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SEC vs. Ripple: Bombshell at the Discovery Hearing!

By March 20, 2021No Comments


Hello and welcome to Legal Briefs Crypto-geek edition and today I attended the SEC v. Ripple hearing – made very easy by a cool new invention called the “telephone” and Wow, this was a very special hearing because there were two yes two Bombshells and so on a scale of 1-10 this hearing was an 11 for Ripple.

SO, I got on the hearing and I was drafting a motion while I was listening because these motions on discovery disputes are pretty mundane and I honestly wasn’t expecting this to be any different.  But around the 15 minute mark I stopped working on my brief because I realized the Judge was letting this go further afield than normal.  Actually, I got so interested in the hearing that I never did finish my brief I was working on – remind me on Monday to call my malpractice insurance – because I was blown away in a legal-nerd way by what I was hearing and I’m going to tell you exactly why.

But first real quick remember not to take what I say as legal advice – I’m the lawyer who didn’t finish his client’s pleading today – so if you need a GOOD lawyer, call this guy – he can get anyone off.  Or so I’ve heard.  Put his name in the Comments for free Youtube Juice.  Please.

Okay, so before we get to the hearing let me bring you up to speed.  We have four pending main motions in the case: one is to Compel discovery of documents by the SEC relating to Brad and Chris’ financial information – that is the hearing that took place today.  We also have the SEC’s Motion to strike Ripple’s Fair Notice Defense, the individual Defendant’s Brad and Chris’ Motion to Dismiss the lawsuit against them altogether, and then Ripple’s Mt to Compel discovery from the SEC about why it took 7 years to sue Ripple and some other juicy things.

The Motions to Strike the Affirmative Defense and Motion to Dismiss the Lawsuit will both be ruled on by Judge Torres and here’s the scheduling Order.

So you can see first the Brad and Chris’ Motions to dismiss will be briefed by June 4 and the SEC’s motion to strike Ripple’s defense will be briefed by May 27.  I’m not super happy with this schedule because I was hoping to see a much quicker timeframe.  With this timeframe we probably won’t have rulings on these motions until mid-June at earliest.

Also, I would be remiss if I don’t mention that today Attorney John Deaton re-filed his letter to get his Motion to Intervene in the lawsuit heard by the Court – you may remember that the Court initially denied this motion.  But as he promised, and as I said a couple days ago, he was going to refile and he did today. Remember, I am never wrong and here it is:

Here attorney Deaton in the 2nd paragraph is asking the Court to be allowed to intervene in the SEC v. Ripple case on behalf of over 10 thousand XRP holders.  10 thousand – last time it was only 6 thousand.  And I think I went over in my last video why this intervention in the lawsuit is so important so keep an eye on that.

But let’s get to the main event.  The SEC wanted to get records of the individual Defendant’s Brad and Chris’ financial information- very detailed financial information about bank accounts, checking accounts, everything.  At this point Brad and Chris had already given the SEC the trading financial documents – in other words – they HAD given the SEC documents showing that on such and such a date Brad Garlinghouse sold 1 million XRP  for $300k.  SO the SEC has all those documents already.

So, understand that I’ve played this game for 20 years and let me tell you exactly why the SEC wants all this detailed financial information.  There’s only 2 reasons to try and get this info: 1.  Sometimes I will ask for this type of information because I want to catch them in some kind of discrepancy – so the trading financial records show Brad made $300k on December first but his bank account only shows a deposit of $295k.  It leads to a cross -examination on “What happened to the $5k?”  Sometimes you can make the witness look bad like that.  And the 2nd reason and this is what this is all about is the SEC is trying to get these detailed records in order to make rich guys look bad.  It’s a common technique and what they want to do is get a record that Brad Garlinghouse spent $10k on a new toilet bowl for his house and $25k for a birthday party for his kid and get that in front of the jury and that’s all it is – to make them look filthy rich and hopefully leave a bad taste in the Judge or Juries’ mouth.  (Don’t blame the lawyers too much – it’s a dirty business we work in).

In any case, the first thing I will tell you is that Judge Netburn saw this motion for what it really was and she asked a very pointed question “Do you have some evidence that the trading financial records are incomplete or somehow fraudulent” and I don’t think the SEC really had a good response so after the hearing I thought that the Judge is not going to give the SEC most of what it wants.  I changed my mind on that point after the hearing.

