SEC Denies Ripple’s Terraform Labs Comparison in Court

4 months ago 48

The US Securities and Exchange Commission (SEC) has countered Ripple’s attempt to use the Terraform Labs settlement to argue against a proposed $2 billion fine.

Ripple contended that the SEC’s demand for a $2 billion fine was excessive. The firm pointed out that the SEC had sought only a 1.27% penalty from Terraform Labs despite its $33 billion in gross sales and fraudulent activities that wiped out over $40 billion in investor funds.

SEC Disputes Ripple’s Interpretation of Terraform’s Penalty Ratio

In response, the SEC criticized Ripple’s reliance on inappropriate comparisons and erroneous calculations to make its case. The financial watchdog argued that Ripple’s comparison to the Terraform Labs settlement was invalid because Terraform is bankrupt and agreed to severe penalties, unlike the Brad Garlinghouse-led company.

The SEC highlighted several key differences between the two cases. According to the regulator, Terraform Labs was winding down operations, destroying keys to all its crypto asset securities, agreeing to significant restitution to investors, and removing two board members involved in the violations. Ripple, on the other hand, has agreed to none of these measures.

“Resolutions where cash-strapped defendants agree to return funds to victims quickly and voluntarily agree to cease their violative conduct are unhelpful to deciding the amount of penalties necessary to punish and deter an undisputedly wealthy defendant [like Ripple] who fails to recognize or acknowledge its violation of the securities laws,” the SEC wrote.

The SEC further argued that Ripple’s comparison based on penalty ratios was flawed, as it ignored gross profit. When considering gross profit, the appropriate penalty for Ripple would be much higher than suggested. The Commission noted that applying Terraform’s penalty ratio to Ripple’s $876.3 million in gross profits would result in a $102.6 million penalty, not the $10 million Ripple proposed.

“Ripple avoids comparing the Terraform settlement’s penalty to the gross profit of the violative conduct. That ratio ($420 million/$3.587 billion) is significantly higher: 11.7%. Applying it to the $876.3 million in gross profits the SEC here asks the Court to disgorge results in a much larger figure, a $102.6 million penalty, than the $10 million ceiling Ripple insists on,” the financial watchdog explained.

Ripple’s legal battle with the SEC has been unfolding since 2020. At the time, the regulator accused Ripple of using XRP as an unregistered security to raise funds, and last year, the case set a significant legal precedent for the emerging industry.

Judge Analisa Torres ruled that XRP is not a security in exchange programmatic sales. However, the judge also determined that direct XRP sales to institutional investors qualify as securities. Since the ruling, the two entities have been battling on the appropriate penalties for these securities violations.

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