New developments in Ripple’s legal battle with the United States Securities and Exchange Commission have recently been reported by observers. These developments could indicate a resolution to this highly consequential case. February 17th is the deadline for Ripple’s release of a number of 2012 documents. Their contents could influence the opinions of the court and the public. Another plot twist is that the court’s decision not to make some documents of the SEC public could be a precedent in similar cases involving U.S executive agencies. This is the current situation ahead of the next round.
What’s at stake
Ripple Labs Incorporated was sued by the SEC on Dec. 23, 2020. The suit claims that Ripple raised more than $1.3 billion through the sale of the XRP token, without registering it in security. Ripple argues that XRP is a tool to facilitate international payments and not an unregistered investment product. The agency’s jurisdiction doesn’t extend to the token or its sales.
The securities regulator has not brought this lawsuit against any digital asset issuer. The vast majority of these cases settle and avoid going to trial. Individual crypto firms are forced to comply with the SEC’s demands, and must pay fines to be released. The case of the regulator never gets to the point where it can be reviewed by a judge or jury panel. There is no precedent for similar cases in future.
Ripple, unlike many others, chose to go all in and engage in a legal fight. The SEC will get a win if the court precedent supports its claim that it can regulate large parts of the crypto market with “tried-and-trued” securities laws. Ripple’s victory will make it more apparent that there is a need for a more complex regulatory system to suit different types of digital assets. If this happens, it is obvious that the SEC’s regulatory ambitions will be severely affected.
Although Ripple, as a company, and the vociferous online community that supported its token’s supporters (known as the XRP Army) have been a divisive presence within the crypto space, the resolution of the lawsuit will impact the entire U.S. financial asset industry.
2012 Legal Memos
Ripple claims that Ripple did not know its XRP token could qualify as a security. This is one of the pillars of Ripple’s defense. According to the SEC argument, it should have informed the company about its intentions before taking matters to court. Ripple was denied fair notice by the agency for failing to do so.
If Ripple realized that the SEC could challenge the token’s status, this powerful argument could be discarded. Cointelegraph was informed by Peter Vogel, a lawyer and a member the Blockchain Task Force at law firm Foley & Lardner.
“U.S. Analisa Torres, District Judge, ruled that Ripple must make public sealed legal memoranda from 2012 from Ripple lawyers advising Ripple prior to launching XRP. Ripple claims that Ripple was informed in 2012 that XRP would become a federal security, so Ripple knew that there was a possibility that the SEC would sue. Ripple asserts that 2012’s legal memos were only about proprietary internal strategies.
Ripple’s argument for federal law compliance will be greatly strengthened if the memos are clear. Ripple’s fair notice argument could be seriously deflated by evidence that Ripple’s executives ignored the relevant concerns of their lawyers before launching XRP.
District Judge Analisa Torres. Source: Columbia Law School
However, the company saw the speech of William Hinman (then-director of SEC’s Division of Corporation Finance) at the Yahoo Finance All Markets Summit, June 2018, as a notice for market participants about what the SEC considers a security. These remarks were interpreted by the regulator as Hinman’s personal view and not that of the agency.
Judge Torres directed the SEC to unseal emails and notes from staff related to Hinman’s speech. This was a plot twist that is thrilling. The commission disagrees with the order. The order could have a significant impact on the practice of deliberative privilege, which is how executive agencies use it.
Check the SEC’s Privileges
Deliberative process privilege, in common law systems is a principle that protects from public disclosure information that shows the process through which an executive body reached a decision or policy. The principle protects documents inside the SEC that explain the SEC’s thoughts on how to categorize digital asset from normal discovery in civil litigations or Freedom of Information Act requests.
However, the SEC argued Hinman’s comments in question were his private opinion. Deliberative privilege doesn’t extend to internal documents of the SEC related to this speech. These records, therefore, are fair game.
Amina Hassan is a litigation partner at law firm Hughes Hubbard & Reed and believes that the battle over the Commission’s deliberative privilege scope is more fascinating than the content of the 2012 memos. Hassan said:
“If the court’s decision stands it could have a wide-reaching effect, opening similar types SEC and agency documents to discovery. Although any discovery disputes relating to agency notes will be determined on a case by case basis and will need to be resolved individually, the decision gives litigants an opportunity to request similar documents from government.
This precedent could allow crypto firms to sue the SEC or other executive agencies in court and demand information previously unavailable. Hassan said that Judge Torres’ decision will also cause agencies to rethink how they treat public speeches of their officials, which are usually disclaimers that express only the views and opinions of the official, not the agency.
What does it all mean?
Ripple’s decision to go to court over settling immediately does not mean that there is no possibility of a settlement. Cointelegraph spoke with legal experts on the matter and they believe that a settlement remains possible. Vogel said:
“Considering that 95% of lawsuits settle before trial it seems unlikely that we will ever have a jury trial. However, the interpretation of these 2012 legal memoranda may play a role in any settlement of the current SEC suit.”
Hassan stated that it was difficult to determine if the case is near resolution as discovery and pleading disputes continue. However, the stakes for both sides are high so we cannot rule out a settlement.
Even if Ripple settles without trial at any point, the litigation has already shown that a well-resourced cryptocurrency company can cause serious problems for the SEC in an open fight.