On Tuesday, District Judge Jed Rakoff of the Southern District of New York decided in favour of the United States Securities and Exchange Commission (SEC), enabling the action against Terraform Labs and its creator, Do Kwon, to proceed. Additionally, Judge Rakoff disagreed with Judge Torres’s distinction between institutional and public sales in SEC vs Ripple. Pertaining to the Ripple case and the SEC’s possible appeal, the SEC had asked Judge Rakoff not to agree with Judge Torrese’s decision.
Judge Rakoff explicitly rejected Terraform Labs’ request for the SEC complaint to be dismissed, finding that the SEC had adequately established its jurisdiction and made a compelling case that TerraUSD (UST), the Anchor Protocol, and LUNA may have broken securities laws.
Stuart Alderoty, Ripple’s Chief Legal Officer, was not going to comment at first but soon stepped in to explain Ripple’s view. Alderoty said: “On closer read, the Terra Judge actually agrees that orange groves alone are not securities without promises to cultivate the groves and share the profits […] There needs to be an agreement between contracting parties for there to be an investment contract”.
In isolation from other rights and commitments, he added that the judge ruled tokens are not a security in and of themselves. According to Alderoty, “The comment about the Ripple ruling is unnecessary, confusing and non-binding.”
James Murphy, aka MetaLawMan, was also ready to comment on Judge Rakoff’s decision. He pointed out that he had called Rakoff a “renegade judge” in a video seven months ago. According to MetaLawMan, Rakoff tends to disagree with other judges eagerly. While many have argued against the judgment, it seems James Murphy has found why Judge Rakoff ruled the way he did.
According to Ripple CTO David Schwartz, the decision appears to be based on the unique and special qualities of the particular scheme rather than the general traits of cryptocurrencies. Joel Katz, as known on Twitter, made the point that the justification for the decision does not apply to normal cryptocurrencies as most people understand them.
The SEC had charged Terraform Labs and its former CEO Do Kwon with manipulating an algorithmic stablecoin and other crypto asset securities in a multibillion-dollar fraud.
Popular crypto lawyer John E. Deaton said: “Judge Torres or Judge Rakoff can’t ignore the issue of PRIVITY – or the lack thereof, in many instances. The bottom line is that there isn’t a single case in history where an investment contract has been found with absolutely no privity between the seller and the buyer.”
In his view, Judge Torres’ decision will be validated because it aligns with the right result, and the SEC couldn’t provide any relevant cases to counter this argument. Deaton asserted that the SEC’s case lacks strong evidence to prove that XRP should be classified as an investment contract in all instances.
With regards to the case Ripple vs SEC, the verdict is still out if the SEC will appeal to Judge Torres’s ruling or if things are going straight to oral trial in relation to the allegation of aiding and abetting brought against Brad Garlinghouse and Chris Larsen.