Judge Torres Ruling on XRP Secondary Market Sales Challenged by Ex-SEC Official

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Judge Katherine Failla’s decisions in the Coinbase Vs US SEC lawsuit were significant developments for both parties and on the crypto regulatory front. However, the ruling was a partial but big win for the SEC. Former SEC enforcement chief John Reed Stark highlights Judge Failla completely disagreeing with Judge Torres’ ruling in the Ripple Vs SEC that secondary sales of XRP can’t be investment contracts or unregistered securities.

Meanwhile, the SEC has asked the court to grant a final judgment against Ripple and penalties and fines of nearly $2 billion for violation of federal securities law.

Ex-SEC Contradicts Judge Torres Ruling in XRP Lawsuit

John Reed Stark, former chief of the SEC Office of Internet Enforcement, in a post on X said the major blow to Coinbase and Ripple was Judge Failla completely rejected Judge Torres’ reason in the Ripple decision that secondary sales can’t be investment contracts because the purchaser doesn’t know who they are buying from.

Judge Failla stated transactions in crypto assets on the secondary market are not categorically excluded from constituting investment contracts. The courts under the Howey test are required to consider the “economic reality” of the transaction to determine whether that transaction is an investment contract or not.

“Contrary to Defendants’ assertion, whether a particular transaction in a crypto-asset amounts to an investment contract does not necessarily turn on whether an investor bought tokens directly from an issuer or, instead, in a secondary market transaction,” said Judge Failla.

Whereas, Judge Torres in U.S. SEC v. Ripple Labs ruled that “An Institutional Buyer knowingly purchased XRP directly from Ripple pursuant to a contract, but the economic reality is that a Programmatic Buyer stood in the same shoes as a secondary market purchaser who did not know to whom or what it was paying its money.”

John Deaton has agreed with the establishment of the Torres Doctrine regarding the Howey test’s application in terms of programmatic sales, while Judge Torres refused to address secondary market transactions.

Also Read: Cardano’s Charles Hoskinson Defends ADA & Ripple Against Forbes “Zombie” Tag

Coinbase Vs SEC Ruling

Judge Failla ruled that Coinbase through its Staking Program engaged in the unregistered offer and sale of securities. The court’s decision means the lawsuit will move forward to discovery and jury trial. With the case going forward, Coinbase will rely on its legal arguments as the SEC alleges that it operates as an unregistered broker, amongst other issues.

However, the court dismissed the part related to the Coinbase acting as an unregistered brokerage for Wallet service. The ruling was to the effect that Coinbase didn’t act as a brokerage although some tokens met certain criteria of an investment contract.

Significant setback for SEC w/ Judge Failla granting Coinbase’s motion to dismiss SEC’s claim that Coinbase acted as a broker by offering non-custodial digital wallet software. SEC aimed to discourage builders from developing peer-to-peer software. Didn’t work.

— Mike Selig (@MikeSeligEsq) March 27, 2024