TRANSCRIPTION OF VIDEO:
Hello and welcome to Legal Briefs crypto edition. Today in the SEC v Ripple case Judge Netburn heard oral argument wherein Ripple requested that the Court force the SEC to turn over all documents related to its internal and external discussions related to Bitcoin and Ethereum being deemed “Not a security” and I listened in for all one and a half hours you so you didn’t have to be bored to death – BUT it was actually super interesting so..I didn’t mind.
As you may know the Court did not allow ANY recording of the hearing under threat of criminal sanctions but, I not only broke the law, I actually snuck a videocamera into the courtroom just for you and here is some video of the SEC and Ripple lawyer going at it.
Two giant jerks who fight for no reason – it’s the perfect trial lawyer analogy.
Welcome back and, before we get into it, as you know this is a legal vlog so I don’t discuss what happened today with the XRP price recently ($1!) or anything related to XRP trading (+45%) this is strictly a serious factual Law Vlog channel (Rocket ship).
And also before we begin remember nothing I say is Legal Advice. If you really want good legal advice on the Ripple case, ask this amazing lawyer:
This is a trick question but big bonus points if you can tell me her name in the comments! She is my new hero in a robe and I’m going to tell you why
Okay, let’s orient ourselves a little in the litigation because the hearing today was about much more than whether the SEC has to produce documents and you have to understand HOW IMPORTANT today’s hearing was. Ripple answered the SEC lawsuit with seven affirmative defenses and the most important one was Ripple’s 4th affirmative defense which isa Fair Notice claim which stems from the US Constitution and is a complete defense to a securities violation and it argues that the Defendant Ripple “lacked fair notice that its conduct was prohibited.”
This affirmative defense was then followed by requests to the SEC from Ripple for any documents from the SEC about the security status of Ether and Bitcoin – any emails, written analysis, transcripts of discussions, communications with 3rd parties. The 4th Affirmative Defense of Fair Notice makes the Ether and Bitcoin documents relevant as to Ripple because the pronouncements by SEC executives that Ether and Bitcoin are not securities could have led Ripple to believe that XRP is not a security also and – there is your Fair Notice defense proved.
So, the SEC does not want provide the documents and also of course wants to get rid of what might be Ripple’s STRONGEST defense so what did it do? The SEC moved to Strike the Fair Notice Defense – remove it from the case entirely.
This is a common legal tactic and if it’s successful it’s a big blow to Ripple.
Keep this in mind because in 5 minutes I’m going to tell you what today had to do with the Affrimative Defense.
And what did we learn from our very first oral ruling on a motion today?
First we heard the Judge very irritated that the hearing was being live-streamed on Youtube. I think she later even warned that the Court deputies were trying to figure out who was doing it and they would be subject to criminal sanctions. It’s good that over 500 people were interested enough to try and get on the call – we actually maxed out the system. And I think it’s a good thing because I get a sense, a feeling now that the Judge feels how important this case is -she’s not treating this case like a run of the mill section 5 case.
The first thing during the hearing that jumped out at me is that the Judge again referred to XRP as “Like other crypto-currencies” Ether and Bitcoin. She has not changed her language – XRP is a currency.
But the second thing that was very odd was that she began with the SEC lawyer – usually you would start with the party filing the motion which would be Ripple– but she launched straight into 5 very pointed questions to the SEC and her VERY FIRST question was to first state that the SEC’s argument as to why it did not have to give the requested documents was all based on case law – she called the SEC out on that right away and it’s true, the SEC cited a lot of case authority especially the Kik Interactive case in which the Judge did NOT allow Kik to get the same type of discovery. And what the Judge said was strong – you might even say brave. She said, reading between the lines of her questions, that although the authority is Persuasive, she does not HAVE to follow it and the SEC better have an independent basis for not providing the documents.
Her very first question pointed out what I now think was a big mistake on the SEC’s part by which I am talking about suing Brad Garlinghouse and Chris Larsen personally. Her first question was: Did any of the cases you cite – were there individuals sued? And the SEC response was an honest “no” and then some awkward silence.
And here’s the thing – the Judge already KNEW that none of the cases had individual defendants. She knew it going in and so she was signalling to the SEC where he mind was already and this was the SEC’s opportunity to change her mind and I think he blew it. Instead of staying on point with his case authority he completely veers OFF-POINT and goes to a talking point that they shouldn’t have provide the documents about Ether and Bitcoin because Ether and Bitcoin had no ICO and XRP did and therefore they are obviously different.
