Ripple’s Legal Battle with SEC Heats Up Over Govil Case Implications

The ongoing legal clash between Ripple and the US Securities and Exchange Commission (SEC) has taken a new turn, with the exchange legal team drawing parallels to the Govil case. This development has reignited hopes for a favorable outcome for Ripple in their long-standing battle with the regulatory watchdog.

The legal battle between these two started in December 2020 when the commission filed a lawsuit against Ripple Labs, its CEO Brad Garlinghouse, and co-founder Chris Larsen, alleging they conducted an unregistered securities offering. However, the latest argument centers on the accusation that the exchange discriminated against institutional investors during the sale of XRP through its On-Demand Liquidity (ODL) platform. The SEC contends that had the exchange registered these sales as required by law, it would have been obligated to disclose any discounts or preferential treatment offered to certain institutional investors.

On the other hand, the crypto-based firm’s lawyer is referring to the Second Circuit Court of Appeals’ rejection of the agency’s appeal in the Aron Govil case. This rejection further solidifies the principle that if a buyer doesn’t suffer any financial loss, the exchange regulator cannot demand the return of unlawfully acquired profits from the seller. Stuart Alderoty, Ripple’s Chief Legal Officer, has emphasized the commission’s continued defeats, citing the Govil case. He noted:

“The SEC continues to lose. The Second Circuit Court of Appeals refused to reconsider their decision in Govil which held that if a buyer suffers no financial loss, the SEC is not entitled to disgorgement from the seller.”

Bill Morgan, another legal expert closely following the case, has echoed Alderoty’s sentiment, stating that if Ripple can demonstrate that no institutional investor suffered financial loss, the Second Circuit’s stance on Govil bodes well for its defense.

He pointed out that the central focus of the agency’s argument centers on the concept of financial harm. The regulator claims that Ripple, by not revealing the discounts provided to preferred institutional investors, deprived non-preferred investors of the chance to negotiate more favorable conditions, which could potentially have caused harm to them

Bill also explained that the regulator is basing its claim for disgorgement (giving up profits) on the Govil decision. He stressed the commission’s argument that disgorgement should be based on the money that was gained unfairly, if investors lost money or were financially harmed. In this case, the SEC says that Ripple’s revenue from selling to institutions was $991 million, and their expenses were just under $115 million. The SEC thinks Ripple should have to give up that $991 million in revenue, minus the $115 million in expenses.

Of course, if Ripple shows that no institutional investor suffered financial loss then the fact the Second Circuit Court of Appeals did not reconsider Govil is a good thing for Ripple.

Bill further countered this argument, stressing that the case hinges not on whether non-institutional investors suffered losses but rather on the non-disclosure of discounts preventing non-favored institutional investors from obtaining more favorable terms – a claim of potential harm rather than actual financial loss. According to him, “the SEC’s argument is not whether the non-institutional investors suffered losses but that the non-disclosure of the discounts to favored investors prevented them obtaining more favorable terms. That is the harm to which the SEC refers.”