SEC vs. Ripple: The Good, The Bad and The Ugly

TRANSCRIPTION OF VIDEO:

Hello and welcome to Legal Briefs – this is attorney Jeremy Hogan and today we are talking about the SEC v Ripple case because this is “Hell week” and there was A LOT of stuff filed so far this week but most exciting we got to see some parts of the big Hinman deposition.

And in all of the “stuff” that was filed there was some good, some bad, and just some Ugly and we are going to tell you what is what and which is which and then we are going to speculate on the outcomes of these hearings.

And yes, we are going to talk about the Hinman deposition and it appears to have been very interesting and of course I snuck a camera into the Hinman deposition so we can see some behind the scenes action. And here it is:

The legal lesson from Mr. Eastwood – never be lawyer at the deposition or at the trial with the unloaded gun. Because then you are just a digger.

I’m not feeling great today and I am actually heading to the doctor right after this video but kids listen to me – half of life is showing up. So I threw the jackt on and  here I am – fever and all – just for you.

So, before I pass out – let’s get to it and let us start with the SEC’s motion to obtain Ripple’s Slack messaging communications and on August 16 we got Ripple’s Reply Brief so now we know how it will defend itself and here it is right in the first paragraph:

“The SEC’s extraordinary demand calls for an extensive and costly fishing expedition that would likely take months to complete and come at very significant cost. The SEC’s disproportionate request is also

unreasonably duplicative of Ripple’s extensive production of over one million pages of discovery—

including emails, documents, text messages, and responsive Slack messages for 33 custodians.”

The SEC is trying to find internal Ripple communications that show it was treating XRP more like a security than a commodity. And Ripple’s response would fall under “The Good” as far as the Good, the Bad and the Ugly.  It’s good because the law on this issue is one of “proportionality” – in other words, the request has to make sense in terms of what it might show in relation to the burden on producing it.  SO if you’ve already produced Slack messages from the top 33 people at Ripple – why do you have to also search the receptionist’s and the interns Slack messages.  It’s costly and you’re not going to find anything new or relevant. That’s the good.

Now, to the Ugly. Look at Roman Numeral II in Ripple’s response.

“Although Ripple’s collection of Slack data was significant, Ripple’s e-discovery vendor inadvertently failed to collect Slack DMs and MPIMs.”

Ouch. That’s not good and now Ripple has to backpedal and explain why their discovery company didn’t search the Direct Messages and , well… it’s like trying to explain a text message from an unknown woman on your cell – there’s never really a good answer even if you’re innocent.  So, in our Good , Bad and Ugly theme, that goes in the “Bad” category.

Which is a shame because our Judge, Judge Netburn has already ruled on a similar issue involving Slack messages back in 2013 and she was conservative in what she required the party to produce.  The name of the case was In re Morgan Stanley pass-Through certificates and here is what she said:

“Accordingly, plaintiffs have not made a sufficient showing that the burden of review – including the burden of reviewing false search hits –“

So, she’s going to want and see something from the SEC about why they need these additional people at Ripple’s messages searched but the mess up by Ripple’s e-discovery vendors gives the SEC a bit of a wedge.

SO, I predict that the Judge will grant the SEC’s motion in part or AT LEAST keep that option open to compel further production depending on what Ripple finds and produces.

Okay, moving on then to Ripple’s Motion which is honestly much more interesting and Juicy and here is where we could see some sparks fly if there were ever to be sparks in this case. Recall that all the way back on April 6 there was a hearing with judge Netburn and she told the SEC to produce certain internal documents related to XRP, Ether, and Bitcoin and related to Mr. Hinman’s infamous Ethereum speech.

That hearing was April 6 – and this is STILL going on and ..sticking with our theme – is it good bad or ugly?  I’d say it’s definitely Ugly.  Because after that hearing in April she was forced to clarify her ruling and here is the Clarification:

1. Produce communications with 3^rd parties – that’s #1.
2. Produce official inter-agency memoranda re Bitcoin, Ether, XRP. – that’s #3

And THAT’S IT. It’s not that complicated yet up to recently the SEC had failed to produce any documents based on the official deliberative privilege.

So, let’s take a look at what the SEC is saying here in its Reply Brief:

“The Court should  not override that privilege and punish frank governmental deliberations, particularly where the internal  predecisional, deliberative material Defendants seek,which  they never saw or knew about,is not relevant to any claim or defense.

