Zakinov v. Ripple Labs, Inc.

• Decision Date: 26 February 2020
• Docket Number: Case No. 18-cv-06753-PJH
• Parties: VLADI ZAKINOV, et al., Plaintiffs, v. RIPPLE LABS, INC., et al., Defendants.
• Court: U.S. District Court — Northern District of California

VLADI ZAKINOV, et al., Plaintiffs,
v.
RIPPLE LABS, INC., et al., Defendants.

Case No. 18-cv-06753-PJH

UNITED STATES DISTRICT COURT NORTHERN DISTRICT OF CALIFORNIA

February 26, 2020

ORDER GRANTING IN PART AND DENYING IN PART DEFENDANTS' MOTION TO DISMISS

Re: Dkt. No. 70

Defendant Ripple Labs, Inc.'s ("defendant Ripple"), defendant XRP II, LLC's ("defendant XRP II"), and defendant Ripple's Chief Executive Officer, Bradley Garlinghouse ("defendant Garlinghouse") (collectively, "defendants") motion to dismiss plaintiff Vladi Zakinov's ("plaintiff") consolidated class action complaint came on for hearing before this court on January 15, 2020. Plaintiff appeared through his counsel, James Taylor-Copeland and Oleg Elkhunovhich. Defendants appeared through their counsel, Damien Marshall, Kathleen Hartnett, and Menno Goedman. Having read the papers filed by the parties and carefully considered their arguments and the relevant legal authority, and good cause appearing, the court hereby GRANTS IN PART and DENIES IN PART defendants' motion for the following reasons.

BACKGROUND

This consolidated putative class action ("In re Ripple") arises out of the creation, dispersal, circulation, and sale of "XRP," a sort of digital units often referred to as a "cryptocurrency." In re Ripple comprises various actions alleging both violations of federal and California state securities laws. Such actions include Coffey v. Ripple et al., 18-3286, Greenwald v. Ripple et al., 18-4790, Zakinov v. Ripple et al., 18-CIV-2845 (Cal.

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Super. Ct. San Mateo Cty.), and Oconer v. Ripple Labs, Inc., 18-CIV-3332 (Cal. Super. Ct. San Mateo Cty.). The procedural posture of this action is complex and its restatement here is largely unnecessary. The court need note only that this action is the only ongoing matter of those referenced above. For more information, the court directs readers to its February 28, 2019 order denying remand. Dkt. 33.

On August 5, 2019, plaintiff filed the operative consolidated complaint against defendants. In it, plaintiff alleges the following claims:

1. Violation of Section 12(a)(1) of the Securities Act (Title 15 U.S.C. § 77l(a)(1)) against defendants for the unregistered offer and sale of securities. Compl. ¶¶ 169-175;

2. Violation of Section 15 of the Securities Act (Title 15 U.S.C. § 77o) against defendant Ripple and defendant Garlinghouse for control person liability for the primary violation of Title 15 U.S.C. § 77l(a)(1). Id. ¶¶ 176-183 (together with U.S.C. § 77l(a)(1), the "federal securities claims");

3. Violation of California Corporations Code § 25503 against defendants for a primary violation of § 25110's restriction on the offer or sale of unregistered securities. Id. ¶¶ 184-190.

4. Violation of California Corporations Code § 25504 against defendant Ripple and defendant Garlinghouse for control person liability in connection with defendants' primary violation of § 25110. Id. ¶¶ 201-207;

5. Violation of California Corporations Code § 25501 against defendant Ripple and defendant XRP II, as well as a parallel material assistance claim under § 25504.1 against defendant Ripple and defendant Garlinghouse, for misleading statements in connection with the offer or sale of securities in violation of § 25401. Id. ¶¶ 191-200;

6. Violation of California Business & Professions Code § 17500 against defendants for misleading advertisements concerning XRP. Id. ¶¶ 208-212;

7. Violation of California Business & Professions Code § 17200 against

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defendants for their unregistered offer or sale of securities in violation of federal and state law, false advertising practices, misleading statements, and offense to established public policy. Id. ¶¶ 212-222.

Defendants filed the instant motion to dismiss for failure to state a claim under Rule 12(b)(6). Dkt. 70. At the core of plaintiff's claims is that XRP qualifies as a security under California state and federal law. While plaintiff alleges this legal theory at length in his complaint, Compl. ¶¶ 121-159, defendants save their dispute with that theory for another day and assume—solely for the instant motion—plaintiff's legal position that XRP qualifies as a security. Dkt. 70 at 11; Dkt. 74 at 9; Dkt. 75 at 7 n.1. Instead, defendants challenge the complaint on grounds of Title 15 U.S.C. § 77m's three-year statute of repose and traditional Rule 12(b)(6) failure to state a claim grounds. Below, the court provides a summary of the relevant allegations and judicially noticeable facts.

A. The Court Partially Grants Defendants' Unopposed Requests for Judicial Notice

As an initial matter, defendants request that the court take judicial notice of the following documents:

• The Statement of Facts from the federal government's May 2015 settlement with defendants Ripple Labs and defendant Ripple XRP II (predecessor to defendant XRP II, LLC). Dkt. 70-3. This document is cited or referenced in the complaint at paragraphs 2 n.2, 25, and 112.

