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SEC vs. Ripple: Hell Week Begins!

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TRANSCRIPTION OF VIDEO:

Welcome to Legal Briefs – I’m back.

Hello this is attorney Jeremy Hogan back with some important info for the SEC v. Ripple case. I don’t if that opening montage was for me or the price of XRP but … we are both back.


Actually, I was really enjoying my garage band but then my favorite Ripple attorney Matt Solomon filed something in the case…

Attorney Solomon had to go and file a motion and I got unnaturally excited about it and well… here I am.  I’m a little sad because My band was actually coming along nicely – we got one song recorded – it’s a little dark and self-titled.

In any case, next week is very important in the SEC v Ripple case and I’m here to orient you to what is going on and what to look out for and also, we can now see how the SEC is going to approach a big aspect of their case.

Also, I have been keeping tabs on all the United States legislative stuff going on in the crypto world but I couldn’t get myself to talk about it. When Senator Ted Cruz is the voice of reason on an issue – you know the legislature has gone crazy. So I will save that for another time.

And then finally at the end of the video I want to show you a very interesting Tweet I received from a Commissioner on the CFTC and an interesting Tweet I did not receive from SEC Chairman Gary Gensler.

First, to orient ourselves in space and time:

This handy graphic is from Filan Law – thank you Jim.  So as you can see fact discovery concludes August 31 and Expert discovery ends October 15.

Fact discovery consists mainly of document discovery and depositions and we’ve seen some of these battles play out over the last couple weeks.  Expert discovery is different. By August 31st the parties will have to disclose which experts they are going to rely on for more technical testimony.  For example, in a personal injury case the expert witnesses will be the doctors who will testify about the injuries. These are witnesses with special expertise who are allowed to provide opinions to the courts and in the Ripple case you will likely see technical experts who can give opinions on the XRP ledger and talk about use cases and decentralization and such.  Guys like Quincy Jones:

In other words, expert discovery is where the lawyers hire people way smarter than them to talk about issues they don’t really understand to a judge who will understand it even less.

So that’s where we are – at the end of fact discovery and going into expert discovery and I was honestly quite surprised that we got these two motions filed as late in discovery as we did. 

There you can see that the SEC filed a motion to compel Ripple to produce internal “Slack” communications and Ripple has to respond by Monday and then Ripple filed its motion to compel production of SEC’s internal memos and such and the SEC has to respond by Tuesday the 17th.

And this is all cutting it really close because once the 31st passes these issues are over. So I expect this to move very quickly this next week because I expect the Judge to want oral argument on these issues so ..hang onto your hats until the 31st. The reason I’m surprised is that this case has been in discovery for over 6 months now with documents going back and forth and depositions being scheduled and you want to have all your documents in hand when deposing witnesses and as we can tell from the filings,  the SEC has taken depositions without having the documents it wanted to ask about and that is always a mistake – especially in Federal Court where you are not likely to get a second shot at the deponent.

In any case, let’s look at the filings,  I’m not going into who will win on these motions today because we haven’t seen the response but I did want to tell you what the issues are, why its important, and what we can see as far as the strategy of the sides from these motions.

Let’s start with the SEC’s motion and the SEC  is trying to get Slack messages from Ripple and I’ve used Slack before and generally hated it but it’s a message AND task organizer and tech companies love it and it really could be a treasure trove of information for the SEC because it’s all centrally stored.

Looking at Ripple’s motion: “Plaintiff SEC … will seek an order compelling Defendant Ripple Labs to search and produce relevant communications between Ripple employees on Slack.”

That’s what the SEC wants but why do they want it and what can we gleen from the motion. It’s super interesting these two motions because it shows this dichotomy as to how the parties are approaching the case.

The SEC is trying to build a case that XRP was sold as an investment contract and therefore a security.  What I am seeing from this latest motion and also from the Requests for Production that the SEC gave Ripple is that the SEC is going to try and stay away from the technical issues of how built out was the ledger, was the XRPL decentralized, all those issues. I can tell that because there’s almost no questions in this motion or in the formal document request related to that.  Why? Probably because the SEC realizes that is a losing argument for them.  Thinking about former Chairman Clayton’s analogy of selling tokens to a laundromat and if the laundromat isn’t built yet, the tokens are a security but if the laundromat is built, you have a commodity – a token that can be used. And by that definition the SEC is going to lose – especially as to more recent sales of XRP.

So instead, the SEC is going to attack from a “marketing’ angle.  The argument here is that Ripple marketed XRP like a security, treated it like a share of stock, tried to manipulate XRP price, etc.  This is an attack from the flank and not the strongest argument – but it might be all the SEC has.

We first get a hint of this in the motion to compel production of Slack docs where the SEC in Footnote 3 on pg. 3 lists whose Slack messages it wants searched. The Ripple employees it wants searched include:

…. three member of Ripple’s marketing team, member of Ripple’s XRP market team, and members of Ripple’s Finance team.”  What does the marketing team have to do with whether XRP is a security or not?  Absolutely nothing. But they have everything to do with how Ripple marketed and treated XRP.

And even more telling, let’s look at the SEC Request for Production to Ripple which is attached as Exhibit D to the motion.

There are 38 total requests and many are generic throw-away requests. And out of the 38, at least 12 or 13 of them are related to marketing efforts or Ripple’s influence on XRP. A good example is request #6 which requests “All documents concerning Ripple’s efforts to promote purchases of XRP by retail purchasers.

