Another discovery dispute — this time, over the sacrosanct legal principle of attorney-client privilege — has emerged in the SEC v. Ripple Labs lawsuit just a day after a judge ruled to give Ripple access to the U.S. Securities and Exchange Commission’s internal documents on XRP, Bitcoin and Ether.
According to a new legal filing, the SEC is now seeking a conference to ask the court to force Ripple to produce documents and testify regarding legal advice it received on whether “Ripple’s offers and sales of XRP were or would be subject to, and in compliance with, the federal securities laws.”
Normally, the legal advice that attorneys provide to clients is protected from disclosure to third parties, including the government. The attorney-client privilege is so strong in the American legal system that it can exempt incriminating information from being revealed in a criminal proceeding.
But the SEC is saying it needs to know what legal advice Ripple received regarding the status of XRP under U.S. securities laws, as Ripple put that the legal advice at issue in Ripple’s own “fair notice” defense — and thus has “waived” its attorney-client privilege over that information. According to the SEC, Ripple has redacted or outright refused to share at least 657 documents that the SEC felt were relevant to the lawsuit but Ripple claimed reflected privileged and protected “legal advice regarding XRP.”
See related article: Ripple: SEC did not give fair notice that XRP violated law
One of Ripple’s core arguments in its defense is that it did not have, and 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.
See related article: SEC seeks to knock out Ripple defense, says no duty to warn over XRP
“Ripple has put the legal advice it received at issue by asserting, as an affirmative defense, that Ripple ‘reasonably understood’ that the federal securities laws did not apply to its offers and sales of XRP, and thus waived privilege over advice it received on this question,” wrote SEC attorney Jorge Tenreiro in a May 7 letter to the judge that was partially redacted.
According to the SEC, Ripple has refused to provide documents related to the legal advice it has received, citing attorney-client privilege and exemption from disclosure. The SEC says the need to have all the relevant information with respect to Ripple’s defense is “particularly acute” as Ripple had selectively disclosed some of the legal advice it received, while withholding other related information.
“The parties are attempting to quickly conduct depositions of key Ripple personnel and, given its continued assertions of privilege, Ripple will presumably instruct its employees not to answer questions about this advice, just as it did during the SEC’s investigation,” Tenreiro wrote, adding that depositions of Ripple’s employees would take place in 12 days.
“The Court should not permit Ripple and its employees to assert a defense that they had no notice that securities laws applied to their conduct, while Ripple is selectively denying the SEC access to documents and testimony sufficient to allow the SEC to test and rebut this defense,” Tenreiro added.
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.
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. The outcome of the SEC’s lawsuit against Ripple and determination of XRP’s status is being closely watched by the crypto industry and investors for its potentially far-reaching implications for the cryptocurrency industry.
In its amended complaint, the SEC had alleged that Ripple’s lawyers had warned Ripple and Ripple’s co-founder Larsen that “there was some risk that XRP would be considered an ‘investment contract’ (and thus a security) under the federal securities laws depending on various factors.
See related article: Court orders SEC to give Ripple internal documents on XRP, Bitcoin, Ether
“If lawyers told Ripple what the law says and how to comply — based on whatever facts Ripple disclosed to those lawyers — the fairness doctrine entitles the SEC to full discovery on the notice Ripple and its employees actually received,” the SEC wrote.