Two memos from 2012 could turn the tide for Ripple in the SEC lawsuit

Ripple’s lawsuit with the US Securities and Exchange Commission (SEC) recently saw new developments. February 17 marks the deadline for Ripple to unseal a series of documents in 2012 whose contents have influenced opinion of both the courts and the public.

Elsewhere, the court’s decision to open and expose certain SEC documents could set a precedent for similar cases involving US law enforcement agencies. This is considered a pivotal moment in the upcoming battle between the SEC and Ripple.

Danger lurks in the market

The SEC lawsuit against Ripple Labs Inc., filed on December 23, 2020, alleges that the company raised $1.3 billion by selling XRP tokens as unregistered securities. As Ripple argues, XRP is more of an instrument that facilitates international payments than an unregistered investment product, and the agency’s jurisdiction does not include the token’s scale and sales.

This isn’t the first lawsuit the SEC has filed against the digital asset issuer. However, most cases end in a settlement rather than a trial. In this case, the crypto companies have followed the SEC’s request and paid the unignorable fines.

Unlike many others, Ripple chose to fight to the end and engage in a legal battle. If the SEC wins, the case law would back up the agency’s claim to regulate much of the cryptocurrency market by applying “tested” securities laws. If Ripple prevails, it will prove that the market needs a more proper regulatory regime for digital assets. Ambition to apply SEC regulations to the market will die if Ripple wins.

Although both the company behind Ripple and the XRP Army, the token’s advocates, had mixed opinions about the lawsuit, its outcome will affect the entire US digital asset industry.

Legal memorandum of 2012

One of Ripple’s main arguments is that it simply doesn’t know that its XRP token can be classified as a security. According to the argument, the SEC should inform the company of its intentions before taking the matter to court.

However, this argument could be “disproved” if Ripple knew that it is possible that the SEC would make a decision on the token’s status at the time of the launch. Peter Vogel, advisor and member of the blockchain task force at the law firm Foley & Lardner explains:

“District Judge Analisa Torres has ruled that Ripple has until February 17 to release the sealed 2012 legal memos of attorneys advising Ripple before XRP is implemented. The SEC stated that in 2012 Ripple was advised that XRP would be treated as a security under federal law, so Ripple is aware of the risk that the SEC will sue. Meanwhile, Ripple claims that the 2012 legal memos only concern proprietary internal strategies.”

If the memos show that Ripple didn’t violate federal laws, Ripple’s argument would bode well for the lawsuit. However, there is evidence that company leaders have chosen to ignore the concerns of relevant lawyers before implementing XRP, which could undermine the credibility of public announcements that rival Ripple’s.

District Judge Analisa Torres | Source: Columbia Law School

Nevertheless, the company checks the contribution specified by William Hinman, then director of the Treasury Division of the SEC. At the Yahoo Finance Summit in June 2018, he revealed to market participants how the committee would rate an asset class as a security. The regulator believes these comments reflect Hinman’s personal views and not those of the agency.

In another episode, Judge Torres ordered the SEC to unseal email communications and staff memos related to Hinman’s speech, the order the commission is challenging. If the order goes into effect, it could change the way law enforcement enforces the principle known as willful privilege.

SEC Authorization Check

In the common law system, the right to due process is a principle of protecting information from public disclosure, which is the process by which the executive branch adopts certain decisions or policies. In the current case, this principle protects internal documents that describe how digital assets are classified by the SEC so that they cannot be disclosed in civil litigation and legal requirements.

However, because the SEC believes that Hinman’s statements reflect his personal views, this privilege does not include internal SEC documents related to this speech, hence the filings. This is subject to disclosure.

Amina Hassan, a litigant at the law firm Hughes Hubbard & Reed, says the battle over the scope of the Commission’s prerogatives is even more interesting for the 2012 memo. Hassan commented:

“If the court’s decision goes into effect, it could have far-reaching implications and expose similar types of SEC and other agency documents to the public domain. While all disputes related to the disclosure of government notes are based on specific decisions and are decided on a case-by-case basis, this decision provides litigants with a useful opportunity to search for similar government documents.

In other words, this case law could open the door for crypto companies to take the SEC and other regulators to court in the future to request the kind of information that was previously unobtainable. Hassan added that Judge Torres’ decision also has the potential to cause authorities to “reconsider public statements made by officials, which often include disclaimers that they reflect only that official’s views, not those of the agency.”

How will the case end?

However, the fact that Ripple has opted to participate in litigation rather than settle immediately does not rule out the possibility that the company will settle in the near future. Legal experts believe a deal is possible. Vogel commented:

“With about 95% of all lawsuits being resolved before the trial, it’s unlikely a trial will ever occur, but interpretation of the 2012 legal memos could be a key factor in resolving the current SEC case.”

Hassan said it is difficult to say in advance whether the case is close to resolution as disputes and defenses are still ongoing. However, the risk of losing the process for both parties is very high, so a possible agreement cannot be ruled out.

Even if the Ripple side chooses to settle things without a trial, the lawsuit proves that a well-resourced crypto company can cause big trouble for the SEC in a lawsuit.

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