SEC vs. Ripple: The SEC’s Case FIZZZLES!

SEC vs. Ripple: Discovery Hype
September 6, 2021
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I received a signal … I received a signal that there is some crazy and confusing going on in the SEC v. Ripple case. And here I am.  Welcome to Legal Briefs.

Welcome back.  For the record I am the Michael Keaton  – definitely not the George Clooney – and wanna be but not cool enough to be the Christian Bale –  Batman. 

So let’s get to it and take look at what has been going on this last week or so – and see if we can make heads or tails out of some very interesting and maybe even exciting revelations in the Ripple case.

We are going to start with a wide angle lens and then zoom in today. First, we’ll take a peek at Chairman Gensler’s testimony – or should I say “rehearsed script recital” –  before Congress. Next – and I hate to use bombshell because it’s clickbaity but well- here’s the response from the Defendant himself to the post that we’re talking about on Twitter:

“One learning I’ll take from this experience: never bet against the tenacity of Twitter sleuths”

Ain’t that the truth and we’ll see what he’s talking about, and then we’ll look at a Tweet from journalist Gasparino – a very interesting Tweet which I think might give us some insight on an important legal issue and FINALLy we will look at the important parts of the last two IMPORTANT pleadings in the case.  Give me 15 minutes, just 15 mins.  and YOU TOO will know the most important things of the last week or two for XRP.  And boy was there some important stuff happening.

Okay, let’s start with SEC Chair Gensler testifying in front of Congress a couple days ago.  What did we learn?  Well, Gensler’s testimony started off with some hard, grilling questions from Senator Elizabeth Warren and here is the video of that:

Large black SUVs will be pulling up to take me away any minute now.

In any case, the most interesting testimony was elicited by Senator Toomey who had obviously  looked at stable coins – crypto which is pegged to the dollar and therefore doesn’t appreciate in value – and looking at US securities law he thought obviously since the value doesn’t increase there can be no basis for a purchaser to think the value would increase and so certainly stable coins can’t be securities – that’s impossible.  And so having found a coin that couldn’t POSSIBLY be a security he asked Chair Gensler about it and Chair Gensler… would not admit that a stable coin is not a security and so there was this interaction:

“I see the red light.”  That was the best part of it all – he wanted that line of questioning to STOP.

And  there you can see that Senator Toomey is having the same frustration getting a straight answer from the SEC and that’s the same frustration Ripple had  in 2019 and that now Coinbase is experiencing.

So,  we learned from the hearing that the SEC is not going to budge an inch on the “regulation by enforcement” model and will continue to sue companies and people instead of providing any form of guidance. Because of course as Chair Gensler said last month:

So that is Chair Gensler 2021. BUT let’s take a listen to Professor Gensler in 2018 thanks to Leonidas on Twitter:

And Wow. What has changed in the last 3 years? And for those of you wondering if that can get into evidence and in front of the judge, yes, there’s a couple different ways that clip can be authenticated and moved into evidence.   And yes it is OF COURSE relevant to Ripple’s Fair Notice Defense.  And yes, it is just one crypto professor’s opinion, which is what the SEC will say, but… it just happens to be the professor who is now the CHAIR OF THE SEC.  I don’t know what else to say – You CANNOT make this up.

And that, my friends, is why Brad Garlinghouse Loves Twitter:

And speaking of Twitter, the Digital Asset investor’s research caught the eye of Fox Business journalist Charles Gasparino who has started digging around a little on the regulation of crypto and specifically as to the lawsuit against Ripple, and this Tweet from him caught my attention:

“SEC Enforcement sources say that the logic of the agency’s case versus Ripple is that the company’s infrastructure is STILL being built out to so XRP – the token which was used to finance the thing – is considered a security while Ethereum has been totally built out for years.”

Now, I’m not a technical guy but… even I can Google stuff and I know what happened recently with the Ethereum network  and this is what you see right on the Ethereum.org website:

Talking about the Ethereum 2.0 Upgrade: “Eth2 is a set of upgrades that improve the scalability, security, and sustainability of Ethereum.”

So…the upgrade just happened – sounds like the Ethereum network  is not “totally built out” after all.

But putting aside the factual argument for a moment and assuming that Gasparino’s SEC source is accurate, and it does ring true to me, if the SEC truly is going to try and make an argument that the difference between XRP and Ether is that the Ripple ledger is not fully built out – that is a major shift in SEC strategy and major admission of a defeat for the SEC.

I say that because remember up to this point the SEC has almost desperately been trying to avoid making that comparison.  Ever since the April 6 hearing, the judge has assumed that part of the case was going to be comparing Ether, as a non-security, to XRP. And the SEC has gone so far as to backtrack on Hinman’s and the SEC’s guidance as to Ether not being a security, helping Ripple with its Fair Notice defense, in order to avoid this comparison.

