SEC vs. Ripple: Predictions!

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Hello and welcome back to Legal Briefs – crypto XRP edition. This is attorney Jeremy Hogan and I have been busy this last 2 weeks – we had a case set for trial that settled almost literally at the courthouse steps and then my case that settled at 7:30  last night at mediation. I can’t tell you what we settled for last night but…my client is very happy.

In any case, it got me thinking about the SEC v. Ripple case, Yes, the lawyers argue over everything and yes it can seem that the case will NEVER end but you’d be surprised how smoothly and quickly cases can settle when it seems like it would never happen.

In fact, to demonstrate that point, here’s some video of me and opposing counsel during negotiations yesterday.

That’s strikingly accurate.

Last night Ripple filed its response to the SEC’s motion to strike its Fair Notice defense from the litigation.  The fair notice defense is where Ripple is saying it had no clarity as to whether or not it was breaking a law by selling XRP and therefore cannot be liable.  THIS IS THE MOST IMPORTANT ISSUE IN THE CASE SO FAR and so this morning I’m going to tell you IF it will be stricken or not – the case could hinge on that.

But first briefly I want to tell you about the two outstanding discovery motions that are pending and I am going to tell you what the results all three motions that are pending will be just like Carnac the Magnificent.

You think Johnny would’ve made it on TV today?  I don’t think so.

Anyways, the SEC v. Ripple case has now moved well into the discovery phase.  This phase actually began back in March but we are only learning now about it because we are seeing only the disagreements bubbling up.

You might see these disagreements as petty squabbles, and sometimes they are, but it’s what is found out during discovery that leads to settlements.  Take for example the case I settled last night.  It would have been malpractice for me to settle that case 6 months ago because before I deposed the other party I didn’t know how strong their case was.  How would I know if $1 million or even 2 million dollars are fair?

So, don’t poo-poo discovery – it might not be exciting but it is VITAL to Ripple and the SEC.

Currently we have two very interesting discovery battles in the Ripple case – the first is over the SEC’s use of MOU requests to foreign governments where the SEC makes official govt. requests to other governments for the other governments to get records from foreign companies for them.

I believe the requests are improper but at oral argument I thought the Judge was leaning towards allowing those requests and I expected a ruling mostly adverse to Ripple.  I also thought that we would have seen a ruling last week and we didn’t.  I think that’s a good sign for Ripple and let me explain why.

At oral argument, the SEC was relying on a case decided by a Judge in the same courthouse deciding a similar issue – the prior Judge held  that the SEC COULD  use the MOU requests because they were voluntary requests.  Ripple had to backtrack and argue that the Judge based his opinion on faulty statements by the attorney.  That’s a tough position to be in and I thought the Judge would rule mostly against Ripple on this issue and have an opinion in writing by last week.

The opinion has not come out yet. If the Judge was relying on the case precedent, the decision would have been easy to draft – this case is like the other one and therefore Ripple loses.  The fact that the opinion has taken this long makes me now think the Judge is going to rule mostly on Ripple’s side.. The order restricting the SEC’s use of MOU’s will take much more thought and research and it makes sense it takes 2-3 weeks to draft.  Prediction: “Ripple’s motion granted in part.”

The next issue is the discovery battle over legal opinions Ripple received from law firms over the years as to whether its sales of XRP were illegal.  Ripple is of course claiming attorney-client privilege for legal opinions.

The attorney-client privilege covers any communications  between an attorney and his or her client or potential client.  You can imagine that you have to be very open with your attorney if I am going to defend you.  For example, my criminal client must feel confident telling me he did it without thinking I could be compelled to testify against him in the future.

There are of course two important exceptions to the privilege. The first is disclosure of future crimes.  If you tell me you are planning on killing someone tomorrow – as soon as you leave my office I’m calling the cops.  The second exception is waiver.  I have this problem with clients all the time – they want to have their friend or parent sit in our meetings and that effects a waiver of the privilege.

And that happens to be the SEC’s first argument – that Ripple waived confidentiality by disclosing the legal memos to third parties:

“Larsen sent one of the two Law Firm memos to third parties on at least 14 different occasion…”

And then later talking about a second legal Memo:

“Law firm B provided Ripple an opinion on the status of offers and sales of XRP under the securities laws which Ripple shared with the investor.”

That is a straight waiver of privilege and Ripple will likely have to produce those documents.

The more difficult argument is to the Legal memos that Ripple has NOT disclosed to third parties and the SEC argument as to those is that Ripple waived confidentiality by raising the affirmative defense that they lacked knowledge that what they were doing was wrong.

Ripple’s problem here is that the SEC ha cited to some pretty strong case authority. Look at the U.S. v. Exxon case where the Judge said this:

“a client waives his attorney-client privilege when he…raises an affirmative defense that makes his intent and knowledge of the law relevant.”

And that is pretty spot on as to what Ripple is doing with its Fair Notice defense. But not EXACTLY what Ripple is doing so Ripple will try and nibble around the edges of the cases and distinguish them from their situation.  So, Ripple has an uphill battle I think they will end up mostly losing.

