The U.S. Securities and Exchange Commission’s motion to strike Ripple’s “lack of due process and fair notice” defense should be denied, according to a new legal filing by Ripple.
The SEC’s motion to strike Ripple’s affirmative defense fails to meet the “demanding” legal standard required, argued the defense attorneys representing Ripple, a San Francisco-based payments technology company. An affirmative defense is one in which the defendant introduces evidence that if proven, mitigates the defendant’s legal liability.
At the heart of the SEC v. Ripple lawsuit is the status of the XRP token and whether transactions involving XRP constitute “investment contracts” and therefore securities subject to registration under Section 5 of the Securities Act of 1933.
The SEC had sought to dismiss one of Ripple’s core arguments that the SEC failed to provide “fair notice” that XRP transactions violated the law or that the SEC would later claim XRP itself to be an investment contract.
“Instead of challenging Ripple’s defense as a matter of pleading, the SEC instead seeks a premature judicial determination of the ultimate merits of Ripple’s defense, asking the Court to credit disputed facts set forth in the supplemental declaration of the SEC’s trial attorney,” asserted Ripple’s attorneys in a 34-page memorandum of law filed on May 13. “This is improper — the Court cannot, as a matter of law, rely on disputed facts proffered by a plaintiff to foreclose a legally cognizable defense.”
Ripple’s attorneys are also seeking to bolster their fair notice defense.
“Ripple’s fair notice defense comes directly from controlling Second Circuit precedent,” Ripple’s attorneys wrote, citing the Upton v. SEC case where the federal appeals court held that the SEC could not apply enforcement action when the defendant did not receive reasonable notice that its conduct was unlawful.
Ripple contends that XRP is a virtual currency and not a security. “Transactions in XRP are recorded on the XRP Ledger, which is decentralized ‘software code’ that originated in 2011-2012, before Ripple was founded,” the attorneys wrote.
“Ripple has never explicitly or implicitly promised profits to any XRP holder; and has no relationship at all, contractual or otherwise, with the vast majority of XRP holders today, nearly all of whom purchased XRP from third parties on the open market,” the attorneys continued. “What limited contracts Ripple did enter into with sophisticated institutional counterparties were not investment contracts, but standard purchase and sale agreements with no promise of efforts by Ripple or future profits.”
“Ripple alleges that a wide variety of people of ‘ordinary intelligence,’ ranging from individual purchasers of XRP, to sophisticated exchanges and broker-dealers, to the SEC’s own commissioners and senior officers, did not know that XRP was an ‘investment contract’ and therefore a ‘security,’ as shown by the statements and conduct of those various actors,” the attorneys added. “Had the law provided sufficient notice, then market makers and exchanges that executed transactions in XRP, not to mention the numerous individuals who purchased and used XRP, would have organized their affairs so as to comply with the requirements of the federal securities laws and regulations.”
Ripple further asserted that its settlement with the U.S. Treasury’s Financial Crimes Enforcement Network (FinCEN) and the Department of Justice in 2015 as well as the SEC’s “Guidance” did not provide fair notice. SEC-issued reports, such as the report on The DAO and enforcement actions from 2017 onward concerned initial coin offerings (ICOs), which Ripple did not hold, the defense attorneys argued. “There is a genuine dispute as to whether a person of ordinary intelligence would have concluded that the SEC’s actions suggested that XRP was — or was not — a security, given the SEC’s focus on ICOs.”
See related article: SEC seeks to knock out Ripple defense, says no duty to warn over XRP
Discovery disputes continue over Ripple’s legal advice
The SEC and Ripple are also currently fighting in court over whether the SEC can obtain access to confidential legal advice — normally privileged attorney-client communications protected from disclosure — that lawyers gave to Ripple as to whether its XRP sales would be subject to U.S. securities laws.
“Ripple has made no disclosures of privileged communications within this litigation; all of the relevant disclosures occurred years before the litigation began,” Ripple’s attorneys wrote in a letter dated May 14 to U.S. Magistrate Judge Sarah Netburn. “Controlling Second Circuit precedent holds that the fairness doctrine does not apply to disclosures made prior to litigation.”
Ripple’s legal defense team — which includes former SEC chair Mary Jo White — also denied that Ripple gave up its rights to confidentiality over legal advice about the XRP by asserting it as its defense and putting the attorney-client communications at issue.
The defense attorneys added: “The SEC repeatedly and misleadingly attempts to reframe Ripple’s affirmative defense as whether Ripple ‘reasonably understood’ the federal securities laws to apply to sales of XRP… But Ripple’s Answer does not assert that Ripple ‘reasonably understood’ the federal securities laws not to apply to Ripple’s sales of XRP. It asserts that the SEC failed to provide ‘fair notice regarding [its] interpretation of the law.’”
The attorneys pointed out that the context that the phrase “reasonably understood” was used in Ripple’s answer to the SEC’s complaint was in describing a 2018 speech by then-SEC Director of Corporate Finance, William Hinman. “The point is that market participants and industry players (of which Ripple is one) paid attention to what a senior agency official was saying (as members of the public certainly do) in forming their expectations about whether certain conduct would subject them to penalties,” the attorney contended. “Whether Ripple subjectively believed that its actions were lawful or unlawful does not matter.”
See related article: SEC demands Ripple reveal legal advice Ripple received on XRP
SEC’s use of formal requests to foreign regulators
The SEC and Ripple have also been battling over the SEC’s use of Memoranda of Understanding (MOU) to seek information on Ripple and XRP transactions outside the U.S.
Ripple’s attorneys have called the SEC’s use of such formal requests to foreign regulators after the start of litigation “unfair,” an “end-run around the discovery rules” and have asked the Court to stop the SEC from using such “improper” tactics. The SEC has defended its actions by saying that such requests “are particularly important” as they will provide the SEC with information that is not obtainable from Ripple.
The judge has yet to make a decision on the issue.
See related article: Ripple demands SEC to stop obtaining info on XRP dealings abroad
XRP, currently the fifth-largest cryptocurrency with a market value of about US$70 billion, is trading at US$1.52 as of publishing time according to CoinGecko data. XRP started the year at US$0.22 and reached a high of US$1.84 this year on April 15.
