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

By May 28, 2021One Comment


Hello Happy Memorial Day weekend and welcome to Legal Briefs – this is the XRP edition and I am Jeremy Hogan.

I have one purpose in today’s video and that is to help you understand Ripple’s Fair Notice defense and why it’s so important – not just to this case but to the whole crypto industry. I’m thinking about it because the SEC just filed it’s final brief on its Motion to Strike the Fair Notice defense and I will tell you what that’s about and what I think is going to happen.

Now, the Fair Notice defense focuses on whether Ripple had reasonable fair notice from the SEC about whether it’s sales of XRP were illegal sales of securities. And to an extent I have some sympathy for the SEC here because it is attempting to enforce laws written by the US Courts almost 100 years ago. But, good viewers, never fear because our representatives and senators in Congress are on top of this new area of technology and will be drafting legislation and are currently holding hearings and asking probing questions on new and emerging technologies surrounding the interwebs:

I can’t wait for the blockchain hearings… “Mr. Buterin – isn’t it true that the Ether coin is only in one demonination – there’s no dime or quarter option – isn’t that correct?

SO, as you may already know in the SEC v. Ripple case the SEC sued Ripple for allegedly selling unregistered securities and Ripple raised two very important defenses.  First of course that XRP is not a security.  And second and maybe even more importantly Ripple raised a Fair Notice Affirmative Defense. Today I want to bring you up to speed on whether the Fair Notice defense will survive and why its so important. You might say it’s the key.

The idea that Ripple should have Fair Notice about the legalities of its actions stems from a little document called the United States Constitution – the 5th Amendment which includes the right to Due Process and the very idea of Due Process of law goes all the way back to the Magna Carta.

No, not that Magna Carta, although that one was pretty darn good, I am talking about the document King John was forced to sign by a group of barons which placed the King under the law so to speak instead of above it. And King John was forced into his weak position in part because he needed money to fund the crusades.

There you have a brief history of the Crusades.

And SO, in a little twist of long-drawn irony , you have the most important defense to tyranny in the Ripple case stemming from tyranny from a thousand years ago.


In the Ripple case, right away the SEC moved to strike the defense – to remove it as  a defense to the lawsuit. Ripple has responded to the SEC motion and now the SEC has responded to Ripple’s response.

Now understand that a Motion to Strike a defense is difficult to win.  The SEC has to get the Judge to agree that EVEN IF everything in the defense pleadings is true, there is absolutely no way Ripple can win on it. It’s a very high standard.

So, what is the SEC’s argument in this brief.  Let’s take a look.

It’s main argument seems to be that Ripple cannot even raise a Fair Notice defense.

 “Ripple hangs its hat entirely on  Upton, even though  Upton has never been applied to negate violations in a SEC district court action. Nor has any court allowed an Upton defense to defeat SEC charges of statutory violations, such as Section 5, as opposed to the SEC’s novel interpretation of its own rules, as was the case in Upton” (pg6)

So the SEC is trying to distinguish the Upton case and say it doesn’t apply here and you cannot have a Fair Notice defense in a Section 5 violation case.. But that’s not the way the law works – even in Chicago.

Just because a rule of law hasn’t been applied in a specific situation doesn’t mean you can’t raise it.  For example, you all know about a self-defense defense.  I punched you because you were punching me. The rule of law is that you can reasonably defend yourself from attacks.  Now let’s say that instead of being attacked with punches, let’s say a stranger comes up to you and tries to kiss you and you push them away, hard, and are arrested.  You can STILL raise the defense of self defense at the pleading stage.  You might not WIN, but you CAN raise it and a motion to strike the defense will be denied. Just because no one has ever raised it before in that exact circumstance doesn’t negate the defense.

And I think the SEC knows this and so what it does is it argues that there is case precedent that states that a Fair Notice defense cannot be raised in this exact situation. it cites to the Kik Interactive case which was a case from 2-3 years ago against a crypto company called Kik Interactive. And this is what the SEC says:

  “Indeed,Judge Hellerstein recently evaluated an Upton defense based on facts materially indistinguishable from those alleged by Ripple, and found the defense to fail as a matter of law.”

