F. "Ripple" Gives Up on R3 and Forges. Its Own Success
Busy dealing with a mass exodus and its never-ending funding round, R3 continued to pay no attention to "Ripple" or R3's obligations under the TPA to work towards the Commercial Partnership on complete standstill.
"Ripple" thus decided to move forward on its own. It continued to work tirelessly on its vision of growing the adoption of the "Ripple"Technology and the uses for XRP. R3 was nowhere to be found in supporting "Ripple", or trying to work towards the Commercial Partnership. Indeed, senior R3 personnel had gone so far as to disparage XRP in public-in front of potential participating banks and central banks possibly supervising those banks. For example, on December 1, 2016, at a meeting hosted by the Bank for International Settlements (the "BIS”), which is comprised of 60 global central banks, R3's Director of Business Development of South America, Carlos Arena, strongly criticized digital assets, including XRP. This conduct evidenced what R3's true intentions were in relation to "Ripple". It also was one of many instances in which R3 breached the covenant of good faith and fair dealing that ran with the Agreements.
Despite R3's efforts to derail "Ripple", 2017 was proving to be a very good year for the company. With no help from R3, "Ripple" was successful in signing up over ten banks to use its technology, penetrating the traditional banking sector in a way other financial technology companies have yet to do. In addition, XRP experienced a large surge in price and market capitalization as 2017 has brought good news in the digital asset space.
Having heard nothing from R3 for some time, "Ripple" was surprised when R3's unreachable CEO reached out in April 2017. In April 2, 2017 email-sent many weeks since the Parties had last spoken-Mr. Rutter stated: "Hey guys I have no idea what's going on with XRP, but I am one of those guys that really celebrates my friends sic) success so I just wanted to say congratulations ... I am finally done negotiating the deal (10 months in all-hell really) and there are just a bunch of logistics things that need to be worked out before we close - so it shouldn't be long now. That means I can begin paying closer attention to the business now and Brad I look forward to giving you an update on the latest strategy." (emphasis added).
Mr. Rutter's unprompted email was revealing in many respects. First and foremost, it was "Ripple"'s success that caused him to reach out. He did not do so in prior months when "Ripple" was working hard to get itself further on the radar in the blockchain and cryptocurrency worlds. In addition, Mr. Rutter expressly admitted that he had "no idea what's going on with XRP'-a digital asset that he was supposedly promoting to his consortium of banks as a liquidity tool. Further, Mr. Rutter conceded that he still did not have time to direct appropriate attention to "Ripple", and would only begin to start paying attention after "a bunch of logistics things” were completed. Mr. Rutter was obliged under the terms of the TPA to begin paying attention to "Ripple" much sooner than nine months after executing the TPA, and inducing "Ripple" to sign the Option.
In the wake of R3's newfound "interest,' Mr. Rutter and R3's other two co founders, Jesse Edwards and Todd McDonald, set up a meeting with "Ripple" on May 9, 2017. Minutes after the meeting began, R3's CEO had to excuse himself to tend to other business. After he left, Messrs. McDonald and Edwards admitted that R3 had failed to perform under the TPA. They explained that R3 had been "too busy" with its own fundraising, and promised to come back with a proposal for moving forward within ten days, another promise which remains unfulfilled to this day.
Having had enough of R3's empty promises, on June 13, 2017, "Ripple" gave R3 notice of termination of the TPA and the Option for material breach. "Ripple" CEO Brad Garlinghouse explained to R3 that: "Unfortunately, the focused attention on your fundraise has left our agreement and partnership stuck in a holding pattern-where it has been for many months.” Mr. Garlinghouse continued: "Over a year ago we began talking about a robust partnership. One where R3 was posed and eager to help "Ripple" position itself as a market leader in cross border payments. And with that vision, XRP would be the centerpiece of building a robust, institutional liquidity solution. When we signed our Agreement in August) of last year, I saw this as our joint objective.” Mr. Garlinghouse gave details of R3's multiple breaches under the TPA, most importantly highlighting R3's failure to create a term sheet for the Commercial Partnership or ultimately make any efforts to the Commercial Partnership's formation, which was specifically contemplated under the TPA and why the Option was given in the first place.
R3 failed to cure within the requisite 10-day period.
R3 and its CEO clearly acted in bad faith, to mislead "Ripple" into granting the Option, knowing that neither R3 nor Mr. Rutter would be following through on their promises.
R3's breaches, including its failure to officiate the Commercial Partnership, has resulted in undue delay at a critical time in this new startup's growth. "Ripple" missed opportunities to pursue other lucrative deals because of its unreturned loyalty to R3.
FIRST CAUSE OF ACTION
(Fraudulent Misrepresentation-Against All Defendants)
"Ripple" realleges and incorporates herein by reference the allegations contained in the preceding paragraphs.
