• A recent ruling by a US District Judge contested Judge Analisa Torres’ decision in the Ripple case.

• Judge Rakeoff’s 50-page Opinion and Order found the SEC’s arguments plausible, indicating that the TerraUSD (UST) and LUNA sale potentially violated U.S. Securities law.

On July 31, there was a significant development as U.S. Judge Jed Rakoff from the Southern District of New York denied Terraform’s attempt to dismiss the fraud charges filed by the U.S. Securities and Exchange Commission. During this ruling, Judge Rakoff also expressed disagreement with Judge Analisa Torres regarding the recent Ripple v. SEC case decision.

Howey Test and Distinctions Between Institutional and Retail Investors

On July 18, lawyers representing Terraform Labs and its CEO Do Kwon in their SEC lawsuit filed a motion to dismiss, citing Ripple’s partial victory against the financial regulator as the basis for their arguments.

Earlier in July, Judge Torres ruled that retail sales of the XRP token did not breach U.S. securities law, and only institutional sales could be considered an offense according to the Howey Test.

Terraform’s motion was met with a swift response from the SEC, urging the court to disregard the rulings in favor of Ripple as they were deemed “wrongly decided.” Judge Rakeoff has now sided with the SEC, and Terraform Labs and Do Kwon will face fraud allegations by the commission.

In a 50-page Opinion and Order document, Judge Rakeoff stated that the SEC’s arguments presented a plausible claim that the sale of TerraUSD (UST) and LUNA, among others, violated U.S. Securities law.

The U.S. judge cited the ruling in the Ripple case, expressing strong disagreement, as the Howey Test does not account for distinctions between institutional and retail investors. A statement from the memorandum reads:

 Howey makes no such distinction between purchasers. And it makes good sense that it did not. That a purchaser bought the coins directly from the defendants or, instead, in a secondary re-sale transaction has no impact on whether a reasonable individual would objectively view the defendants’ actions and statements as evincing a promise of profits based on their efforts.

Is Ripple’s partial victory against the SEC in jeopardy?

After the recent ruling in the SEC v. Terraform et al. case, there is considerable speculation regarding the implications for Ripple’s partial victory against the financial regulator in the future.

Ripple’s Chief Technology Officer, David Schwartz, offered a glimmer of hope to the Ripple community in a tweet on August 1. He hinted that the unique circumstances of that specific situation might influence the ruling in Terraform’s case.

Moreover, Schwartz mentioned that the court’s dissenting view from Ripple’s ruling seemed influenced by differences in case-specific facts. Consequently, both XRP investors and the crypto community closely monitor Ripple’s case with the SEC, particularly as the commission indicated the possibility of an appeal in response to Terraform’s motion to dismiss on July 21. 

Earlier in July, former SEC Chair of the Office of Internet Enforcement, John Reed Stark, suggested that a victory for the regulator in the Court of Appeals was feasible and not unprecedented.