TRANSCRIPTION OF VIDEO
Hello and welcome to another episode of crypto Legal Briefs. Today we are going to talk about all of the recent activity in the SEC v. Ripple case including the upcoming Motion to Strike one of Ripple’s key defenses, Ripple’s motion to compel discovery, and explain what’s going on and why it’s important for you. And,excuse me one second … hi George? Yes, thanks for calling me back? It’s okay to use? Are you sure George? Wow, that’s great – thanks buddy.
Okay roll it.
A long time ago in a Courthouse far away…
SEC v. RIPPLE
In a time of creeping enforcement
The SEC brought action against
Ripple Inc. for Securities Violations for the sale of XRP.
Ripple filed an Affirmative Defense of “FAIR NOTICE”
And now the SEC moves the Court to Strike
that Defense from the Pleadings.
But Ripple has secret Motion of its own….
Am I gonna get sued for that?
Ok, we have a lot to cover – some very important things happening in this litigation. The SEC filed its letter to the Judge to Remove Ripple’s Due Process/Fair Notice defense. I am going to tell you what that is all about.
First our quick “Don’t take this as legal advice” disclaimer: Don’t take this as legal advice. If you need a good lawyer, do a séance and summon this gentleman from the dead.
Bonus points for his name in the comments. Hint: You can buy about 20 XRP with the U.S. bill that he’s on.
So, first let’s take a look at the Framework of the SEC’s Mt to Dismiss Ripple’s Fair Notice defense. As you may know, Ripple’s 4th defense to the lawsuit is that it could not reasonably know that XRP was a security.
“Here, due to the lack of clarity and fair notice regarding Defendants’ obligations under the law, in addition to the lack of clarity and fair notice regarding Plaintiffs’ interpretation of the law, Ripple lacked fair notice that its conduct was prohibited.”
Ripples defense stems from the 5th Amendment of the Constitution – the Due Process amendment as applied to our situation – a regulatory body suing a private company – via the U.S. Supreme Court’s decision in the FCC v. Fox Television case. It was the Fox case back in 2012 that really first spelled out this defense and here’s what the U.S. Supreme Court said:
“[I]t is one thing to expect regulated parties to conform their conduct to an agency’s interpretations once the agency announces them; it is quite another to require regulated parties to divine the agency’s interpretations in advance or else be held liable when the agency announces its interpretations for the first time in an enforcement proceeding and demands deference”
As a quick aside – you know who we have to thank for the FCC v. Fox Television case? This young lady.
She let out the F-Bomb on live TV and that’s what Fox TV got sued for which eventually led to the Supreme Court precedent and that’s why Ripple can now raise this defense. God bless you Cher.
And its this defense that Ripple is hanging its hat on in order to raise all kinds of issues with the Court like: Was the SEC aware of FinCen’s determination that XRP was a currency? Why didn’t the SEC tell exchanges that inquired about selling XRP that it was a security? What did the SEC deliberations about whether to sue Ripple look like? All those kind of juicy questions are extremely important to this case. So this Motion to remove that Defense is vital.
So, the first question is whether the SEC will win this motion and THAT analysis is too complicated to go into here but let me just say that I believe the defense does not get stricken but the Judge pushes a decision on it to summary judgment time with all the other issues. And let me tell you why that would be okay.
A motion to strike an affirmative defense is common. I file one on almost ALL my cases. In fact, here’s one I drafted yesterday.
As you can see, the Defendant filed 40 Affirmative Defenses against me. That’s ridiculous and any attorney will tell you that – so I said ok, let’s rumble, and I moved to strike all 40 of them. Every. Single. one.
Because there’s really only two reasons to move to strike aff defenses. The first is to tell the other side – you are in for a fight. Nothing is coming easy in this case for you. Let’s rumble. That’s why I filed mine. Don’t tell the judge. The Second reason to move to strike a defense is because you are scared of it and you want it out.
The SEC obviously did not move to strike because it wanted to bully Ripple. If that was the case it would have moved to strike almost all of them. I can think of reasons to strike all of Ripple’s defenses except one. So, what I conclude then is that the SEC is filing this motion because it is nervous about the defense and wants it out. And why would the SEC be nervous about it? Well, it tells us, right in its letter to the Judge so let’s take a look:
Look at that: “These allegations – also the basis of Ripple’s attempts to seek a multitude of privileged SEC deliberations – will lead to wasteful forays in this litigation.” “Ripple attempts to seek a multitude of SEC deliberations.
