Ahead of a discovery hearing in the SEC v. Ripple lawsuit tomorrow, Ripple Labs, its CEO Brad Garlinghouse and executive chairman Chris Larsen have challenged the U.S. Securities and Exchange Commission’s responses on its use of formal agreements with foreign regulators, and are asking a judge to compel the SEC to produce relevant internal documents on Bitcoin, Ether and XRP. 

In a joint letter to U.S. Magistrate Judge Sarah Netburn on April 28, attorneys for the defendants Ripple, Garlinghouse and Larsen disputed the SEC’s assertions that its requests to foreign regulators for assistance were “merely ‘voluntary’ and not ‘compulsory’” and asked the court to stop the SEC from using requests to foreign regulators to seek information on Ripple and XRP.

Is the SEC’s use of MOUs proper? 

“The SEC should not be permitted to act in secret, leveraging the cooperation of foreign regulators to force foreign non-parties to comply with burdensome and extensive document requests,” wrote Ripple’s attorneys, in their opposition to the SEC’s letter of April 23.

“The SEC’s efforts represent an end-run around the discovery rules, allowing it to conduct discovery beyond the Court’s purview and upsetting the level playing field that the Federal Rules strive to create,” the attorneys wrote. “Due to the breadth of such requests, and the involvement of foreign regulators, Defendants are also concerned about chilling Ripple’s business activities. Whether or not that is the intent, that is the real world consequence. These tactics are improper and should not be condoned.”

See related article: SEC sought info on Ripple and XRP from 20 foreign entities, including trading platforms

The defense attorneys also took issue with the SEC’s allegation that its use of Memoranda of Understanding (MOU) requests to foreign regulators was “particularly important,” claiming the defendants had refused to provide information. 

“The SEC’s implication that Defendants have forced them to resort to MOU requests because of their non-compliance with the SEC’s administrative subpoenas and RFPs is simply false,” the defense attorneys wrote, adding that the “suggestion is belied by the timing of the SEC’s MOU requests.”

“The SEC cannot credibly claim that it issued RFPs to Defendants, waited for Defendants to respond and produce documents, reviewed those responses and productions, learned that Defendants did not produce the documents sought, and only then issued MOU requests to foreign authorities as a fallback measure,” the attorneys wrote. “The SEC’s MOU requests to UK authorities appear to have issued on February 2, 2021, just eight days after it issued its first RFPs in this litigation.”

Ripple’s attorneys say the SEC still has not provided them — with the exception of documents from the United Kingdom’s Financial Conduct Authority — with a list of foreign regulators and entities to whom it is seeking discovery via MOU requests or the SEC’s communications with foreign regulators in the six weeks since the meet and confer process began. 

“Defendants filed their letter-motion only after the SEC made clear that it would not cease using MOU requests or even share its requests and related communications with Defendants,” the attorneys wrote.

The attorneys also expressed that the defendants were “mystified” by the SEC’s claim that it had informed them of its intent to use requests for assistance at the start of discovery, given that the Civil Case Management Plan and Scheduling Order had no mention of foreign discovery. 

See related article: Ripple accuses SEC of ‘intimidation tactic’ in seeking XRP info overseas

The letter to Judge Netburn is the latest in a series of legal filings this month over discovery in the SEC v. Ripple lawsuit, with each side trying to obtain information and limit what must be shared with the opposing party.

Last December, the SEC filed a lawsuit against Ripple alleging that its sale of XRP was an unregistered securities offering worth over US$1.38 billion. The SEC also named Ripple’s executive chairman Chris Larsen and CEO Brad Garlinghouse as co-defendants for allegedly aiding and abetting Ripple’s violations and making US$600 million in personal profits from their unregistered sales of XRP. 

The price of XRP, which was the third-largest largest cryptocurrency in the world by market value prior to the SEC’s enforcement action against Ripple, plummeted by more than 60% following the SEC’s lawsuit and subsequent suspension of XRP trading on U.S. cryptocurrency exchanges. XRP has remained popular in parts of Asia, however, and is now ranked fourth, with a total market value of US$64 billion. Ripple has also been pushing ahead to expand its payments business, including the new and growing area of serving central bank digital currencies. XRP is currently trading at US$$1.40 as of publishing time, an increase of over 500% since the start of the year. 

At the heart of the lawsuit is whether transactions involving XRP constitute “investment contracts” and therefore securities subject to registration under Section 5 of the Securities Act of 1933. 

SEC seeks to block Ripple from accessing internal documents

In a separate joint letter to Judge Netburn on the same day, the attorneys for Ripple, Garlinghouse and Larsen have asked the judge to order the SEC to provide or log internal documents — with the exception of informal emails between SEC staff — concerning Bitcoin, Ether and XRP following a letter motion filed by the SEC on April 21 seeking to deny Ripple’s requests for internal SEC communications.

Judge Netburn had, at an earlier discovery conference on April 6, ruled to grant “in large part” Ripple’s motion to compel the SEC to produce documents reflecting SEC’s prior statements and communications with third parties as well as internal documents discussing whether XRP, Bitcoin or Ether are considered as securities.

In her ruling, Netburn excluded internal SEC staff-to-staff email communications from discovery, but said that “to the extent internally there are memos being sent up to higher-ranking officials expressing the agency’s interpretation or views on these matters, those types of documents may be discoverable.”

See related article: Ripple wins access to SEC’s internal documents on Bitcoin and Ether

“Obviously to the extent in producing these documents there are documents that are privileged, the SEC certainly has the right and obligation to identify privileged documents and produce the privilege log and the parties are ordered to meet and confer on that privilege assertion and if you can’t reach a resolution you can obviously bring that dispute to me,” Netburn said. 

The SEC is arguing that Ripple’s discovery demands are improper and internal SEC documents are irrelevant. 

“Defendants’ approach is part of a pattern of gamesmanship with respect to discovery,” the SEC attorney Durgan Bliss wrote in a letter filed on April 21. “It has become evident through the meet-and-confer process that Defendants are seeking to ignore the limitations of this Court’s Order and to mire the SEC in indefinite discovery disputes and, if successful, document review.” 

Ripple’s attorneys, on the other hand, argue that the documents they’ve requested are clearly within the scope of the court’s ruling. “The Court’s directive to meet and confer about internal minutes and memos and its statement that the SEC had an ‘obligation’ to produce a privilege log were not invitations for the SEC to tell Defendants that it will produce nothing, log nothing, and reargue its opposition to any internal document discovery at all. Yet, that is exactly what the SEC has done,” they wrote.

The SEC’s internal documents may contain information about market conditions and uncertainty or dissent within the SEC about the regulatory status of cryptocurrencies, which is relevant to the defendants’ fair notice defenses and undermines the SEC’s allegations of recklessness against Garlinghouse and Larsen, according to Ripple’s attorneys.

“Despite the SEC’s refusal to complete the meet-and-confer process, that process yielded important information: the agency has responsive internal documents,” Ripple’s attorneys wrote. “Because the information Defendants seek is likely to lead to discovery of other relevant, admissible evidence, Defendants will suffer prejudice if the SEC does not produce sufficiently ahead of the close of discovery on July 2, 2021, to enable Defendants to follow up with third parties.”

A discovery conference with Judge Netburn is scheduled for April 30.

See related article: SEC seeks to knock out Ripple defense, says no duty to warn over XRP