On July 12, the U.S. District Court rejected the Security Exchange Commission (SEC) request to withhold documents on the so-called Hinman speech of 2018. In a highly anticipated ruling in the ongoing SEC v. Ripple case, Magistrate Sarah Netburn denied the SEC’s motion citing attorney-client and deliberate process privileges. The judge slammed the agency for hiding documents which could answer questions in front of the court. She called the behavior so egregious that it impugns the agency’s “faithful allegiance to the law.”
Congress should heed her forceful, deliberate words. The House Financial Services Committee holds an oversight hearing on the SEC Enforcement Division next Tuesday. Chairwoman Maxine Waters can ask them directly where their allegiance lies– with the public and the law—-or their own personal interest.
The blockbuster case gone bust
The SEC meant its December 2020 SEC against Ripple Labs to be its big crypto enforcement blockbuster. It alleged that Ripple and its two senior executives made unregistered, illegal securities trades with sales of the digital token XRP dating back seven years. The complaint not only claimed SEC authority from the 1933 Securities Act, but that everyone should have known that XRP was a security from its first sales in 2013. The lawsuit’s thesis is that XRP, the token itself, is an investment contract in the company Ripple no matter who sells it or how it’s sold. It seems the agency’s thought it could force a quick and dirty settlement and put big crypto hide in its trophy case.
Ripple becomes a riptide
Neither the judge nor the defendants played along with this scheme. Moreover, Ripple didn’t fold; it assembled a top legal team and hit back at the agency ferociously.
Ripple’s defense, with its centerpiece of Hinman’s market-moving speech, documented the SEC’s failure to provide fair notice to the market on XRP’s status. With this revelation, the SEC has been stumbling and bumbling to hide Hinman, his emails, his speech drafts, his calendar, and anything related to his tenure.
The defense argued that the agency failed repeatedly to provide guidance for years to anyone who asked it whether XRP was a security, and that the 2018 speech by then-Director of Corporation Finance William Hinman laid out criteria that strongly suggested XRP isn’t a security.
Defense further cited an over-stretch of the so-called Howey test for determining a security and violation of due process. It claims the SEC was vindictive, alleging Ripple’s top executives Chris Larsen and Brad Garlinghouse were “objectively reckless” in their XRP sales because they should have known that the token was a security seven years before the agency itself concluded as such. The SEC wanted billions in fines and demanded to comb through executives’ personal financial records.
The SEC’s hapless lawyers have spent almost two years defending the absurd lawsuit against enterprise blockchain company Ripple Labs. They tried to prevent Hinman from being deposed by Ripple until the judge could finally sort through its tactical obstructions and order him to sit last year. They insisted the speech was irrelevant to the markets and to the case. Then, they tossed out privilege arguments, one more crazy than the last, to refuse to hand over any of the internal documents Ripple was seeking for its defense. By last Tuesday, they’d run out of reasons.
A Patient, Portentous Ruling
In her ruling, Netburn laid out the chronology of how the defendants have been seeking these documents for their fair notice defense, and dismantled each of the SEC’s tactics to hide them, including an excruciating in camera review in which she forced each document in question to be handed over. Finally, Netburn wrote, the SEC raised an attorney-client privilege argument with another round of in camera reviews, leading to Tuesday’s ruling. She eviscerated the attorney-client nonsense and launched a carefully aimed rocket at the agency.
Judge Netburn has endured the agency’s pre-trial antics, biding her time for ammunition for the blistering ruling she issued last Tuesday. It was vindication for the small band of observers who long ago saw the SEC lost in a maze of its own making with this case, and now it’s clear to everyone.
In the decision, she writes,
“The hypocrisy in arguing to the Court, on the one hand, that the Speech is not relevant to the market’s understanding of how or whether the SEC will regulate cryptocurrency, and on the other hand, that Hinman sought and obtained legal advice from SEC counsel in drafting his Speech, suggests that the SEC is adopting its litigation positions to further its desired goal, and not out of a faithful allegiance to the law.”
The question remains whether the SEC will change its tune. Congress should demand an answer.