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Suing Ripple could be a catastrophic mistake by SEC as discovery phase begins

  • 4 min read
  • XRP
  • Ripple’s “fair notice” defense is becoming key in the legal battle with the SEC to expose the SEC’s inconsistent views.
  • Attorney John E. Deaton’s petition blatantly shows that Ripple should have been “obliged to have psychic powers” to know XRP’s status as a security.

Ripple’s “fair notice” defense is increasingly crystallizing as a central point of contention in the early stages of its litigation with the U.S. Securities and Exchange Commission (SEC). The company argues that it could not reasonably have known that XRP was a security. In its fourth defense, Ripple writes:

Here, due to the lack of clarity and fair notice regarding Defendants obligations under the law, in addition to the lack of clarity and fair notice Plaintiffs interpretation of the law, Ripple lacked fair notice that its conduct was prohibited.

As attorney Jeremy Hogan explained in a new video, it’s all about that defense. If the judge agrees with the SEC and rejects this defense as “improper,” as the U.S. agency urged in one of its recent letters, numerous other arguments by Ripple will be null and void.

For example, it would not matter that FinCEN had already issued a decision in 2015. The “sensation” that the SEC had already been approached by “one or more major crypto exchanges” about the vacant securities status in 2019 would also be null and void. According to Hogan, however, approval of the SEC application is unlikely.

I believe that the defense does not gets stricken but that the judge probably pushes the decision down to summary judgment time, with all the other issues.

Moreover, the SEC’s move shows they are “nervous,” Hogan said. The discovery phase has begun, and Ripple wants the SEC to provide transcripts from conversations with exchanges that were about XRP. The only way the SEC can prevent that is with this motion:

And what this [this]tells me is, not only is the SEC worried about the affirmative defense, they are also worried about what Ripple might find out in discovery. […] this is the beginning of a discovery battle, and it’s apparently the SEC who might have some skeletons in its closet. And in order for Ripple to find out what they are, they are going to get past this motion. […]
[These] are the opening volleys of fight over information and secrets. […] Lots of these letters in the coming couple of months will argue over what is discoverable and more importantly what isn’t discoverable. And this is where the case is lost or will be won.

John E. Deaton’s lawsuit exposes SEC’s ambiguity and contradictions

In a similar vein, Roslyn Layton expressed her views in a well-received article on Forbes, which was retweeted by Ripple’s General Counsel Stuart Alderoty. According to Layton’s opinion, the “fair notice” argument is apparently far-fetched, as evidenced by the petition filed by attorney John E. Deaton on behalf of all XRP holders.

As CNF reported, the petition is critical in preparation for a class action lawsuit because it exposes the SEC’s ambivalence and the contradictions in its reasoning. In response to Deaton’s submission, the SEC had to admit the open status of XRP. Layton writes in this regard:

Put two and two together, and the SEC is saying that Ripple and its two top executives had to have reasonable knowledge of something seven years ago that the agency itself wasn’t sure about last Friday. One wonders which part of the 1933 Securities Act the SEC will eventually use to argue that Ripple is obliged to have psychic powers to operate lawfully in the United States.

According to Layton, SEC Chairman-elect Gary Gensler faces a “disastrous mistake” that he must now “sort out”:

The SEC probably didn’t expect the storm that Clayton’s final act has kicked up, and it has exposed the inherent weakness in the decision to sue. It began on January 1, when a group of XRP holders led by Rhode Island attorney John E. Deaton struck back at the agency.

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