<p><span style="font-size: 12pt;">SEC discovery tactics questionable in Ripple case </span></p>
<p><span style="font-size: 12pt;">The Securities and Exchange Commission (SEC) has gotten away with questionable investigation and litigation methods for years. The Commission’s Enforcement Division tactics are so well known they have earned a particular kind of lore among securities lawyers, <a href="https://www.crowdfundinsider.com/2017/11/124483-first-regulated-initial-coin-offering-conference-ico-2-0-summit-dives-deep-ico-legal-regulatory-economic-implications/">described</a> by one as “like living in hell without dying.” But in the SEC’s epic battle against cryptocurrency company Ripple and two of its executives, the agency’s go-to tactics are finally being challenged.</span></p>
<p><span style="font-size: 12pt;">In April, U.S Magistrate Judge Sarah Netburn <a href="https://www.crypto-law.us/wp-content/uploads/2021/04/210406_HearingTranscript_Apr6_2021_2pm_20Civ10832.pdf">ordered</a> the SEC to produce documents, including certain internal and external communications, along with a log of privileged documents, that could reveal potentially sensitive or embarrassing information about SEC crypto legal uncertainty in the midst of dozens of prosecutions. Of the high-profile nonfraud crypto cases—<a href="https://www.thecrowdfundinglawyers.com/sec-goes-for-kik-will-it-get-knifed/">Kik</a>, <a href="https://www.thecrowdfundinglawyers.com/sec-telegram-fight-shows-government-at-its-worst/">Telegram</a>, <a href="https://cei.org/blog/lbry-cryptocurrency-prosecution-shows-secs-misplaced-priorities/">LBRY</a>, and the current case involving Ripple—the Ripple litigation is the first time a court has forced the SEC’s own actions to the fore.</span></p>
<p><span style="font-size: 12pt;">The implications are huge—for crypto companies and perhaps for all facing securities investigations.</span></p>
<h2 style="text-align: center;"><strong>SEC discovery tactics questionable from the start </strong></h2>
<p><span style="font-size: 12pt;">This drama started on December 22, 2020, when then-SEC Chairman Jay Clayton, on his last day, greenlit the lawsuit against Ripple and two of its executives, accusing the firm of selling unregistered securities in the form of its cryptocurrency, XRP, which Ripple began selling in 2013.</span></p>
<p><span style="font-size: 12pt;">The company and its individual defendants claim the SEC failed to provide constitutionally required fair notice about XRP’s status in form of due process. After years of crypto prosecutions, this is a potential problem the SEC is only now having to confront.</span></p>
<p><span style="font-size: 12pt;">As Commissioner Hester Peirce <a href="https://www.sec.gov/news/speech/peirce-why-behind-no-051118">stated</a>:</span></p>
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<p><span style="font-size: 12pt;">Given the power and reach of the Commission, due process is of paramount importance. The rules should be clear, so that individuals know in advance the actions that constitute violations. In enforcing the rules, the SEC should be even-handed and sensible. An unwavering commitment to due process is particularly important in light of the continued growth in the volume and complexity of the securities rulebook.</span></p>
<p><span style="font-size: 12pt;">Following due process principles is rarely costless, comfortable, or convenient for a regulator, but doing so speaks volumes of the agency’s integrity and helps to bolster the agency’s standing in the markets, the courts, and the minds of the American people. In short, an agency that adheres to basic principles of due process will be more effective at carrying out its mission.</span></p>
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<h2 style="text-align: center;"><strong>Defendant lawyers turn tables on SEC </strong></h2>
<p><span style="font-size: 12pt;">Defendant lawyers, naturally, requested internal and external communications between staff and commissioners regarding XRP and non-security cryptocurrencies Bitcoin and Ether. In a change from other crypto cases, Judge Netburn <a href="https://www.crypto-law.us/wp-content/uploads/2021/04/210406_HearingTranscript_Apr6_2021_2pm_20Civ10832.pdf">ordered the SEC</a> to produce documents including certain internal and external communications along with a log of privileged documents. The Commission is not handling it well.</span></p>
<p><span style="font-size: 12pt;">The SEC <a href="https://www.crypto-law.us/wp-content/uploads/2021/04/210421_SEC_Motion_-Discovery_Order.pdf">refused</a>, telling the judge brazenly that she didn’t understand how the SEC worked and that any information defendants sought could be obtained on their website: </span></p>
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<p><span style="font-size: 12pt;">The Court further indicated a lack of familiarity with how the SEC operates and required the parties to meet and confer about “whether” the SEC should produce or enter onto a privilege log memos or other official documents “expressing <em>the agency’s</em> interpretation or views” as to XRP, Bitcoin and ether. <em>Id.</em> at 53:2-13 (emphasis added). As detailed below, the SEC expresses its interpretations and views in a number of ways, all of which are public. These agency interpretations and views are subject to the Order, but internal emails and memos expressing SEC staff interpretations and views are not.</span></p>