To its credit the SEC isn’t hiding the ball. What’s going on here is that the discovery phase of the case has begun and there have been formal requests for documents and written responses to questions and ONE of those questions and documents Ripple wants to get are the transcripts of SEC deliberations about XRP, whether XRP is a security, what it should tell various exchanges that want to sell XRP and what this paragraph tells me is that NOT ONLY is the SEC worried about the affirmative defense they are ALSO worried about what Ripple might find out.
Because you are only allowed to get discovery on things that are reasonably relevant to the lawsuit at hand. I use the example: if I sue you for money you owe me, I don’t get to ask about your daughter’s personal life in discovery – it’s not relevant. If the SEC wins on this motion, most of those questions about FinCen and discussion with exchanges and all that – most of it becomes not relevant and no discoverable so this is a key Motion.
SO, the SEC is fighting to get the defense removed not only to remove the defense but ALSO to keep Ripple from obtaining certain discovery. Ladies and gentlemen this is the beginning of a discovery battle and apparently it is the SEC who might have some skeletons in its closet. And in order for Ripple to find out what they are, they are going to have to get past this Motion. But remember, this Motion is NOT about whether the defense is proper or about “wasteful forays” this Motion is ALL about what documents the SEC has to provide Ripple and what questions an SEC rep has to answer under oath.
We aren’t privy to what those questions are because they aren’t filed in Court – but have no doubt there are a number of lawyers working on Requests for Production, Interrogatories, scheduling Depositions. That is all going on as we speak and this is just a peak into that world. This letter is the opening volley in a fight over information and secrets. And that is where the case will be lost or won.
And speaking of Discovery battles. Look what was just filed today – the response to Brad Garlinghouse and Chris Larsen’s motions to dismiss the lawsuit against them. If you recall, the individual defendants had moved to have the case against them completely thrown out and I thought they had a strong argument to be dismissed. So, look at this discovery dispute brewing here and it’s the SEC’s only hope maybe.
Remember that the SEC has to prove that Brad and Chris KNEW what they were doing was illegal and the SEC in this letter goes right to its strongest argument. “In 2012, two legal memos warned Larsen that XRP could be considered a security if it was offered and sold under certain circumstances and advised him to contact the SEC to seek additional clarity as to whether XRP was a security. Larsen did not heed this advice.” So what is the discovery fight going to be? The letter the SEC is referencing was a communication from a lawyer to a client and that is very very privileged meaning no one is allowed to see it. There is one problem for Chris here and that is …if I write a letter to a client and then my client posts it on Facebook (it’s actually happened to me) that destroys the privilege. So my question, which I don’t know the answer, is how does the SEC even know about a lawyer opinion letter from 2012? That has me nervous for him but… we will see.
More interesting for the Ripple case is where the SEC later in the letter talks about jurisdiction. Remember in my last video where I said that the SEC is going to have to argue that Ripple made one kind of super-long offering and sale of XRP over a span of almost 8 years and If they couldn’t do that Ripple would file for partial summary judgment on ONLY future sales from escrow?
Well, look what the SEC says in these letters. On page 4 they actually say that
“Larsen committed a discrete violation of Section 5 each time he offered or sold XRP without registering the offers or sales with the SEC or qualifying for an exemption from registration….”
Yep, that is the SEC making Ripple’s argument for it – that each offer or sale of XRP is a “Discrete” sale. Boom, that might come back to haunt them. I also noticed on Page 2 of the Motion to Dismiss kind of the same thing.
This case turns on… the facts of Ripple’s offers and sales of XRP …to determine if they were offers and sales of securities. OFFerZ and SALEZ – plural!
Nothing gets by me. I’m not sure why the SEC is making Ripple’s argument for it but – there it is. I think this just might show you how complicated the law and issues in these cases can be. It’s easy to lose the forest for the trees.
But in any case, what I want you to understand is that these letters are not only outlines of pleadings but MORE IMPORTANTLY are the opening volleys in a fight over information and secrets. Just wait and you will see lots of these letters in the coming couple months – all arguing over WHAT is discoverable and what ISN’T – And that is where the case will be lost or won.
As Sun Tzu said in the Art of War “If you know the enemy and know yourself, your victory will not stand in doubt” True Dat.
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