We know this comparison wasn’t part of the SEC’s gameplan because we’ve now seen the SEC’s interrogatory responses where it was supposed to lay out its technical case and “Not fully built out” was not mentioned anywhere – the technical argument for the SEC was SUPPOSED to only be that the XRP ledger was CENTRALIZED.  Or, as the SEC says in its formal responses under oath in response to interrogatory number 4:

“the Commission avers that certain critical aspects of the XRP ledger were centralized to Ripple between 2012 and 2020, including through Ripple’s control over several aspects of the XRP Ledger, such as the ledger’s maintenance, development, governance, functionality, default trusted nodes list, and consensus mechanism.”

And that was supposed to be the entirety of SEC’s technical argument – that the ledger was not decentralized.

So assuming Mr. Gasparino’s source is accurate – we are now seeing the SEC admitting that what it has tried to avoid for most of this litigation is GOING TO HAPPEN – that there will be a comparison between the Ethereum ledger and the XRP ledger.  And that is not a place I’d want to be if I was representing the SEC  because, and again, I’m not a technical person but even I know that the XRP ledger was made, basically built out in 2013 and has been tweaked and made better since. And the Ethereum ledger was built out in 2015 and has …also been tweaked and made better since.  Meaning, there’s NO SIGNIFICANT DIFFERENCE.  So, good luck to the SEC’s experts in coming up with that argument.

AND finally, zooming in on our pending motions, I want to talk with you about the big one and that is Ripple’s motion to compel better responses to its Interrogatories and what we see from them.  THAT is the motion to look at out of all the recent motions we’ve seen, it’s the most important, and it is good.

Interrogatories are simply formal written questions BUT they are super important because they are submitted under oath – and therefore the answers are admissible to the Court. And in this case Ripple filed a motion to Compel better answers on August 31, the SEC responded on September 8 and now we have Ripples Reply Brief dated September 15, 2021. And just to get this out of the way, yes I think that Ripple’s motion will in large part be granted.  But that’s not really the most important thing going on here.

Because really  Interrogatories and also Requests for Admissions are tools with which to wittle your opponent’s case down.  It’s not as exciting as finding a video of Chairman Gensler saying Ripple had no clarity but it’s just as important.

Under the Howey test of whether something is a security you have 2 important components, an “investment contract” and a “common enterprise.”

Of course the easiest and best way for the SEC to prove an “investment contract” is for it to show the judge a contract between Ripple and a group of buyers and the SEC left this option open in its Amended Complaint and so Ripple attacked that option in its Interrogatory #2 which reads as follows:

Interrogatory #2:  “Specify the terms of Defendants contracts (if any) that the SEC contends created an expectation of profits.”

Now, the SEC didn’t want to respond that there’s nothing written in any contract between XRP holders and Ripple so instead it responded by referring to statements by Ripple outside of any contracts and by referring to Ripple’s sales contracts in general.  In other words, it didn’t respond to the question directly because it wanted to leave open the possibility of arguing that an actual written contract existed which consisted of an investment contract.

And that is not proper under FRCP Rule 33. And his is what Ripple thinks about the SEC’s failure to respond. Listen to this:

“The SEC refuses to answer Interrogatory No. 2 because, Defendants suspect, a truthful, sworn answer would reveal that no contractual provisions actually bear the weight the SEC intends to place on them. The same is true regarding identification of the “common enterprise” in which XRP buyers allegedly invested (Ripple Interrogatory No. 17), and whether Ripple’s efforts were necessary for XRP purchasers to receive profits (Ripple Interrogatory No. 11), among several others.”

And, after reviewing SEC’s answers to the questions, I tend to agree.  The SEC is evidently having a problem properly laying out its case.  It can’t point to an investment contract and instead is going to rely on statements and other murky half-promises made by Ripple.  For example, the SEC is relying on a statement by Ripple that it would be a “good steward” of XRP to mean that there was an investment contract in place between Ripple and you – the XRP holder. That type of thing.

What is becoming clearer is that the SEC can’t articulate a solid “investment contract” argument and is even struggling with pointing out the “common enterprise” between Ripple and purchasers. And finally the SEC can’t really say why or how Ripple’s efforts affected the price of XRP.

And so this motion to compel is really Ripple nibbling away at the SEC’s ability to argue these Key AND VITAL issues other than through innuendo and suggestion.

This is good lawyering and its not glamorous but its very important  and I think the judge will force the SEC to lock itself into its written positions on this and THAT will then be something Ripple can point to at summary judgment.

And if that happens,  and I think it will, the SEC’s case will be getting murkier and murkier.  If it was a murder case, it would all be circumstantial evidence and although you can certainly win a case on circumstantial evidence , it surely is a tough road to hoe.

This case is really high drama – I love this stuff-  and watching all these videos from the XRP people on Twitter and YouTube reminds me of a saying from Sean O’casey: “All the world’s a stage, and most of us are desperately unrehearsed.”  Thanks for watching.

Jeremy Hogan
Jeremy Hogan
Attorney Jeremy Hogan is a partner at Hogan & Hogan.