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<p><span style="font-size: 12pt;">(Incidentally, when convenient, the SEC discards even statements available on its website, like a former director’s pronouncement that <a href="https://www.thecrowdfundinglawyers.com/sec-ether-comments-invite-crypto-armageddon/">Ether was not a security</a>).</span></p>
<p><img class="size-medium wp-image-3701 aligncenter" src="https://www.thecrowdfundinglawyers.com/wp-content/uploads/2019/08/Homer-Simpson-GIF-300x225.gif" alt="" width="300" height="225" /></p>
<h2 style="text-align: center;"><strong>Magistrate Judge unhappy with SEC discovery tactics  </strong></h2>
<p><span style="font-size: 12pt;">The judge, not accepting the SEC’s recalcitrance, <a href="https://www.crypto-law.us/wp-content/uploads/2021/05/210506_1-20-cv-10832_Order_-US-Judge-Netburn_May-6-2021.pdf">again ordered</a> the SEC to produce certain internal and external documents along with a log of documents it was withholding based on privilege claims.</span></p>
<p><span style="font-size: 12pt;">Has that transpired? Nope. According to <a href="https://www.dropbox.com/s/3z2q5ybulvnll61/Motion%20to%20Compel%20Internal%20Documents.pdf?dl=0">defendant lawyers</a>, two months since the initial order, SEC lawyers have not produced a single internal document or external-response document, but told the judge the ordered discovery was “irrelevant and needless.”</span></p>
<p><span style="font-size: 12pt;">SEC lawyers are also refusing to produce other discoverable documents, like communications from the Office of Investor Education and Advocacy or from its financial technology email inbox, <a href="mailto:FinTech@SEC.gov">FinTech@SEC.gov</a>. Defendant lawyers have <a href="https://www.dropbox.com/s/3z2q5ybulvnll61/Motion%20to%20Compel%20Internal%20Documents.pdf?dl=0">now requested</a> a third hearing, and that motion is pending, but the judge may decide three strikes is enough.</span></p>
<p><span style="font-size: 12pt;">The SEC’s questionable tactics don’t stop there. While <a href="https://www.crypto-law.us/wp-content/uploads/2021/04/210421_SEC_Motion_-Discovery_Order.pdf">accusing Ripple lawyers</a> of “gamesmanship,” “harassing” the SEC, and seeking invasive materials, prosecutors sought eight years of personal bank statements and attorney-client-privileged <a href="https://www.crypto-law.us/wp-content/uploads/2021/05/210507_SEC-Letter-re-Waiver_vPublic.pdf">legal advice</a> from defendants.</span></p>
<h2 style="text-align: center;"><b>New SEC Chair on board with SEC discovery tactics </b></h2>
<p><span style="font-size: 12pt;">New SEC Chair Gary Gensler hasn’t commented on the legal team’s conduct or its adherence to SEC rules. The SEC’s Canon of Ethics <a href="https://www.law.cornell.edu/cfr/text/17/200.66">warns</a>: “The power to investigate carries with it the power to defame and destroy.” Its <a href="https://www.sec.gov/files/FY%202022%20Congressional%20Budget%20Justification%20Annual%20Performance%20Plan_FINAL.pdf">stated values</a> include integrity (“We inspire public confidence and trust by adhering to the highest ethical standards”), accountability (“We embrace our responsibilities and hold ourselves accountable to the American public”), and fairness (“We treat investors, market participants, and others fairly and in accordance with the law”).</span></p>
<p><span style="font-size: 12pt;">But Gensler has had plenty to say about crypto enforcement intentions. In <a href="https://www.sec.gov/news/testimony/gensler-2021-05-26">congressional testimony</a>, he signaled a looming new wave of crypto prosecutions, lamenting that the SEC has only managed 75 thus far. The SEC <a href="https://www.sec.gov/files/enforcement-annual-report-2020.pdf">also touts</a> its performance in this regard during the past pandemic year—namely, only a meager decline in prosecutions but still a record uptick in penalties. That includes $1.2 billion it disgorged from Telegram, which forced the company to shutter its blockchain project.</span></p>
<p><span style="font-size: 12pt;">The SEC’s actions do not serve the public interest. Instead of protecting consumers, regulators trample constitutional rights, foist millions in legal fees on companies trying to offer innovative consumer products and, ultimately, disadvantage the U.S. economy vis á vis global competitors. </span></p>
<p><span style="font-size: 12pt;">Hopefully, Judge Netburn in the <em>Ripple</em> case will start holding the SEC accountable to its own ideals and mission, which has veered so far from what is fair and decent.</span></p>
<p><span style="font-size: 12pt;">By <a href="https://twitter.com/thecrowdfundlaw">Jossey PLLC</a> via <a href="https://www.thecrowdfundinglawyers.com/">www.thecrowdfundinglawyers.com </a></span></p>
<p><span style="font-size: 12pt;"><em>For more perspectives on the ongoing SEC v. Ripple case, listen to this </em><a href="https://fedsoc.org/events/sec-v-ripple-labs-cryptocurrency-and-regulation-by-enforcement"><em>podcast</em></a><em> of a panel of the Federalist Society featuring CEI Senior fellow John Berlau.</em></span></p>
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