Ripple Legal Win Guards Retail Investors from FTX-Style Fallout

Ripple’s legal team has taken a firm stance against Linqto’s proposed Chapter 11 bankruptcy plan, particularly opposing the use of customer-linked shares as collateral for a $60 million debtor-in-possession (DIP) loan. Linqto, a fintech firm that enabled retail investors to access private investments in pre-IPO companies, has filed for Chapter 11 bankruptcy in Texas and is attempting to sell off over $500 million in assets, including a substantial stake in Ripple. The company’s portfolio also includes shares in Circle, SpaceX, and other private firms, amounting to a total of 111 private company holdings [1].

A major point of contention arose when Linqto sought to use customer shares—specifically in Ripple—as security for the DIP loan. This move sparked immediate backlash from Ripple’s attorney, John E. Deaton, who filed a motion objecting to the plan and requesting the court to impose a constructive trust, arguing that Linqto does not own these shares and thus cannot use them as collateral. On August 19, Deaton announced that the proposed DIP loan had been withdrawn, avoiding the need for litigation and marking a significant win for Linqto customers [4]. The constructive trust, which would have protected customer assets from being liquidated to cover Linqto’s legal costs, was not ultimately required due to the dropped loan plan [4].

Linqto’s troubles began in March 2025, when it ceased operations amid growing regulatory pressure from the SEC and FINRA. The company is under investigation for allegedly selling unregistered securities to unqualified investors and applying excessive markups—some as high as 60% on Ripple shares. FINRA referred Linqto Capital, its broker-dealer affiliate, for enforcement in late 2024, further complicating the firm’s financial situation [1]. Court filings reveal that the SEC is scrutinizing whether Linqto adequately verified that its customers were accredited investors, a key legal requirement for accessing private market investments [2].

The court has authorized Linqto to sell its portfolio of assets, which includes a $399 million stake in Ripple, $100 million+ in Circle, and $35 million in SpaceX. These sales are intended to fund the ongoing bankruptcy proceedings and pay off creditors [1]. However, the lack of clear ownership documentation for many of the shares has raised concerns among Linqto’s 13,600 customers. Linqto’s bankruptcy attorney, Samuel A. Schwartz, noted that technical and regulatory hurdles have prevented the direct transfer of these securities to customers, leaving the ownership question in legal limbo [2].

Ripple has distanced itself from the situation, with CEO Brad Garlinghouse stating that Ripple never had a business relationship with Linqto and did not participate in its financing rounds. Additionally, Ripple stopped approving Linqto’s purchases of secondary shares in late 2024, coinciding with FINRA’s review of Linqto Capital [4]. Despite these efforts, the repeated association of Ripple’s name with Linqto’s misconduct has prompted the company to closely monitor its legal exposure. John Deaton’s intervention has been critical in safeguarding customer assets and preventing a scenario similar to FTX’s bankruptcy, where customer funds were liquidated and distributed to creditors rather than directly returned to investors [4].

The case highlights broader concerns about the risks of private market investments for retail investors, particularly when offered through platforms lacking robust regulatory safeguards. Linqto’s collapse follows the broader trend of fintech firms struggling to balance innovation with compliance, with companies like Synapse Financial Technologies having faced similar regulatory and financial challenges. As Linqto moves forward with its asset sales and bankruptcy proceedings, the outcome could establish important precedents for how distressed fintech firms manage illiquid assets and how regulators respond to the expanding access to private markets [3].

Source:

[1] Bankrupt Fintech to Sell Hard-to-Get Stakes in Private Firms (https://www.bloomberg.com/news/articles/2025-08-19/bankrupt-fintech-to-sell-hard-to-acquire-stakes-in-private-firms)

[2] Bankrupt Fintech Linqto Gains Court Approval To Sell ... (https://www.crowdfundinsider.com/2025/08/247771-bankrupt-fintech-linqto-gains-court-approval-to-sell-private-company-stakes/)

[3] Ripple lawyer fights Chapter 11 bankruptcy plan (https://finance.yahoo.com/news/ripple-lawyer-fights-chapter-11-002519878.html)

[4] Ripple's tied Linqto has reached a settlement offer in ... (https://www.mitrade.com/au/insights/news/live-news/article-3-1052126-20250820)