And this is where I fell very confident in the Judge because she saw right through that circular argument. Right away she jumped on it and said “well then, you are just asking me to decide the ENTIRE case then because if I have to decide before discovery has even finished how XRP is different than Bitcoin for example, then I’m in effect making a ruling on the entire case. And she is absolutely right – the whole purpose of discovery is for the parties to get information to PREPARE their case, not to make a unilateral decision that something is or isn’t relevant and then dictate what’s discoverable around those assumptions.
And it was at that point ladies and gents when I knew where things were heading. And it was also at that point I knew that nothing the parties said after, absent something very surprising, was going to change the Judge’s mind on the issue – she already knew HOW she was going to rule at the 15 min. mark when the SEC didn’t zip off a prior case in which individual defendants were involved.
You see, absent intervention or questions from the Judge – hearings are like well orchestrated ballets. The parties move across the floor in orchestrated point and counterpoint. Some more elegant than others. I really think the SEC lawyer lost the beat there at the beginning although he finished relatively strong. Ripple’s lawyer was good – good but he was no Matt Solomon.
The only real shocking dance move was when the Ripple lawyer almost suggested that Jay Clayton was in bed with the Ethereum people. I think he said that Clayton “embraced” Bitcoin and Ether and for a second I thought he was going to take it to the next level and then…he backed off right at the last second.
So, after 90minutes the Judge made an oral ruling on the record – she ruled that the SEC must search for and provide ALL documents related to XRP, Ether, and Bitcoin discussions wherein third parties were involved. I expected that.
The next part of her ruling was a bit of a surprise to me. In the U.S we have a fairly strong deliberation privilege for government work. The deliberative privilege is kind of an off-shoot of executive privilege that you might have heard President Trump raise during the 2 impeachment proceedings. The idea is that if people in the government can’t freely communicate about ideas, plans of action and that sort of thing without being worried about someone using their thoughts and ideas against them later, we inhibit the function of the government.
So I THOUGHT the Judge was going to order that no documents with thought process be produced and she PARTIALLY did that but only Partially.
What she Ordered is that no “Informal” emails, etc. be produced in regard to Ether and Bitcoin. So for example, if an SEC employee sends an email to his work-friend about Hinman’s speech saying that Ether is not a security that is not discoverable. IF there are more formal communications, memos, etc. then those are discoverable.
That was the Order and Ripple got more than I expected. But there are two important things at play – beyond the motion being granted. First, with this Order the SEC is not only going to have to produce many documents but also produce what’s called a Privilege Log of documents they believe are privileged. It’s just a summary but Ripple will be able to see exactly what documents are out there – all of them. It looks kind of like this:
Except it would be all filled in at the end and as you can see, EVEN not having to produce the exact documents, Ripple will still be able to get a feel for what emails, etc. are out there and those can be used to find additional leads for more information or for use at deposition.
IF THERE IS A SMOKING GUN TYPE DOCUMENT OUT THERE – in the next 30 days is when the Sec will look to get out of the litigation – this also conforms with Gensler getting on board. If that is going to happen – look for something before Mid-May.
The SECOND big take away from this hearing is what we discussed at the beginning of this video. Judge Netburn already pretty much knew how she was going to rule on this motion going in. You can bet that Judge Torres already pretty much knows how she is going to rule on the motion to dismiss Ripple’s Fair Notice defense. Judge Netburn is NOT going to Order the SEC to spend hundreds of hours going over tens of thousands of documents relevant only to Ripple’s Fair Notice defense if she knows that the entire defense is going to be thrown out next month. Repeat: I would be shocked that the Judge would order production of all these documents IF the court was going to rule in favor of the SEC next month on its Motion to Dismiss Ripple’s Fair Notice Defense. And its THAT hearing and THAT defense that are crucial to Ripple and this is the first evidence we have that the Judge is NOT going to throw it out.
Could I be wrong? Yes, but remember – I’m never wrong. And when I am, it’s always someone elses fault.
So, yes, Motion granted for the most part, but much more importantly is what it signals for a possible early resolution of the case and for Ripple’s Fair Notice Defense. In. My. Opinion.
Thanks for watching and yes, this was an important victory but as they say “Pride comes before the fall.” Stay humble and stay safe.