The second thing I HAVE to tell you is that Brad Garlinghouse’s lawyer Matthew Solomon is an absolute beast.  He looks younger than I thought and fresh – usually litigators look tired and haggard – like me.

And look where he worked until 2016! He was the SEC’s Chief litigation attorney for 3 years.  Anyways, I was super impressed by him he was amazing  and I’ll leave it at that before things get weird.

But NONE of THAT is the big news from the hearing. Not even close.  First off there was the bombshell from the Judge just about 15 minutes in where the Judge interrupted Mr. Solomon to say this:

“my understanding about XRP is not only does it have a CURRENCY value but it has a Utility and that utility distinguishes it from Bitcoin and Ether.”

Then, Attorney Solomon had to of course disagree with the Judge and say “no” XRP is SIMILAR to Etherium.  And the comment itself shows that the Judge has done some research and is trying to understand but is not QUITE there yet because as we know Ether has utility – a lot of utility – and has been given a pass already by the SEC.  So the comment in a way didn’t make much sense.

But even if the logic is faulty, the statement is premised on 2 humongous things: That XRP has a “Currency value” and that XRP has utility.

First, no matter what the SEC might try and argue, a currency and a security are by definition inapposite. A currency can be used to procur things of value.  A security is an ownership interest in a common enterprise – they are  2 different things.  The example you see in a lot of the case law is the laundry mat example.  If you buy tokens for a laundry mat that hasn’t been built yet, you’ve bought a security.  But once the laundry mat is built you now have a currency because you can buy something of value with the tokens.

And that’s the second thing that the Judge disclosed is that she has bought into the argument that XRP has “utility,” that, at least at the present time, that XRP can be used to do things and that is EXACTLY what Ripple wants the Court to be thinking.  When she first was talking and said “currency” and “utility” I thought she was Chris Larsen’s attorney or something – she sounded like she was arguing the case for them.

Boom wow.  That’s the point at which I stopped working on my client’s work and started listening.  And I’m glad I did because there was one more big point that was more subtle but let me just flesh one thing out first about the Judge’s statement.

This hearing was with the Magistrate Judge Netburn and it is true that she isn’t the main Judge on the case.  But the first thing you have to understand is in Federal Court – judge Netburn and Judge Torres are like a team along with the law clerks.  They talk about cases, they roundtable them.  So , when Judge Netburn says XRP is a currency with utility as a factual statement – you better believe Judge Torres is very likely saying the same thing or at LEAST knows the Netburn feels that way.

And the other thing to know is what the role of the magistrate Judge is in the Court – let’s look at “A Guide to the Federal Magistrate Judge System” for more information.

What does a magistrate judge do?  They settle discovery disputes, they conduct mediations, and they make recommendations regarding summary judgment.

Yes, Judge Netburn will be involved at the 2 most important junctures of the case – she will be mediating the case AND will be involved in discussions with Judge Torres as to who should WIN the case.

If I’m Ripple I’m feeling pretty good that my mediator and consulting summary judgment Judge just said on the record what I essentially argued in my pleadings.  Pretty good like “is this really happening?” good.

But there was one more thing that was HUGE in today’s hearing that you had to listen carefully or you could miss and might be super important for EVERYONE.

About halfway through the hearing the Judge skeptically made a remark to the SEC attorney that based on his theory, EVERYONE who sold XRP – including you and me – are selling illegal securities and THIs is What the SEC lawyer said on the record.  He said “ No, under Section4 , only Ripple and affiliates of Ripple can have sold XRP illegally.  Listen again, the SEC said that only Ripple and employee’s of Ripple can illegally sell XRP.   “

Why is that super important?  That means that the Exchanges that de-listed XRP 2 months ago were not and would not be violating securities laws IF they re-listed XRP for sale and began to sell it again.  And I think I saw recently that one exchange recently relisted and so I wonder if there are perhaps a slew of non-action letter requests coming  or already received by the SEC and if so, I wonder if we will see XRP for sale in the US ofA once again.  I hope so.

Anyways, it’s extremely late and I have to sleep but thanks for watching and remember – pay attention to the small and mundane things in life – sometimes that’s where you find the greatest insight.

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