R3 intentionally misrepresented existing material facts to induce "Ripple" to enter into the Agreements, both before closing and while soliciting "Ripple"'s participation. Among these material facts were:
・ a materially false and misleading fact that that R3 led a strong, robust consortium of over 50 global financial institutions, a consortium to which "Ripple" would get access through R3;
・ a materially false and misleading fact that R3's roster of banking members would continue to grow and include key leading financial institutions;
・ a materially false and misleading fact that R3 had the time and resources to devote to developing its relationship with "Ripple"; and
・ a materially false and misleading fact that R3 was interested in a Commercial Partnership and promoting XRP, just as it had done with Ethereum, another cryptocurrency on the market, when R3 never had intentions of forming a Commercial Partnership and in fact disparaged digital currencies like XRP in public.
"Ripple" reasonably relied to its detriment on R3's foregoing misrepresentations.
R3's false representations were material-indeed essential-to "Ripple"'s decision to enter into the Agreements. "Ripple" never would have entered into the Agreements had it known that R3's representations were false.
As a result of the knowing misrepresentations it made before and at the time of signing, R3 intended to, and did, defraud "Ripple" into executing the Agreements. R3 defrauded "Ripple" so that it could profit from the Option Agreement, while simultaneously failing to meet its duties under the TPA Agreement.
As a direct result of, and in reliance upon, R3's misrepresentations, "Ripple" executed the Agreements.
Due to R3's fraud, "Ripple" has incurred, and will continue to incur, damages in an amount to be determined at trial. Further, "Ripple" is entitled to recover punitive damages, because R3 committed its fraudulent acts maliciously, wantonly, and oppressively, and with knowledge that the consequences would negatively affect "Ripple".
SECOND CAUSE OF ACTION
(Fraudulent Concealment-Against All Defendants)
"Ripple" realleges and incorporates herein by reference the allegations contained in the preceding paragraphs.
R3 fraudulently concealed from "Ripple" material facts before closing and while soliciting "Ripple"'s participation in the Agreements. Among these material facts Were:
・ R3's prior knowledge and intent to unveil a product that directly competed with "Ripple"'s ILP software;
・ R3's prior knowledge and intent to focus exclusively on its Series A fundraise for the next ten months after executing the Agreements which would consume their entire team for that duration;
・ R3's prior knowledge of the shakiness of its consortium, and the likely departure of key members after the signing of the Agreements; and
・R3's simultaneous partnerships with competingfintech companies that it would promote-often times against "Ripple", to "Ripple"'s detriment.
R3 withheld this information with the intent to defraud "Ripple". R3 knew that "Ripple" wanted a Commercial Partnership between the Parties, and by withholding this information, R3 misled "Ripple" into entering the Agreements.
R3's omissions were material-indeed essential-to "Ripple"'s decision to enter into the Agreements. "Ripple" never would have entered into the Agreements had it known the foregoing material facts.
R3 had a duty to disclose the foregoing material facts because R3 possessed superior knowledge regarding its business model and the effect of its upcoming announcements to investors.
In entering into the Agreements, "Ripple" justifiably relied to its detriment on R3's omissions of material facts.
Because of R3's fraudulent concealment, "Ripple" entered into the Agreements on August 16, 2016.
Due to R3's fraud, "Ripple" has incurred, and will continue to incur, damages in an amount to be determined at trial. Further, "Ripple" is entitled to recover punitive damages, because R3 committed its fraudulent acts maliciously, wantonly, and oppressively, and with knowledge that the consequences would negatively affect "Ripple".
THIRD CAUSE OF ACTION
(Negligent Misrepresentation-Against All Defendants)
"Ripple" realleges and incorporates herein by reference the allegations contained in the preceding paragraphs.
R3 recklessly or negligently misrepresented existing material facts to induce "Ripple" to enter into the Agreements, both before closing and while soliciting "Ripple"'s participation in the Agreements. Among these material facts were:
・a materially false and misleading fact that that R3 led a strong, robust consortium of over 50 global financial institutions, a consortium to which "Ripple" would get access through R3;
・ a materially false and misleading fact that R3's roster of banking members would continue to grow and include leading financial institutions;
・ a materially false and misleading fact that R3 had the time and resources to devote to developing its relationship with "Ripple"; and
・ a materially false and misleading fact that R3 was interested in a Commercial Partnership and promoting XRP, just as it had done with Ethereum, another cryptocurrency on the market, when R3 never had intentions of forming a Commercial Partnership and in fact disparaged digital currencies like XRP in public.
"Ripple" reasonably relied to its detriment on R3's misrepresentations.
R3's reckless or negligent representations were material-indeed essential to "Ripple"'s decision to enter into the Agreements. "Ripple" never would have entered into the Agreements had it known that R3's representations were false.
- As a direct result of, and in reliance upon, R3's misrepresentations, "Ripple"
executed the Agreements.