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If anyone spends too much time listening to crypto content creators, they might come away with the impression that the Securities and Exchange Commission (SEC) has lost the majority of its court battles against the industry.
Although Protos has already debunked this widespread misconception, there is one particular judge who has frustrated the SEC’s enforcement of US securities laws on the crypto industry: Analisa Torres.
Docket observers in the Southern District of New York know that signatures from US district judge Torres are anything but a rubber stamp. Her extensively cited and carefully deliberated rulings have upended some of the highest-profile civil actions against the crypto industry.
In so doing, she has checked the powers of chairman Gary Gensler and clarified that some of his views do not reflect the law of the land.
The SEC employs the most workers of any country’s securities regulator. Tasked by Congress to oversee over $118 trillion worth of trades in US equities plus $237 trillion in fixed-income markets, it also reviews financial disclosures of more than 5,000 companies while regulating the activities of more than a million workers employed at 29,000 SEC-registered entities.
Chairing all of this activity is Gary Gensler, the most powerful securities regulator in the world. His views on crypto are pretty clear. Gensler once agreed with his predecessor Jay Clayton when he said “I believe every ICO I have seen is a security.”
Under Gensler’s leadership, SEC enforcement against crypto promoters has prevailed via settlement or court victory in over 95 lawsuits, including 99% of its distinct complaints. However, Judge Torres’ gavel has served as a very important reminder: 99% is not 100%.
From her courtroom, Torres has impacted lawsuits involving Brian Armstrong’s Coinbase, Guo Wengui’s Himalaya and GTV, and Reggie Middleton’s Veritaseum. To be clear, many of her rulings have favored the SEC.
However, her highest-profile crypto lawsuit — and arguably the most favorable ruling in the history of US crypto litigation — partially favored Ripple (XRP).
Analisa Torres changed crypto forever in SEC v. Ripple
Torres’ ruling in SEC v. Ripple Labs Inc. et al. agreed with the SEC that Ripple illegally sold $728 million worth of unregistered securities to institutional investors.
However, Torres ruled that Ripple didn’t illegally offer $757 million worth of unregistered securities via programmatic sales on secondary markets. Nor, according to the judge’s surprise ruling, did Ripple illegally offer $609 million worth of XRP for non-cash compensation like labor.
It was a surprising partial loss for Gensler’s highest-profile lawsuit against the crypto industry.
The crypto community widely broadcast this ruling as a victory for two reasons. First, it slashed Ripple’s financial liability from multiple billions of dollars to almost certainly something in the nine figures or less.
Secondly, it established for the first time that crypto tokens themselves, even if originally sold via unregistered offerings, don’t permanently remain a security. According to Analisa Torres, the SEC’s claim that Ripple sold XRP as unregistered securities on secondary exchanges is false.
By extension, it is incorrect to automatically assume that even initially illegally launched altcoins trading on secondary exchanges remain unregistered securities. Instead, harmed investors or the SEC must litigate those complaints separately, describing the unique facts and circumstances of each class of token sales.
Crypto wins even more, thanks to Torres
Moreover, in an even more favorable development this week, Torres ruled that Ripple doesn’t need to disgorge its ill-gotten gains. Saving Ripple at least $728 million dollars with that determination, Torres ruled that binding circuit court precedent disallowed disgorgement because the SEC didn’t prove that institutional investors suffered monetary harm from Ripple’s violations.
Indeed, the price of XRP is higher today than most of those illegal sales. Moreover, the SEC didn’t sufficiently establish financial harm to any class party to this lawsuit. According to Torres, the law of the land is not that all illegally obtained money must be disgorged. Instead, there are circumstances when a violator may keep their ill-gotten gains, and Ripple is one of those entities.
Instead, Torres simply ruled that Ripple must pay a modest $125 million civil penalty. The SEC had requested $2 billion.
Read more: Crypto Twitter misinterpreted everything in SEC v. Ripple
Crypto has a new path to compliant fundraising
In summary, Torres’ most recent denial of the SEC’s lawsuit against a major crypto company arrived this week with her drastic reduction of Ripple’s financial penalty and the termination of the US District Court for the Southern District of New York’s deliberation of SEC v. Ripple.
The SEC has the right to appeal the case to a higher court if a court agrees to take the case. Commissioners haven’t commented on that potential.
With this week’s finalization of SEC v. Ripple, Torres has opened a pathway for countless crypto promoters to get around Jay Clayton and Gary Gensler’s once-shared view that “every ICO I have seen is a security.” The SEC tried, and failed, to prove that Ripple’s initial coin offering to retail investors on secondary exchanges was a security.
Perhaps many other offerings are not securities, as well.
Gensler’s career at the SEC will certainly end with an overwhelmingly victorious track record of litigating against crypto defendants. However, an SDNY judge has clarified the law and narrowed Gensler’s overly broad pronouncements.
There are exceptions. Analisa Torres reminds the world that not every altcoin is an unregistered security.