The developer of XRP, the third largest cryptocurrency in the world, Ripple Labs Inc., has been hit with another lawsuit for securities fraud. This is the third lawsuit in three months. The current lawsuit alleges that the company violated US securities laws and manipulated prices. The latest suit was filed on June 27 by a private investor, represented by lawyers from San Diego based Robbins Arroyo.
New Lawsuit Alleges Continuous ICO and Price Manipulation
In the complaint, lead plaintiff David Oconer accused defendants Ripple Labs Inc. and CEO Bradley Garlinghouse of having conflated their tokens with their Ripple technology, as well as having earned illegal profits through price increases, TNW reports. The present lawsuit suggests that the centralized nature and mining-free distribution model of their cryptocurrency have allowed the company to run perpetual ICOs. The previous two lawsuits allege similar things, hinting that the company funded itself by selling tokens worth $100 million in the last quarter of 2017 alone.
It was further alleged that the company’s management used the social media platform Twitter to pump the prices of their currency.
Ripple’s decision to put 55 billion XRP tokens in escrow to “ensure certainty of total supply” has also been called out in the suit. While the company maintained that it made the move to ensure that a large sell-off would not throw the coins off balance, the plaintiff alleges that the company was selling tokens quietly. They also noted that the price of the XRP token rose by 1,000% in the quarter after the escrow was announced.
Ripple Appears Unhinged by the Lawsuits
The company and its CEO could be held liable for illegally trading millions of dollars’ worth of securities if Ripple’s defense fails. Moreover, they could be ordered to pay full refunds to investors. The leadership at Ripple could also face criminal charges. However, the company seems unphased by the allegations as its representation in court will be led by former SEC Chair Mary Jo White and Andrew Ceresney.
The Howey Test established by the US Supreme Court in 1946 could be crucial in this case. This framework defines whether an asset is an investment contract or security. FindLaw explains:
“Under the Howey Test, a transaction is an investment contract if:
1. It is an investment of money
2. There is an expectation of profits from the investment
3. The investment of money is in a common enterprise
4. Any profit comes from the efforts of a promoter or third party.”
In May this year, the Securities and Exchange Commission even launched its own “scammy” ICO website HoweyCoins to warn investors about fraud in the industry.
Plaintiff now has to prove that Ripple’s entire operation has been a continuous ICO since inception. If they win, Ripple would be neck deep in trouble.