XRP Lawsuit Update: Second Circuit Limits SEC’s Disgorgement Power, Potential Impact on Ripple

The United States Court of Appeals for the Second Circuit has cut short the SEC’s ability to seek disgorgement without demonstrating actual financial harm to investors. Ripple’s Chief Legal Officer, Stuart Alderoty, and legal expert Jeremy Hogan have provided key insights into the repercussions of the case for both regulatory practices and impacted companies like Ripple.

In a case involving the SEC and defendant Jignesh Govil, the Second Circuit limited the SEC’s reach for disgorgement, emphasizing that investors must have sustained monetary losses to warrant such claims. This interpretation aligns with the precedent set by the Supreme Court in Liu v. SEC, which restricted disgorgement to actual victim restitution.

In July 2021, the SEC charged Cemtrex’s main shareholder and executive, Govil, with misusing over $7 million of investor funds for personal use, promoting stock sales while secretly selling his shares, and failing to disclose his trades as required by law.

Alderoty and Hogan’s Take on Ripple’s Case

Commenting on the ruling, Stuart Alderoty tweeted about the SEC’s continued losses in court, noting that without demonstrated investor harm, the SEC’s push for financial restitution lacks foundation. Jeremy Hogan, an attorney following the Ripple case closely, interpreted the decision as beneficial for Ripple, which is currently in the damages phase of litigation with the SEC over its XRP cryptocurrency.

The Ripple controversy has brought to light the broader question of when and how a company is liable for the damage to investors. Hogan’s perspective suggests that XRP holders who bought at prices below the current rate have not been “damaged” by Ripple, potentially limiting Ripple’s liability in the ongoing legal battle with the SEC.

The outcome of the Govil case, which now emphasizes the need for clear evidence of financial harm, is being viewed by some as a positive sign for Ripple and its defense team. The decision suggests that mere misinformation, without demonstrable pecuniary loss, may not meet the threshold for disgorgement under the current legal framework.

The nuances of legislative changes, including the NDAA, have raised debates about the SEC’s power to pursue profits from illegal activities. While new statutes have provided the SEC with broader authority for disgorgement, courts are still bound by the equitable limitations that require proving harm to investors.