2 years ago
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The Southern District of New York US Federal District Court has released the transcript of the widely followed telephone conference of August 31 in the SEC v. Ripple case.
The conference debated the Deliberative Process Privilege (DPP) in the context of Ripple’s motion to compel the SEC to hand over internal documents concerning the agency’s views on digital assets, namely XRP, BTC, and ETH.
A granted motion would be a huge win for Ripple as Judge Sarah Netburn would signal that the defendant’s fair notice defense might have some ground.
Why investors didn’t know XRP would be treated as securities?
As Ripple counsel Matthew Solomon said in the conference, the purpose was to find out whether the SEC acknowledged that market participants did not understand that offers and sales of XRP would be treated as securities either because the SEC itself wasn’t certain or because their communications with market participants made that clear.
This relates to Ripple’s fair notice defense in which the defendants argue that the regulator failed to make it clear that its native digital asset could be construed as an investment contract.
The conference explored analogous court cases, including Kik and Zaslavskiy, and their request for internal SEC deliberations as part of fact discovery.
Judge Sarah Netburn first asked about the SEC’s aiding and abetting claim regarding the complaint against the individual defendants, if Brad Garlinghouse think it relies on objective or subjective foreknowledge that XRP was a security in 2013, to which counsel Matt Solomon replied that it had to be obvious to reasonable people.
If the status of XRP was not obvious to the SEC until filing the lawsuit in December 2020, it could not have been obvious to Mr. Garlinghouse, Ripple’s counsel stated.
Matt Solomon then mentioned the SEC’s use of the deliberative privilege process (DPP) argument to keep its internal documents from being handed over to the defendants. Mr. Solomon argued that the plaintiff went grossly overboard in regard to DPP and should be compelled to hand over those documents as requested by Ripple.
Judge not happy with SEC’s arguments
The Judge moved to attorney Jorge Tenreiro, the SEC’s counsel, and asked his view of the “reckless standard” for the aiding and abetting claim made by the plaintiff.
Mr. Tenreiro first attacked Ripple’s analysis and stated that specific, simple foreknowledge alone is all that counts. “But was Mr. Garlinghouse’s action objectively reasonable?”, the Judge asked.
The SEC answered with a subjective argument – “He could sit before a jury and say he did or didn’t know” – to which the Judge interrupted “But that’s subjective!”.
The Judge asked again and Mr. Tenreiro repeated himself, i.e., not offering an objective interpretation of Garlinghouse’s alleged aiding and abetting of an unregistered securities offering.
Then, the SEC counsel complained that Ripple wants to “collapse everything” into “digital asset law” and look at “everything internally” and “swing the door open” which would be “very damaging”.
Judge ruling right around the corner?
The court ruled it would have the SEC’s internal documents handed over so the Judge could decide whether there was enough ground to grant Ripple’s motion to compel.
The hearing was in late August 2021 and the court has ruled over many other motions afterward and presided over the expert discovery that included the testimony of 16 experts.
The release of the transcript might signal that the Judge’s ruling over Ripple’s motion to compel the SEC to hand over internal deliberations is right around the corner. This motion is a make or break for Ripple’s fair notice defense.
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