So from those types of requests you can see what the SEC’s tactic will be in its final motion for summary judgment.  It’s going to argue that Ripple marketed XRP, used XRP as a kind of stock option in order to get business partners to work with them, and otherwise treated XRP LIKE a stock – even if it technically wasn’t.

And lets compare that strategy with what Ripple is doing. AS you may be aware, back on April 6, Ripple went to a hearing with the judge and won the right to receive formal internal correspondence from within the SEC about whether XRP and Ether were securities. And apparently, to date, the SEC has not produced one document to Ripple. So FINALLY, after all this time, Ripple filed a motion to compel production of the documents – we’ve been waiting a long time for this and it was filed last week by the one and only Attorney Matt Solomon”

And here is the argument:

Look at the bottom of the 2nd paragraph:

“Discovery in this case has confirmed that during much of the same period, market participants and THE SEC ITSELF were still uncertain about whether or not digital assets generally, and XRP specifically , should be subject to regulation under the federal securities laws.”

If you own XRP, you should say a short prayer that this is true because this would mean that Ripple has evidence that the SEC has either deposed someone at the SEC or obtained documents that say that the SEC itself wasn’t sure whether XRP itself was a security. Boy, that would be nice.

But putting aside that godsend for a second this highlights how each side is putting together its case. The SEC is going to stay focused on what Ripple did – how did it market XRP? Did it worry about or try and manipulate XRP price?  And Ripple is focusing on what the SEC did – did it provide clear guidance to Ripple? Or better said, did the SEC  even know whether XRP was a security?  Apparently there’s evidence that it didn’t at least until December 22, 2020 which is of course when it filed this lawsuit.

And what we don’t know is how good the documents or depositions are that each side will get. Only when we see that will we know how strong each side will be. But these motions and the hearings in the next 2 weeks are very important because these are how the SEC and Ripple will get the bricks with which to build their case.

And finally, I wanted to show you something from the “World of Twitter”

I’ve only been on Twitter since January  – it’s not for the faint of heart ya’all – and there’s a lot of policy issues surrounding U.S. securities laws discussed sometimes nicely – sometimes not.

But there’s something broken at the U.S. securities commission and I think this highlights it and it begins with the Chairman of the SEC Gary Gensler talking at the Aspen Forum and listen to this when he’s asked about basically lack of clarity in the crypto world in the U.S.  Roll it:

If you think that was awkward – go watch the video from the 35th to the 50th minute. If he was a witness on the stand – it’s what I would call a disaster witness. But anyways, what was disengenous was when he said the law is “very clear.”  He knows that’s not true, we know that’s not true, so why did he say that?

So, I couldn’t let it go after watching that and so I took to Twitter – because that’s the lazy way – and I asked Mr. Gensler a very simple question:

“We know you understand Ethereum very well. We also understand you recently said that U.S. securities laws are “very clear.” Therefore, the millions of Americans who own Ether would like to know the answer to a SIMPLE question: is Ether a security? YES. or, NO.”

And I Tweeted that and I believe almost 7k people liked it and so I waited and waited and…

But the truth is I knew there would never be an answer, first because Mr. Gensler’s lawyer has instructed him not to answer questions about specific cryptos, but also because I asked what at trial I call the “No good response” question.  IT’s similar to asking “Are you lying now or were you lying then?” question. There’s no good way to answer.

If he answers yes, Ether it’s a security – well then why haven’t you sued it yet? If he answers “No” then he is greenlighting similar cryptos.  If he tries to waffle with a “maybe” then he is admitting there is no clarity.

And really the purpose of the question wasn’t to get an answer but to highlight an inherent problem with how the SEC is set up and how it regulates crypto because the truth is that the way the SEC does things worked fine in a world where companies go public and sell parts of the company as shares and SOME companies try and get around disclosures by hiding that they are really selling shares.

But with crypto you have a different scenario.  In the crypto world Ford doesn’t just make cars – it literally MAKES steel and oil out of nothing – and then makes cars from the steel and fuels it with the oil – at the same time selling the steel and oil to others.  Is the steel and oil a security or is it a commodity?  The answer to that question is ANYTHING but very clear.

So the truth is that Mr. Gensler CAN’T answer that simple question yes or no – even if his attorney would let him – because the answer is very much a “maybe”.

And so what you have is a regulator which only really has a hammer, and the hammer has worked for a long time, but now it seems that the SEC is not willing to recognize that the “regulation by litigation” model doesn’t work in the crypto world. And that’s ESPECIALLY true where it takes years before enforcement actions are brought. In the 8 years before action was brought against Ripple you have millions of U.S. citizens who have put time,  energy, and money into projects involving XRP and now all that time and energy are at risk by the very entity that is supposed to protect them. The “protector” becomes the “harmer.”

It’s a shame and there really is no reason that the head of the SEC shouldn’t be able to go down the list of the top 20 cryptos and says “yes – security . no – not a security.”  THAT would be true investor protection and true clarity.

But not to end on a negative note – in a good surprise, Commissioner Brian Quintez of the U.S. commodities commission responded to my little Tweet and said:

Nope, Ether is a Non-security commodity.

Props to him for responding and if you have a free moment – Tweet to Mr. Gensler politely: “Do say good sir, is Ether a security? Yes or no.” and maybe someday we will get an answer.

Thanks for watching and remember – sometimes in business and in your life you have to be brave and say “this isn’t working,” and it’s going to suck for a while but I need a big change in how I’ve been doing things.  And then Make that change.

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