Here's how two memos from 2012 can turn the tide in the landmark crypto case

Ripple’s legal battle with the United States Securities and Exchange Commission has recently seen new developments which, according to s...


Ripple’s legal battle with the United States Securities and Exchange Commission has recently seen new developments which, according to some observers, could presage an imminent resolution of this massively consequential affair. February 17 marks the deadline for Ripple to unseal a series of documents from 2012, the contents of which are likely to influence court and public opinions on one side or the other. In another twist, the court’s decision to treat some of the SEC’s documents as open to discovery could set a groundbreaking precedent for similar cases involving US executive agencies. Here’s where things stand heading into the next round of the showdown.

What’s at stake

The SEC lawsuit against Ripple Labs Inc., filed on December 23, 2020, alleges that the company raised more than $1.3 billion by selling the XRP token without registering it as a security, which the agency considers as such. Ripple’s argument is that XRP is a tool that facilitates international payments rather than an unregistered investment product and that the agency’s jurisdiction does not extend to the token and its sales.

This is not the first legal action taken against a digital asset issuer by the securities regulator. However, the vast majority of these cases end in settlement instead of going to trial. In this scenario, individual crypto firms give in to SEC demands and pay penalties to be fired. The Regulator’s case never reaches the stage where it can be considered by a judge or jury. No precedent for similar cases in the future is set.

Unlike many others, Ripple chose to go all the way and get into a legal fight. If the SEC gets a W, the court precedent will bolster the agency’s claim to regulate much of the crypto market using “tried and tested” securities laws. If Ripple wins, the need for a more nuanced regulatory regime tailored to different types of digital assets will become more evident than ever. It goes without saying that the regulatory ambitions of the SEC would suffer a major blow if this last scenario were to materialize.

While Ripple as a company and the vocal online community of supporters of its token, known as the XRP Army, have been a divisive presence in the crypto space, resolving the lawsuit will affect the whole of the US digital asset industry.

legal notes 2012

One of the pillars of Ripple’s defense is that it simply did not know that its XRP token could be classified as a security. The SEC, the argument goes, should have informed the company of its intentions before taking the case to court. By failing to do so, the agency denied Ripple what is called a fair notice.

This powerful argument, however, could fail if it turns out that Ripple knew that there was a possibility of the SEC challenging the status of the token. Peter Vogel, attorney and member of the Blockchain Working Group at law firm Foley & Lardner, explained to Cointelegraph:

“US District Judge Analisa Torres has ruled that by February 17, Ripple should release sealed 2012 legal memos from Ripple attorneys advising Ripple before launching XRP. The SEC claims that Ripple was informed in 2012 that XRP would be considered a security under federal law, so Ripple was well aware of the risk of the SEC taking legal action. Ripple claims that the 2012 legal notices only related to proprietary internal strategies.

If the memos clearly indicate no violation of federal law, Ripple’s argument will receive a huge boost. However, evidence suggesting that firm executives chose to ignore relevant concerns from their lawyers prior to XRP’s launch could significantly deflate Ripple’s fair notice argument.

District Judge Analisa Torres. Source: Columbia Law School

The company, however, saw the speech by William Hinman, then Director of the SEC’s Corporate Finance Division, at the Yahoo Finance All Markets Summit in June 2018, as an advisory to market participants on what the commission considers and does not consider a security . The regulator argues that those remarks reflected Hinman’s personal position rather than that of the agency.

In a cliffhanger, Judge Torres ordered the SEC to unseal email communications and staff memos related to Hinman’s speech — an order the commission disputes. If the order stands, it could change how executive agencies exercise a principle known as deliberative privilege.

SEC Privilege Verification

In common law systems, deliberative process privilege is a principle that protects information from public disclosure that shows the process by which an executive body made a certain decision or policy. In this case, the principle protects, for example, internal documents that outline the SEC’s thinking on how to categorize digital assets from normal discovery in civil litigation and Freedom of Information Act requests.

But because the SEC argued that the Hinman remarks in question reflected his private opinion, the deliberative privilege does not extend to internal SEC documents related to that speech, so those recordings are fair game.

Amina Hassan, a litigation partner at the law firm Hughes Hubbard & Reed, thinks the fight over the scope of the commission’s deliberative privilege is even more interesting than what’s inside the 2012 memos. Hassan commented :

“If the court’s decision stands, it could have a far-reaching impact, opening similar types of SEC and other agency documents to discovery. While any litigation over the discovery of agency ratings is necessarily related fact-based and resolved on a case-by-case basis, the decision provides litigants with a useful hook to request similar documents from the government.

In other words, the precedent could open the door for crypto firms to fight the SEC and other executive agencies in court in the future to demand the kind of information that was previously out of reach. Hassan added that Justice Torres’ ruling is also likely to cause agencies to reconsider “how they deal with public speeches by their officials, which typically contain standard disclaimers that they only express the opinions of the civil servant, not those of the agency”.

How does this end?

The fact that Ripple chose to engage in court rather than seek a settlement right away does not rule out the possibility of a settlement at some point in the process. Legal experts who spoke to Cointelegraph about the matter believe a settlement is still on the table. Vogel commented:

“Given that approximately 95% of all lawsuits settle before trial, it seems likely that we will never have a jury trial, but the interpretation of these legal memoranda from 2012 could be a factor in settling the case. current SEC lawsuit.”

Hassan said that “it is difficult to say whether the case is close to being resolved as the discovery and pleading disputes continue. But the stakes are very high for both sides, so we can’t rule out a settlement.

Even if Ripple’s side chooses to settle without a trial at some point in the process, the litigation has already demonstrated that a well-resourced crypto company can cause serious problems for the SEC in an open fight.