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Hello and welcome to Legal Briefs – SEC v. Ripple edition. I am just home from work and I’ve been waiting to talk about the Discovery hearing from this morning for 6 hours and I can’t hold back no more.

The hearing was in regard to the SEC use of formal requests to foreign regulators to get documents from Ripple’s business partners and … I still happen to have my secretly placed video camera in the actual courtroom so before I give you my opinion let’s roll the video of the hearing.

That would make more sense if the Panda talked much much faster.

Sometimes the Judge in these cases feel like these discovery disputes are silly and like they are dealing with children because the attorneys are always squabbling but the truth is that these cases are often won or lost on what is discovered during the legal process so these hearings are very important.

But Briefly before we begin, remember that nothing I say is legal advice.  I just watched a nursery rhyme and enjoyed it immensely so if you need a mature lawyer go out and hire this lawyer, if you can:

Bonus points if you leave her name in the comments.

But back to the case at hand.  Let me orient you where this lawsuit is.  And to do so my assistant made a handy-dandy but simple flowchart of a lawsuit and here it is.

So, the SEC filed a lawsuit against Ripple of course and we are currently in the 2nd tier of activity.  The first thing that is going on right now is that Garlinghouse and Larsen have filed Motions to Dismiss the case against them and that is pending and won’t be decided for about another month.  The SEC has filed a Motion to Strike Ripple’s Fair Notice Defense and I would submit that that is the most important pending motion and that also won’t be decided for about a month.  We are currently in the middle of Discovery and Discovery Battles which will last until June or July.  Then, finally we reach Summary Judgment which is the third tier down and THAT is where the Judge can decide the case.  I am 90% confident that Ripple’s case is decided at summary judgment – I think only Garlinghouse and Larsen have cases that could potentially make it to Trial.

The hearing today was a discovery battle and here is what is going on.  The SEC has been sending formal SEC government requests to other foreign regulators and asking those governments to go to companies in their countries that work with Ripple and get documents from the companies and then forward them to the SEC.  This is highly unusual.

To make it worse, the SEC didn’t tell Ripple it was doing this.  The SEC got caught with it’s hand in the cookie jar so to speak when apparently one of the companies told Ripple about the requests.  Ripple then moved to stop the SEC from sending the requests because it’s discovery outside the Rules of Federal Procedure.

And if you listened to the hearing you may have been bored to death but I have to admit I was entranced. This was the most interesting hearing so far for me.  I literally had my assistant grab me a bag of popcorn while I was listening.  Here’s a pic – I ate half the bag – there’s goes my diet. Uck.

Anyways, here’s why this was fascinating to me.  The general rule is a lawyer can reach out to any non-party and ask anything he or she wants.  In a divorce, for example, if I represent the husband, I can absolutely call the wife’s best friend and ask questions about the wife’s cheating, and the friend has the absolute right to hang up on me. That’s fair.

But I cannot reach out to the 3rd parties like that if they are obligated to speak with me – if they HAVE to talk to me. If they have to talk to me by law, then I must obtain information from them through the Rules of Civil Procedure  – which means I need to subpoena them and the other side can object and they know I am doing it.

So that’s the main issue that was being argued over today – whether the Memorandum of Understanding between between the Federal govt. and the foreign governments is mandatory or voluntary.  If it’s mandatory, the SEC can’t do it.

And that was Judge Netburn’s first statement to Ripple, she said “my understanding is that although the foreign company MUST comply with the request by its government, the foreign government does not HAVE to comply with the SEC’s request.  That was not a good way to start for Ripple.

But the reason why the issue is so fascinating to me is that it brings us to thinking about the REASON for the rule.  Is the rule meant to protect the third parties?  Or is the rule meant to provide the litigating parties EQUAL power?  Well, the Judge seems to think it’s to provide equal power and therefore I think she was leaning towards allowing the SEC to continue with the requests because the handing over of the docs from the foreign government to the SEC is voluntary.

But the Ripple attorney knew this was coming and argued that although there are bases for not providing the documents, for the MOST part these requests in fact are NOT voluntary especially when perhaps smaller countries are dealing with an economic giant like the US of A.

And further, IF the purpose is to place the parties on even ground then EVEN IF only one of the countries HAD to produce the documents then the practice should not be allowed.  That was Ripple’s argument and I loved every minute of it.  Who’s with me on that?

Anyways, it’s so intriguing for me and here’s the problem for Ripple.

Lawyers say that bad facts make bad law and unfortunately, Ripple is dealing with case precedent where either the lawyer or the facts were bad and so Ripple is on its back foot right out the box.

The case is  the SEC v. Badian and it’s a case in the SAME COURT where a Judge, judge Pitman ruled that in an SEC case that the SEC COULD us these types of requests.  Oh, and guess who the attorney for the SEC was?  Yep, it was the same attorney as the Ripple case – Tenreiro.

Here’s how the SEC describes the ruling:

“Thus in SEC v. Badian, Magistrate Judge Pitman considered and rejected defendant’s request that in an enforcement action, the Federal rules require that the SEC be Ordered to cease using Requests for use in litigation.”

So, Ripple has to distinguish this case and they tried – they said that the Defense attorney screwed up and told the Judge that compliance by the foreign governments was VOLUNTARY when in fact that is not true. And since the Judge ruled based upon incorrect facts, Judge Netburn should not look to that case as having any persuasive authority on the Ripple case.

So, at the end of the hearing the Judge did not Rule right away?  Why not? Because she is going to pull out the Badian file and take a look at it and see if Ripple is really distinguishing the case or not?

Heck – she might even call Judge Pitman – he is retired now but she worked with him for many years  – and say “Hey Henry – what do you think of this?”  Here’s Judge Pitman by the way – he looks like the kindest guy you’d ever meet. Cute.

In any case, it started out rough for Ripple but I think they got the Judge thinking about this voluntary issue and whether the opinion by Judge Pitman was correct.

If I was forced, I would guess that Judge Netburn will probably allow the SEC requests to continue even though I truly feel that is the WRONG decision because the requests are De Facto demands but… maybe she will surprise me. Just remember – I’m never wrong so Judge Netburn will deny the motion at some level and she will also be WRONG to do so. 

And finally – there was some dirty poker at this hearing and it’s subtle but you need to see this and it involves the SEC NOT being forthcoming and if I was the Defendant this would really piss me off.

So, look at what the SEC just did – its very subtle but – nothing gets by me.  So, remember, the SEC got caught sending out these requests by Ripple and they are supposed to disclose what they are doing so Ripple called them out on that. Look at page 6 in the SEC’s response letter filed with the Court.

“Defendant’s arguments that they will be prejudiced by the Requests are meritless.  First, despite contrary accusations, the SEC informed Defendant’s of its intent to use RFAs at the start of discovery …”

The SEC says that it told Ripple it doing this by letter long ago.  That’s malarky (excuse my language).  Ask 100 lawyers what RFAs are and 99 of them will say it means Requests for Admissions”  RFA = Request for Admissions.

Only one of them – who probably works for the SEC will say it stands for “Requests for Assistance” which really means a MOU request.  It’s like telling the Court – Judge I never wrote down “SOS” asking for help – yes, I wrote “SOS” on the paper but that  stands for “Selling Old Sacks.”  I sell sacks to people on the weekend your honor.

Ugh.  I’m disappointed when I see that but..it is what it is.

Anywhoo, thanks for watching and remember, you can’t win them all but you can always play fair and leave with your head held high.

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