(Reuters) – (The opinions expressed here are those of the author, a columnist for Reuters.)
In a major development in private crypto litigation, a California judge last week certified a class of U.S. purchasers of XRP digital assets in a case accusing XRP’s issuer, blockchain company Ripple Labs, of selling unregistered securities.
The XRP class is the most consequential yet to have been certified in a crypto class actions. A handful of previous decisions have certified classes of digital asset purchasers, but none of those rulings involved widely distributed tokens that have traded for several years on major crypto exchanges. In one case, the entire class consisted of only 26 crypto purchasers who traded on a single exchange.
By contrast, the Ripple class, according to briefing from class counsel from Susman Godfrey and Taylor-Copeland Law, may include millions of purchasers.
And it doesn’t matter, according to U.S. District Judge Phyllis Hamilton of Oakland, that tens of thousands of them disagree with the fundamental premise of the case.
The class action, which dates back to 2018, preceded the U.S. Securities and Exchange Commission’s closely watched action in Manhattan federal court against Ripple. The SEC, like the class action plaintiffs, contends the blockchain company breached federal securities laws by selling XRP as an unregistered security.
Ripple, as you surely know, hotly disputes that XRP is a security under the U.S. Supreme Court’s 1946 test in Securities and Exchange Commission v. W.J. Howey Co. The company — along with myriad other crypto issuers and exchanges that insist digital assets don’t meet the Howey test for securities — is waiting for a ruling on that question in the SEC’s case, in which the agency and Ripple completed summary judgment briefing last November.
In the private class action before Hamilton, Ripple lawyers from King & Spalding; Debevoise & Plimpton; and Kellogg, Hansen, Todd, Figel & Frederick raised a variation on their Howey test argument in attempting to block class certification.
Plaintiffs’ lawyers sought to certify a class of all XRP purchasers since 2017 who lost money when they sold the tokens. But the problem with that definition, according to Ripple, is that “vast swathes” of those purchasers do not believe that XRP is a security — and will, in fact, be harmed if the lead plaintiff wins.
Such a fundamentally conflicted class, defense lawyers argued, cannot be certified because the class representative cannot adequately represent the interests of XRP purchasers who dispute the entire premise of the case.
That’s particularly true, the defense brief said, because the Howey test for a security relies in part on the purchaser’s expectations. The lead plaintiff, who bought and sold XRP only during a two-week window in 2018, said in a declaration that he expected the crypto coins to increase in value based on Ripple’s efforts, a key inquiry in the Howey test. But other XRP purchasers, the defense brief said, submitted amicus briefs in the SEC case asserting entirely different expectations about the digital assets.
“For these thousands of putative class members, the notion that their XRP — that they purchased and may still own — is a ‘security’ comes as an unwanted surprise,” the defendants said. XRP trading would be more complicated if the coins were found to be securities, Ripple’s lawyers said — and sellers might even face individual liability for trading unregistered securities. It would also be harder, according to Ripple, for businesses to accept and make payments using XRP if the tokens are securities.
Several XRP purchasers underlined that point in a proposed amicus brief in the class action. The brief was filed by John Deaton of The Deaton Law Firm, who said he represents the interests of nearly 76,000 XRP holders who do not believe XRP is a security. (Deaton was granted leave to file an amicus brief for XRP holders in the SEC case.) Like Ripple’s lawyers, Deaton argued that the lead plaintiff cannot represent the interests of class members who “totally disagree” with his claims.
The judge overseeing the class action was not convinced.
Echoing language from Susman Godfrey’s brief, Hamilton said that the Howey test is objective: The courts will decide whether XRP is a security, so it doesn’t matter what purchasers believe. “The merits issue of whether XRP is a security will be the same for all class members,” the judge wrote, “regardless of each member’s individual expectations.”
If XRP purchasers don’t want to be part of the class, they can simply opt out, Hamilton said, declining to speculate about any potential harm to class members if XRP is deemed a security. (The judge said she would consider waiting for a ruling in the SEC case before she decides the merits of the class claim.)
The judge also rejected defense arguments that the lead plaintiff does not typify class claims because he did not buy XRP directly from Ripple. Defense lawyers had cited a 2022 decision denying approval of a $27.3 million class settlement with investors who alleged that Block.one sold unregistered securities because the proposed deal did not acknowledge intraclass conflicts between class members engaged in U.S. transactions and those whose trades were not covered by U.S. laws. But Hamilton said Ripple hadn’t shown any difference in the strength of claims by class members who bought directly from Ripple and those who bought XRP in the secondary market.
The judge did narrow the proposed class, ruling that only U.S. purchasers can be plaintiffs.
Ripple lawyers did not respond to my email query on the class certification ruling. Deaton said he was disappointed that Hamilton denied leave for an amicus brief to be filed — the judge found that it reiterated arguments Ripple had already asserted — but not surprised that plaintiffs met the “easy threshold” for class certification.
Deaton said that the class action could end up being obviated by the SEC case, which seeks to establish a fund for XRP purchasers. Class counsel from Susman Godfrey did not respond to my email on that point.
For now, crypto plaintiffs can celebrate the milestone of certification for a vast class of digital asset purchasers. Ripple’s lawyers wanted the judge to focus on the complexities of crypto trading. Hamilton instead said the Howey test makes class certification relatively simple.
Read more:
Ripple says recent Supreme Court ruling weighs in its favor in SEC case
Crypto investors’ class settlement with Block.one killed by N.Y. judge
Reporting By Alison Frankel; editing by Leigh Jones
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Opinions expressed are those of the author. They do not reflect the views of Reuters News, which, under the Trust Principles, is committed to integrity, independence, and freedom from bias.
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