Uh-oh.  That’s the legal jargon for oh crap.

Lucky for us, I have read all of the Kik Interactive pleadings and this is just not true. In fact, I just pulled it up on Courtlistener to show you.

Right there at entry #26 you can see that in the KIK Interactive case the SEC also filed a Motion to Strike the Defense, called a Motion for Judgement on the Pleadings, here. And if you go down to entry 29 you can see that the Judge denied the motion without prejudice.

Now the Kik Interactive judge eventually did rule against Kik on the issue but it was not “on the pleadings” but later at summary judgment. And that’s where I also think Ripple’s Fair Notice defense will be decided. Prediction: Motion to Strike Denied.

But this Reply Brief by the new SEC attorney on the case does again highlight a problem for Ripple and it’s a problem that the SES has been trying to capitalize on since day one and that is the Kik Interactive case. Kik had an ICO in 2017 and it was sued for the same thing as Ripple by the SEC.

The unfortunate thing was..and I don’t want to disparage anyone, but the Judge was “of an elevated age” shall we say – Judge Hellerstein. And he squarely ruled against Kik – ruling that Kik’s sales of its coins were illegal sales of securities.  And that case was in the exact court where the Ripple case is.  And it’s unfortunate because… like our senators in the beginning, well, I’m not sure Judge Hellerstein understood what was going on with the technology.  Here’s me, reading from the Kik Interactive hearing transcripts in a video I did about the case :

I love referring to myself as a source.

In any case, Judge Hellerstein ruled against Kik Interactive and the SEC is trying to make the Ripple case out to be just like the Kik Interactive case and Ripple is going to have to be very careful about that.

So in a sense there’s bad luck there having to deal with the non-binding precedent.  On the other hand, if you are pulling for Ripple, you can thank your lucky stars that Judge Netburn and Torres are on THIS case.  Funny how the potential fate of an industry can hinge on something as mundane as Judge assignments.

In any case, one more SUPER important thing I want you to understand about the Fair Notice defense.  I think Ripple’s argument that its sales of XRP were not a security are stronger than it’s Fair Notice defense but I think the Fair Notice defense might be more important and here’s why.

The U.S. follows the rule of stare decisis meaning that rulings from upper courts control the lower courts. The Kik Interactive case is from a same-level court so it’s persuasive but not binding.  If the ruling was from an appellate court, a higher level court, the ruling would be binding on the Ripple court.

So, if Ripple wins on the Fair Notice defense it becomes persuasive authority for ANY CRYPTO company the SEC sues from this point forward. If the Fair Notice defense survives and Ripple wins, the SEC is going to have an uphill battle winning any other lawsuit they bring.

But it’s even bigger than that.  Listen to this.  Even if Ripple loses the Fair Notice defense, they can appeal the ruling.  And IF an appellate court determines that Judge Torres was wrong and Ripple did NOT have Fair NOTice… then the SEC is now REALLY in trouble because that ruling is BINDING on every crypto lawsuit that comes along.

For the most  part, the SEC will not be able to bring ANY more crypto lawsuits if that happens AND, the SEC is funded by the fines and such from these lawsuits so … read between the lines.

SO, the Fair Notice defense is the main thing right now that is applying pressure to the SEC.  Pressure is the key. It’s the defense that the SEC is most worried about, it’s the defense that could potentially save the industry from the SEC, and it’s the defense that would lead to the case settling/resolving before a hearing on Summary Judgment.  Pay attention to what happens to it – the other stuff going on is important but for me, THIS is the issue to watch.

Happy Memorial Day. Did you know that most of the US soldiers that died in war were 18-22 years old. Just kids. The older I get the less I like the idea of people like me sending kids to be killed. We should know better- it’s death, not the internet.

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