Are 73 SEC actions against crypto enough warning to Ripple about XRP?

Striking at the heart of Ripple’s defense, the U.S. Securities and Exchange Commission is citing its history of more than 70 enforcement actions against other crypto companies in asking a court to dismiss Ripple’s argument that it lacked “due process and fair notice” that XRP transactions violated the law, according to a new legal filing.

Ripple’s attorneys asserted in a court filing earlier this month that there was legal precedent for Ripple’s fair notice defense, citing the Upton v. SEC case where a federal appeals court held that the SEC could not take enforcement action when the defendant did not receive reasonable notice that its conduct was unlawful. 

But the SEC is now arguing that Ripple’s fair notice defense “rests exclusively on a single decision, Upton v. SEC, an outlier case arising under very different circumstances.”

“Ripple hangs its hat entirely on Upton, even though Upton has never been applied to negate violations in a SEC district court action,” wrote SEC attorney Benjamin Hanauer. “Nor has any court allowed an Upton defense to defeat SEC charges of statutory violations, such as Section 5, as opposed to the SEC’s novel interpretation of its own rules, as was the case in Upton.”

‘Both Ripple and the public were on notice’

In the SEC’s May 27 reply memorandum in support of its motion to strike Ripple’s defense, Hanauer contended that “Ripple cannot validly claim to lack notice that its offers and sales of its digital asset could involve a security.” 

“Prior to suing Ripple, the SEC had already brought more than seventy cases that subjected other digital assets to the application of the federal securities laws,” Hanauer wrote. 

The SEC filed its first cryptocurrency-related enforcement action in July 2013, and Ripple was the 74th out of the 75 crypto cases that the agency filed through year-end 2020, according to the SEC. Of the 75 SEC digital asset cases filed between 2013 and 2020, 52 of the actions alleged an unregistered securities offering in violation of Section 5.

“By the time the SEC sued Ripple, both Ripple and the public were on notice that the SEC: (a) routinely charged securities laws violations involving novel and previously unregulated investment products, and (b) had already filed a large number of actions involving digital assets,” Hanauer wrote.

Hanauer added that allowing Ripple to pursue the defense would “prejudice the SEC well beyond this case, as future defendants could invoke the defense — and shift the focus away from their own misconduct — whenever the SEC brings charges involving nontraditional investment products. The Court should avoid creating precedent with such far-reaching implications.”

Ripple’s use of its fair notice defense would burden the SEC in discovery, Hanauer added. “Ripple relies on the defense to justify its discovery into the internal deliberations and conduct of the SEC and its staff. This discovery has required the expenditure of significant SEC resources, and is even more burdensome and disproportionate given the strict liability charges against Ripple.” 

In a filing on the same day, the SEC notified the court that SEC counsel Dugan Bliss who has been involved in the litigation was leaving the SEC’s employ.

See related article: Court orders SEC to give Ripple internal documents on XRP, Bitcoin, Ether

Beyond prejudicing the SEC, Hanauer wrote, allowing Ripple to present its defense at trial would “heavily (and needlessly) burden” the court and jury and lengthen the trial. 

Unsurprisingly, Ripple’s attorneys disagree. “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. This is improper.”

Discovery disputes continue

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 for its potentially far-reaching implications for the cryptocurrency industry.

The lawsuit is currently in its discovery phase, with the SEC and Ripple battling over the information to be shared with the other side.

Earlier this month, U.S. Magistrate Judge Sarah Netburn denied Ripple’s request for the SEC to stop using “requests for assistance” to foreign regulators to obtain information on Ripple and XRP transactions overseas. However, she ordered the SEC to produce all documents obtained through the use of the formal requests. 

In a separate ruling, Netburn ordered the SEC to provide to Ripple internal agency memoranda or formal position papers discussing Bitcoin, Ethereum and XRP.

Netburn has yet to rule on 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. 

This week, the SEC filed a request seeking six additional depositions and records on five more custodians, including former Ripple employees and Christian Gil, a co-founder of crypto trading firm and liquidity provider GSR. The SEC also wants Ripple to produce information on its XRP transactions following the filing of the SEC’s complaint against the company in December as well as on its lobbying efforts.

According to the SEC’s letter, the agency is planning to seek a short extension of the current July 2 deadline for fact discovery, given “the amount of other discovery still outstanding.”

See related article: SEC and XRP holders face off anew over SEC’s lawsuit against Ripple