On the Good side here, the SEC Reply brief is very well written – on the Bad side – it’s like déjà vu reading this thing because I feel like this issue has been argued about 3 times already and each time Judge Netburn has ruled the EXACT SAME THING.

And that’s the type of thing that tends to piss off Judges and I think the SEC realized that in preparing for the brief and so look what they hide in Footnotes:

Looking at Footnote 3:

“In the document review process in connection with this motion, the SEC determined to no longer assert DPP over parts or all of approximately 40 previously withheld documents”

A-hah.  The old backtrack just before the hearing trick. I’ve done it before and it can take the sting out of an upset Judge. So the SEC has decided to un-privilege some documents at the last minute.

But bottomline, and a prediction, there is not enough time left in fact discovery and this has just dragged on too long – I think Judge Netburn is going to have to take some of these documents in chambers and do an in camera review of them and some judges just will not do that but I don’t see how she avoids that and I think she will order some of those documents produced after she looks at them. Hopefully we’ll see a very specific Order.

But really all of this motion practice pails in comparison to what was attached to the SEC reply brief – parts of the Hinman deposition were attached and there was some JUICY stuff in there.  These excerpts of the deposition were of course chosen by the SEC so we don’t see the bad stuff yet but this is our first look at some real evidence in the case and it didn’t disappoint.

So, we only have about 90 pages of the deposition out of probably over 500 pages and much of what we do have is redacted but let’s start off with a trap laid by the SEC – obviously together with Hinman and here it is on pg. 95 of the transscript:

“Q: Do you recall other issues that were

brought to you and members of your staff about the application of the federal securities laws to

digital asset transactions in which they sought guidance without seeking a no action letter?

A: Yes.

Frankly, the one I recall the most clearly is probably the one when XRP came in with a person

who had my position before me, as well as enforcement counsel. They were interested in is there a way to restructure what we’re doing to bring it within compliance of the securities laws,and the first thing I said to them was you’re continuing to offer XRP without any kind of restrictions that would apply as a securities offering. If you want to come into compliance you have to stop doing that, and they understood that”

So this is  a trap response and the SEC had discussed this with Mr. Hinman ahead of time to make sure to get this response in his testimony somewhere. So there’s no doubt whose side Mr. Hinman is on here. He has a remarkable memory on this interaction out of hundreds.  Amazing. The answer is in the “Good” category for the SEC because obviously the SEC’s position on the Fair Notice Defense is that Ripple knew it was breaking the law and by Hinman telling them that, they should have known.

But MAYBE not as good as the SEC would hope because later on in the deposition Mr. Hinman is asked WHEN his meetings with Ripple took place and he says this:

On pg 376 of the transcript:

“….I think some of these meetings began in 2018 and some early meetings with XRP representatives, general meetings, and then meetings trying to figure out how XRP could come into compliance were later, probably 2020.”

SO, keep in mind that the SEC investigation of Ripple began I think in 2019 and the lawsuit was December 2020.  So according to his testimony Mr. Hinman met with Ripple generally in 2018 and maybe 2019 but the meeting in his “trap” testimony was in 2020.  It was only in 2020 that he met with Ripple and said “ I think you are breaking the law.”  But also keep in mind that when asked what they could do to come into compliance it seems according to his testimony his only response was to say “stop selling XRP.”  And then a couple of months later the lawsuit was filed.  So, in other words, this is how a company in a burgeoning industry was treated – only told to stop realizing its main source of income while the SEC tees up its lawsuit against them.  Not very helpful or fair if you ask me.

And in any case the testimony only really helps the SEC for the period from when Hinman told the SEC in 2020 until the lawsuit was filed. It does nothing for pre-2020 Fair Notice.

And there is another bombshell in the deposition which the SEC wasn’t so happy to highlight and that has to do with the SEC’s policies for SEC employees owning securities.  And there is a policy which basically says that SEC employees can’t own securities they are in any way working with or about and the purchase of any security by an SEC employee had to be pre-cleared and looking at that line of questioning:

A: … If you buy securities you’re supposed to get them precleared.”

Q: And am I correct that digital assets were not covered by the securities clearance form until 2018?

Well, Mr. Hinman waffled answering that question but of course the answer was “No” – the SEC did NOT consider digital assets securities for their ethics purposes until 2018.  You never ask a question on cross you don’t know the answer to already.  And THAT bodes very well for Ripple as far as its Fair Notice defense for periods from 2013-2018.

And there were a couple of other interesting interactions in that deposition but I’ve run out of steam so That’s all I got for you today – The Good, the Bad and Ugly.  Thanks for watching.