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SEC vs. Ripple: It’s All About the Fair Notice Defense
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TRANSCRIPTION FROM VIDEO:

Happy Friday and welcome to Legal Briefs Crypto Crash Edition – this is attorney Jeremy Hogan and boy was this a rough week in the Crypto World but guess what – it’s Friday and we made it.

This week saw Bitcoin, Ethereum, EVERYTHING tanked and in the SEC v. Ripple lawsuit we had a -for me – disappointing ruling on the Memorandum of Understanding issue, we’ll talk about that and then of course there was the hearing today which is very important to Ripple’s Fair Notice defense and the bright spot of my week.

But first briefly some people have asked about my crypto currency holdings on Twitter and I don’t usually talk about them very much and I don’t know how to do the Blockchain Backer charting magic like he does but I did put together a brief montage of my holdings and how they did this week.  Enjoy.

“Jeremy, your crypto misery montage is over”

“Ok coming”

It was apple juice I swear.

In any case, today in the SEC v. Ripple case we had the hearing on the SEC’s motion to pierce the attorney/client privilege of Ripple and its lawyers, we will talk about that, and also this week we had the ruling on the SEC sending discovery requests to foreign governments and we’ll touch on that. And also 2 very very important things from the hearing today that you might have missed but …nothing gets by me.

First, if you were on the hearing call Congratulations – the capacity maxed out at 4k again and the Judge again acknowledged the public and Press members in attendance.  If you listened in to the hearing here’s an inside joke for you – did you run out and eat Chipotle for dinner also?

Chipotle Es Delicioso.

So, there was a ruling from Judge Netburn this week that the SEC could continue to send out formal requests to foreign governments requesting documents from Ripple’s business partners – MOU requests.  If you recall, the SEC was doing this IN SECRET and when Ripple found out they called them out on it.  So the Judge said the SEC could continue the practice but had to tell Ripple what they were doing and what documents they obtained.

Based on this decision and the hearing today I have a much better read on Judge Netburn.  Ripple made the argument in part that the SEC was using bullying tactics not available to it as a private litigant – that the SEC was trying to scare away business partners.  And this is absolutely true in my opinion.  Litigation is war and this is not uncommon.  I litigate against insurance companies and if they know my client is in bad financial condition they will absolutely drag out the case, make us spend more money, in order to force my client to accept a lower settlement.  It’s a nasty business.  BUT, Ripple didn’t have any evidence of that – it was an assumption.  And the Judge said “nope” I’m not going to rule based on assumptions without evidence.

Which brings us to the hearing today. First, let me say how disappointed I was that Garlinghouse’s attorney Matt Solomon didn’t argue today.  He’s so cool – all the other attorney are like “Good afternoon your honor…” and he’s like “Hi Judge, how’s it going?” Love that guy.

Looks like he’s surfed before.

Anyways, the issue presented was whether the SEC can get its greedy little hands on opinion letters from Ripple’s lawyers as to whether XRP is a security or not.  Now we learned today from the SEC’s argument that Ripple has ALREADY given the SEC to lawyer letters from 2012 and 2015 and at least the 2012 letter says “be careful, this XRP thing could be considered a security.”

Why is that important?  Because Ripple has two viable strong defenses – one, that XRP is not a security and two, even if it, Ripple lacked Fair Notice that it was.  The more this litigation goes on, the more important I think the Fair Notice defense is.  Certainly the SEC just wants to keep it a simple “is it a security or not case” meaning the SEC is nervous about the Fair Notice defense – for good reason.

So the hearing today was super important because the Fair Notice defense puts the SEC on trial so to speak because a Fair Notice defense looks at what the SEC did and didn’t do and what effect that has on companies they have jurisdiction over.  And the SEC wants to get the other lawyer opinion letters because it wants to be able to say that Ripple had Fair Notice from its own lawyers, no matter the ambiguities coming from the SEC.

And the SEC had some case law on its side. I’m sure the SEC lawyer thought it very clever to rely in part on the Scott v. Chipotle case because that was a decision by Judge Netburn herself.

In that case, “the Court concluded that Chipotle had received legal advice on the very legal question it had asserted good faith over and that fairness required that such communications be disclosed” 

So in that case she had forced Chipotle to hand over the lawyer opinions.

BUT, alas, I think being cute might have backfired on the SEC in this case because the Judge knew the case very well – since she wrote it.  Right at the beginning of the hearing, before the SEC even started she began with the question:

“Do you have any cases that say that a Fair Notice defense is a “subjective” test.”

Well, I knew where things were heading right at that point because the Fair Notice defense is an objective test.  A Fair Notice stems from the Constitutional right to Due Process and from the Upton case:

“Due process requires that laws give the person of ordinary intelligence a reasonable opportunity to know what is prohibited”

That is an objective standard – what a normal person would know – not what a  lawyer thinks or Garlinghouse or any particular person – that is irrelevant.  What is relevant to the defense is what a regular normal market participant would know.

A subjective test asks what the Defendant knows.  Did Ripple sell XRP thinking it wasn’t a security.  Did Garlinghouse know?  In that case, what their lawyer told them is very relevant and therefore the SEC can get it.

So, when the Judge asked right away “Do you have any case authority that a Fair Notice defense is a subjective test?”  That’s like asking “Do you have any case authority that Texas is not a part of the United States?” 

I knew it was not going to go well for the SEC because – at least for now – Texas is a part of the United States .. and we love them – despite its birthing of the Dixie Chicks.  We forgive you Texas.

In any case, what occurred over the next 45 minutes was the SEC attorney trying to argue that Ripple was attempting to really plead a Good Faith defense (a subjective test) and call it a Fair Notice defense. And HE REALLY TRIED – to his credit he didn’t give up like I would of.  But this takes us back to what we have learned about Judge Netburn from the MOU hearing and ruling.  She is not going to let you have her follow bread crumbs.  She wants hard evidence or she’s not going with you down that road.

And I don’t think she’ll follow the SEC down this road either.  My prediction: motion denied.

But two other more subtle things from this hearing and maybe more important.  Like I told you before, I listen extremely closely to what the Judges say and here’s what I heard.

The most important pending motion in the case is the SEC’s motion to strike or throw out the Fair Notice Defense – that would be a big blow to Ripple.  I listened when the Judge described the defense itself.   She said something to the effect that the Defense is an issue of whether there was a lack of clarity ON THE SEC’s PART.  It was exactly what I wanted to hear because it shows she has bought into what the defense is all about.  There are other ways to say it but she chose the way Ripple would have said so I would suggest that is a good sign as far as whether the defense will survive.

Finally, the SEC attorney let out that the Ripple attorneys told him that Ripple intended to file for Summary Judgment on its Fair Notice defense in August.  This is before even the close of discovery and it’s faster than I expected and makes me think they might set the hearing on their defense BEFORE even the hearing on whether XRP is a security or not.  A Ripple victory at that hearing would of course end the whole case. Would XRP have “clarity” then?  Yes and no. XRP’s status would not, but no one could be sued after that by the SEC because there would be case precedent that no one had Fair Notice anyways.

It’s been a rough week but always remember the Sun will come out tomorrow – bet your bottom dollar.  If you have any left. 

Jeremy Hogan
Jeremy Hogan
Attorney Jeremy Hogan is a partner at Hogan & Hogan.