Ripple CEO Brad Garlinghouse responded to the Alderoty posts, saying,

“Gensler’s SEC has repeatedly acted outside the law – not going unnoticed by Judges admonishing the agency for a “gross abuse of the power entrusted to it by Congress” (DEBT Box case) and for acting without “faithful allegiance to the law” (Ripple case). Let’s not also forget Gensler’s lack of attention to SBFraud.”

Notably, XRP gave up more significant gains as investors reacted to the news. However, US case law establishes precedent and suggests a significantly lower penalty, with one caveat… If Ripple continued to breach Section 5 of the 1933 Securities Act after the complaint, the penalty could become punitive.

US Case Law and Post-Complaint Activity

On Monday, Brad Garlinghouse highlighted a significant point about the case and the SEC push for $2 billion, saying,

“The SEC plans to ask the Judge for $2B in a case that involved no allegations (let alone findings) of fraud or recklessness. There is absolutely no precedent for this. We will continue to expose the SEC for what they are when we respond to this.”

Ripple could cite case law to address the $2 billion claim. In SEC v Govil, the 2d Circuit court held that the SEC may not request a crippling disgorgement award without proving that investors suffered actual financial harm.

Other case law that may assist Ripple in bringing down the penalty to a reasonable amount include,

• Liu v SEC: A penalty must not exceed the wrongdoer’s net profits and must go to the victims.
• Morrison v NAB: The Supreme Court ruled that the SEC only has jurisdiction over US-based sales.

Amicus Curiae attorney John E. Deaton shared the respective case laws in November, predicting a sub-$150 million penalty.

While Ripple will likely cite case law to argue for a lower penalty, post-complaint activity is relevant. The SEC may pursue a punitive penalty if it can show that Ripple continued breaching the Securities Act after the complaint. In a February court order, Judge Sarah Netburn stated,

“The SEC credibly argues that the District Judge may consider post-complaint conduct when determining whether an injunction is necessary and just.”

Judge Netburn added,

“Courts have no hesitation in concluding that, in calculating the size of a penalty necessary to deter misconduct, the extent of a defendant’s wealth is a relevant consideration.”

The SEC must file a redacted version of the remedy-related opening brief by March 26. Ripple must file its opposition brief by April 22 and a redacted version by April 24.

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