Tuesday, May 11, 2021
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SEC attacks Ripple’s key defenses, calling them ‘legally improper’


  • In a new letter, the SEC seeks to break down two of Ripple’s key defense strategies, due process and fair notice.
  • According to the regulator, it was not required to issue warnings about violations in the midst of a non-public investigation.

After Ripple filed its response to the U.S. Securities and Exchange Commission’s (SEC) amended complaint in the U.S. District Court for the Southern District of New York a few days ago, it was the securities regulator’s turn again. As a document uploaded to CourtListener yesterday shows, the SEC didn’t take much time in responding.

In the letter to Judge Analisa Torres, the SEC asks the court to deny Ripple’s “fair notice” defense and to dismiss the motion for leave to file to dismiss the individual claims against Brad Garlinghouse and Chris Larsen. The SEC claims that Ripple is attempting to “avoid liability” by shifting blame to the agency.

As attorney Jeremy Hogan explained in a tweet, the SEC apparently wants to eliminate Ripple’s “fair notice” defense “because they are worried about it. 2. It would be a blow to Ripple if it is removed. 3. The SEC wants it done quick because there are facts they don’t want to come out in discovery,” Hogan said.

As CNF reported, the “fair notice” is a key cornerstone in Ripple’s defense – because Ripple found out that the SEC was approached in 2019 by “a major crypto exchange or perhaps multiple exchanges” about the status of XRP, and because the SEC failed to make a classification for years, even though FinCEN did so back in 2015.

To strengthen that argument, Ripple had also added new arguments in its response to the SEC’s amended filing, as Hogan explained:

A lot of new information is added to Aff Defense #4 related to Due Process and Fair Notice. Do not listen to anyone who says ‘Arguing you got away with it for 8 years is not a good defense.’ The Due Process argument is KEY to this case.

The SEC’s strategy against Ripple

To puncture this very defense strategy, the SEC states in the letter that Ripple’s defense is “legally improper” and claims that it is not required to issue warnings about violations in the midst of a non-public investigation.

Rather than acknowledge its own obligation to follow the law, Ripple instead posits that the SEC staff has an obligation to affirmatively warn industry participants about violations of other participants – even if the staff is in the process of conducting a non-public investigation – a requirement that does not exist in our legal system.

In addition, the SEC argues that the settlement with FinCEN and the vacant comments to the unidentified exchange do not provide a legal basis to dismiss the complaint. According to the SEC, Ripple is not exempt from compliance with securities laws or other applicable laws merely because “the government, legal counsel, or anyone else” has classified it as a currency. In this regard, the regulator urges:

An affirmative is improper and should be stricken if it is legally insufficient basis for precluding a plaintiff from prevailing on its claim. […] None of these facts, even if proven, would set forth a legally valid defense to the SEC’s Section 5 claim against Ripple.

Further, the SEC submits that only the Howey test is determinative of a security or non-security. In this regard, the SEC argues that Ripple essentially funded its business by selling the digital security XRP:

Ripple’s argument is, in essence, that the term ‘investment contract’ as defined through decades of case law is void for vagueness. However, that argument has been repeatedly rejected by courts. The Second Circuit has at least twice rejected the argument, and at least two district courts in this Circuit have specifically rejected the argument in the context of applying Howey to digital asset securities. […]

Here, Ripple essentially capitalized its entire business by selling a digital asset security to the public while promoting to investors the potential for profits based on Ripple’s future efforts. Yet Ripple now claims surprise that the SEC filed this enforcement action.





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