• The "Ripple Credits" page from defendant Ripple's Wiki website. Dkt. 70-4. This document is cited or referenced in the complaint at paragraphs 24 n.7, 130 n.91, and 145 n.99.

• A Quarter One 2018 XRP Markets Report. Dkt. 70-5. This document is cited at complaint paragraph 36 n.16.

• An article titled "Ripple is sitting on close to $80 billion and could cash out hundreds of millions per month—but it isn't." Dkt. 70-6. This document is cited at complaint paragraph 52 n.31.

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Here, the court need not consider the fourth request for judicial notice (Dkt. 70-6) to resolve defendants' motion. As a result, the court denies that request. Otherwise, because plaintiff does not oppose the remaining requests and their underlying documents are sufficiently cited at the complaint sections noted immediately above, the court grants defendants' request for judicial notice of those three documents and will incorporate their contents by reference in its analysis below.

B. The Parties

1. Defendant Ripple

Defendant Ripple is a Delaware corporation with its principal place of business in San Francisco. Compl. ¶ 14. While defendant Ripple sells certain enterprise software products, the primary source of its income is the sale of XRP. Id. ¶ 28.

2. Defendant XRP II

Defendant XRP II is a New York limited liability company with its principal place of business in San Francisco. Id. ¶ 15. Defendant XRP II's predecessor is XRP Fund II, LLC, which was incorporated in South Carolina on July 1, 2013. Dkt. 70-3 ¶ 22. Defendant XRP II was created to "engage in the sale and transfer of XRP to "various third parties on a wholesale basis." Id.

3. Defendant Garlinghouse

Defendant Garlinghouse is the Chief Executive Officer of defendant Ripple. Defendant Garlinghouse has held that position since January 2017. Compl. ¶ 16. Previously, Garlinghouse served as Ripple's Chief Operating Officer from April 2015 through December 2016. Id.

4. Plaintiff

On June 21, 2019, the court appointed Bradley Sostack as lead plaintiff. Dkt. 60. Plaintiff is a Florida resident. Id. ¶ 13. Between January 1, 2018 and January 16, 2018, plaintiff purchased roughly 129,000 units of XRP for approximately $307,700 in other cryptocurrencies. Id. Plaintiff alleges that he purchased such XRP "from defendants," id. ¶¶ 172, 187, although he does not specify whether he made such purchase directly from

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defendants or incidentally on a cryptocurrency exchange. Plaintiff sold his XRP between January 9, 2018 and January 17, 2018 for $189,600 in other cryptocurrency, representing a $118,100 loss in XRP value. Id. ¶ 163. Plaintiff seeks to certify a Rule 23(b)(3) class that generally includes all persons or entities who purchased XRP. Id. ¶ 160.

C. Relevant Allegations

In 2013, defendant Ripple generated 100 billion units of XRP. Compl. ¶ 2. Following their creation, defendant Ripple gave 20 billion XRP to its founders and retained the remaining 80 billion XRP. Id. ¶¶ 2, 22, 23.

1. XRP Escrow Program

Since the XRP's creation, defendant Ripple has placed a substantial percentage of XRP that it owns in escrow and developed a plan for when and in what quantities XRP should be sold. Id. ¶ 5. As of May 2017, defendant Ripple maintained 62 billion XRP. Id. ¶ 84. At that time, defendant Ripple stated that it would place 55 billion XRP in a secured escrow account and would only offer and sell limited amounts of XRP at defined intervals. Id. In an article, defendant Garlinghouse publicly stated that "[o]ur goal in distributing XRP is to incentivize actions that build trust, utility, and liquidity." Id. ¶ 86. In that same publication, Garlinghouse subsequently characterized the XRP distribution as "ongoing." Id. Defendants adopted the escrow plan to allow investors "to mathematically verify the maximum supply of XRP that can enter the market." Id. ¶ 87.

2. Alleged Offers or Sales of XRP by Defendants

a. Sales Acknowledged in Defendants' May 2015 Settlement Agreement

In May 2015, defendant Ripple and defendant XRP II entered a settlement agreement with the United States Attorney's Office for the Northern District of California ("USAO") for violation of the Bank Secrecy Act, Title 31 U.S.C § 5330. Id. ¶ 25; Dkt. 70-3. Significantly, plaintiff alleges that, as part of that agreement, defendants "acknowledged that they sold XRP to the general public." Compl. ¶ 25 (emphasis added). The parties' characterization of the agreement aside, its statement of facts and

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violations section identifies the following XRP sale-related conduct by defendants since 2013:

• As of the date of the agreement, defendant Ripple "facilitated transfers of virtual currency and provided virtual currency exchange transaction services." Dkt. 70-3 ¶ 2.

• "From at least March 6, 2013, through April 29, 2013, Ripple Labs sold convertible virtual currency known as 'XRP.'" Id. ¶ 17.

• "Throughout the month of April 2013, Ripple Labs effectuated multiple sales of XRP currency totaling over approximately $1.3 million U.S. dollars." Id. ¶ 20.

• "By on [sic] or about August 4, 2013, XRP

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