Ripple faces new challenge from SEC over fair notice on XRP

The SEC has today filed a letter of supplemental authority in further support of its motion to strike the fair notice defense.

Addressed to Judge Analisa Torres, the plaintiff brings to the table the SEC v. Keener case in which the court concluded that the defendant unlawfully failed to register as a securities “dealer”.

“In doing so, Keener rejected the same “fair notice” argument Ripple asserts in this case and that the SEC has moved to strike, holding that the defense fails as a matter of law”, said the letter.

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According to court documents, the Keener defendant contented he had “no fair notice that his conduct could be unlawful” because he lacked notice his conduct could make him a “dealer” as defined in the Exchange Act.

The defendant’s arguments included that:
1) “the statutory language is not transparent, which is why the SEC issued so many interpretations over the years”;

2) the SEC’s “position in this litigation directly contradicts its prior guidance”;

3) whether the defendant had fair notice of the new way in which the Exchange Act definition of “dealer” would be applied is a factual question that must be decided by the jury.

The ruling by a Southern District of Florida court on January 21, 2022, rejected the fair notice defense as a matter of law and awarded the SEC summary judgment.

“Defendant had notice that his conduct could be unlawful based upon “the express language of the Exchange Act, decisions from this circuit applying the definition of “dealer” and SEC guidance itself”.

The SEC filed the letter because it considers the case as being analogous to the fair notice argument on the SEC v. Ripple lawsuit, thus providing additional authority for the SEC’s motion to strike Ripple’s fourth affirmative defense.

The defendants are reportedly invested in their fourth affirmative defense, which argues the SEC failed to provide fair notice that its conduct could be deemed as unregistered sales of securities.

Last year, attorney Jeremy Hogan said a Ripple win on that defense could “save the industry from the SEC” as it would serve as precedent, meaning that the SEC failed to provide fair notice to the whole digital asset ecosystem in the past.

Earlier this month, the SEC filed another letter of supplemental authority in support of its motion to strike. The plaintiff has brought to the court a 20 December 2021 ruling on a Northern District of Illinois court denying the defendant’s motion to dismiss the SEC v. Fife.

According to the letter, the Fife defendants contended they did not have fair notice of the SEC’s novel interpretation of the statutory term “dealer”.

The court stood by the SEC as it agreed that for purposes of assessing fair notice and due process, “the standard against which the SEC seeks to measure defendants’ conduct is the statute itself, the language of which defendants and all others even arguably involved in securities transactions plainly have had notice.”

The SEC is looking to make the same argument in the SEC v. Ripple: “It is for the courts – not the parties – to determine whether particular conduct falls within the scope of the statute.”

“Indeed, the court rejected the defendants’ fair notice defense at the motion to dismiss stage despite acknowledging that lack of “binding authority” constructing the term “dealer”. In Ripple’s case, binding authority constructing the term “investment contract” has existed since 1946.”

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In its letter, Ripple countered that the Fife case does not support the SEC’s arguments. “The question before this Court arises in a completely different procedural posture: whether Ripple’s Answer plausibly sets forth a cognizable legal theory for its affirmative defense, such that it should be permitted to develop evidence and present the defense on a more complete record.

Attorney Hogan had said the same on Twitter: “It was in a very different stage of litigation and the standard is completely different than the SEC v. Ripple case”. In the “Fife” case, the Defendant tried to argue “Fair Notice” in order to dismiss the lawsuit entirely (and failed) because the burden is very high on a party moving to strike a pleading. Fife can still raise it as an affirmative defense later – and I expect they will.

“In the Ripple case, it’s the SEC that is trying to strike the affirmative defense of Fair Notice and it has the high burden to meet. The general idea in modern courts is that the decision should be made after looking at the evidence, unless there’s no “plausible” way of winning”, he explained.