So, why bother the fight?  I’ll tell you why – because litigation is war and in war you don’t give up ANY ground, you fight for every yard, every foot, every inch.  You don’t give them sh… nothing. And that’s why because f… screw them.

In any case, let’s move on to funner topics because last night Ripple dropped it’s Vol I, II and III of its greatest hits in the form of a Response brief to the SEC’s Motion to Strike its Affirmative defense.  This is the MOST important motion out there right now and Ripple knows it so, it’s lawyers decided to create a Mona Lisa. A piece of Art – let’s take a look.

First, why is this Affirmative Defense so important?  Because if the Court finds Ripple lacked Fair Notice – it’s a complete defense.  Case is over – even if the Court THINKS XPR is a security.  So this is Ripple’s first bite at a Defense verdict.

So, first, what does the SEC have to show to have the defense thrown out?  Well, it has to prove A LOT. Right away the SEC has a big problem.

Ripples provides the blackletter law right in the first paragraph and let me translate that – this says that the SEC has to show that EVEN IF what Ripple says in the affirmative defense is true, it would still lose.  Basically, the Court has to take all allegations of lack of fair notice as true and STILL think it could never ever find that there was lack of Fair Notice.  It’s a very high bar for the SEC to meet.

In fact, Going back to the SEC’s brief on this, most of its brief was spent arguing facts it says shows Ripple should have known that it was violating the law. Problem is – that’s improper at this point – arguing which facts are true is for later in the case at trial or summary judgment.  The SEC got ahead of itself here and tried to jump to a closing statement when we are still at opening statements.  For that reason, and a couple others – I predict: “SEC’s Motion is Denied – the Affirmative Defense of Fair Notice remains.”

But that’s not what got me excited about the Motion to be honest – where it gets really good is on pg.17 – Roman Numeral II – paragraph A where Ripple in about 5 pages (14 font double-spaced) really Kill the argument that they had Fair Notice they were selling an unregistered security.  Those 8 pages – pages 17-25 should be mounted in a frame or at least taught in legal writing class.  Just very concise and elegant.  I really enjoyed reading it and here are the headlines:

Paragraph A : “The Prosper Order did not Provide Fair Notice”

That case didn’t even involve crypto currency – it was issued before the Bitcoin whitepaper was even drafted. Next.

B: “The 2012 Legal Memoranda did not provide fair notice.”

I can’t comment on this point too much because the content was redacted but knowing legal opinions letters there was certainly a lot of “possiblies” and “maybes” in those memos.  Not sure how much hay the SEC can make out of them.

C: “The SEC’s Guidance did not provide fair notice”

First, there was no “Guidance” until 2017 and from that point forward the guidance  was focused on ICOs – which RIPPLE NEVER HAD.  The lawsuits brought by the SEC back then – the Recoin and Kik Interactive cases were all ICOs involving companies raising money to actually create the blockchain itself.  Not Ripples situation – in fact the XRP ledger was apparently in existence before Ripple.

Next, Ripple cites public statements by Chairman Clayton suggesting that what makes digital assets more like a security is when the offer is for “ interest in a yet-to-be built system”.

Obviously Ripple in 2017 had an “already built “ system.

And then, Ripple really gets to go to town for another couple pages distinguishing between every official and unofficial SEC statement in which the SEC said “don’t do it this way” and Ripple says “we weren’t doing it that way!”

Ripple brings in no less than 6 articles by the SEC or its employees, 2 no-action letter responses where the SEC said it would not take action against a company because the funds were not being to used to build out the infrastructure.  Ripple talks about The FinCen and DOJ settlement which found that XRP was a currency and subject to regulation as such. Heck, even my friend John Deaton gets one of his own sources in here:

Per the Deaton declaration: distinguishing between ICOs promising to create an application and those where the network is up and running.

And it goes on and on and by page 26 you are so brainwashed you feel like not only should Ripple be found not guilty but should be given some kind of award for service to humanity so that when Ripple start to call out the SEC for making misleading statements to the Court, that’s more just a cherry on top:

Page 26: “In any event,  the SEC’s description of the discovery in this case— which is being ably managed by Magistrate Judge Netburn —is incomplete and misleading.”

I even liked the minor Judge butt kissing in there. Well done.

So suffice it to say that this was the most impressive pleading so far for me and really lays out half of Ripple’s Fair Notice Defense. Prediction: And I say this with as much legal certainty as there is possible in this crazy world – the Fair Notice Affirmative defense will live on – SEC Motion Denied.

Don’t hit the button yet!  Really fast – Predictions for settlement.  The SEC litigation review meeting was held Yesterday.  My prediction is that IF Gary Gensler is going to pull back from this lawsuit and instead work for more regulatory clarity – it will happen in the next 2 weeks.  If we go into June with no settlement then this lawsuit has been adopted and supported by Chairman Gensler for better or worse. IF that is the case I predict no settlement until September at earliest.

If there is no settlement and we go to summary judgment or trial I predict…well, heck I don’t know – do I look like a mind reader?  Thanks for watching.

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