple.
Between early 2019 and July 2020, the “Money Transmitter” conducted the overwhelming majority of XRP trading volume in connection with ODL. Ripple had to pay the Case 1:20-cv-10832 Document 4 Filed 12/22/20 Page 57 of 71 58 Money Transmitter significant financial compensation—often paid in XRP—in exchange for the Money Transmitter’s agreement to help Ripple increase volume on ODL.
Specifically, from 2019 through June 2020, Ripple paid the Money Transmitter 200 million XRP, which the Money Transmitter immediately monetized by selling XRP into the public market, typically on the very days it received XRP from Ripple. The Money Transmitter publicly disclosed earning over $52 million in fees and incentives from Ripple through September 2020.
The Money Transmitter became yet another conduit for Ripple’s unregistered XRP sales into the market, with Ripple receiving the added benefit that it could tout its inorganic XRP “use” and trading volume for XRP. The Money Transmitter has served that principal purpose for Ripple in exchange for significant financial compensation.
And finally how executives kept the incentive programmes quiet from the public:
Ripple and Garlinghouse did not disclose to XRP investors or the public the full extent of incentives that Ripple provided to the Money Transmitter in return for its assistance in increasing XRP trading volume. 344. For example, in a September 12, 2019 interview on CNN, Garlinghouse refuted speculation that Ripple was manufacturing demand for ODL and claimed: “When [the Money Transmitter] is moving money from U.S. dollar to Mexican peso, they’re buying [XRP] at market. There’s no special sweetheart deal there.” While the Money Transmitter was buying XRP in the market at current market prices (not from Ripple), Garlinghouse did not disclose that Ripple was paying the Money Transmitter significant financial incentives to do so. 345. Even after ODL’s launch, Ripple publicly acknowledged in July 2019 that XRP has no significant use beyond investment, as alleged in paragraph 211 above.
No mention, sadly, of the extensive social media PR war that was waged by the XRP army online to the benefit of the Ripple community. Or of Ashton Kutcher’s promotional activity on The Ellen DeGeneres Show. But we are sure it won’t have gone unnoticed.