Suit Against Ripple Labs Survives Motion to Dismiss

Defendant technology company Ripple Labs, Inc. et al. have filed a motion to dismiss a case filed by plaintiff Vladi Zakinov. The Northern District of California granted in part and denied in part the motion to dismiss the case.

Plaintiffs filed a consolidated class action in response to the “creation, dispersal, circulation, and sale of ‘XRP,’ a sort of digital units often referred to as a ‘cryptocurrency.’” They accused Ripple of violating federal and California state securities law; including the Securities Act, California Corporations Code, and California Business & Professions Code. The allegations include the unregistered offer and sale of securities, “control person” liability, and misleading advertisements or statements.

In 2013, Ripple created 100 billion XRP units, of which it gave 20 billion to its founders and kept the other 80 billion units. Ripple placed a large percentage of the XRP units in escrow, creating a strategic plan for when and how many units of XRP to sell. It would keep 55 billion units in escrow and sell the other 25 billion units in set timeframes. In an agreement with the US Attorney’s Office for the Northern District of California, Ripple Labs, who settled with XRP II, acknowledged that it sold XRP to the general public. In 2017, the defendant sold XRP wholesale to large investors and to the general public as cryptocurrency. Zakinov et al. allege various misstatements from Ripple Labs about XRP, its valuation and its alleged non-security status. In 2018, the leading plaintiff purchased XRP units for $307,700 and sold them days later for $189,600.

The defendant’s motion to dismiss alleged that the plaintiffs had failed to state a claim on which relief could be granted.  Preliminarily, the court determined that the plaintiffs’ claims are not blocked by the statute of repose, which resembles a statute of limitations, because there was no evidence that the defendants offered their item for sale to the general public more than three years prior to the filing of the litigation. 

The defendant went on to argue that the plaintiff did not adequately plead their claims because “(1) he failed to allege that he purchased his XRP as part of an ‘initial distribution’; and (2) he failed to allege that defendants qualify as ‘sellers’ within the meaning of [the relevant federal statute].” The court held that the plaintiffs adequately alleged the federal claims; they need not have purchased XRP in an initial distribution, and they did successfully allege the defendants are sellers under the law. The court also agreed with the plaintiff that defendants Ripple and its CEO Bradley Garlinghouse were available defendants in this case because of their control over XRP II, the alleged “primary violator.”  The plaintiffs were also successful in bringing their state law claims, according to the judge.

However, the judge held that the plaintiffs did not adequately allege misrepresentation claims against Ripple under California Corporations Code; specifically, the judge ruled they did not sufficiently claim an actionable misstatement. Zakinov did not adequately allege, “(1) who among defendants’ employees made the statement, (2) when it was made, (3) where it was made, and (4) how it was communicated.”

The plaintiffs have 28 days to file an amended consolidated complaint to fix the inadequacies in its argument. Plaintiffs are represented by Robbins; Robbins Geller Rudman & Dowd; Robbins Arroyo; Scott and Scott; Taylor Copeland; and Susman Godfrey. Defendants are represented by Boies Schiller & Flexner; Debevoise and Plimpton; Skadden Arps; and Cooley.