- The SEC refuses to turn over exculpatory evidence to Ripple’s lawyers during the discovery phase.
- The SEC has been advised by experienced market participants that XRP is not a security and has made no public statement to the contrary.
The legal team of Ripple CEOs Brad Garlinghouse and Chris Larsen filed a new letter with the court yesterday in their legal dispute with the U.S. Securities and Exchange Commission (SEC), making serious allegations. According to the letter, both parties have reached an “impasse” after “three lengthy video conferences and an exchange of letters” regarding the SEC’s refusal to seek and produce information on key issues in the litigation:
Whether sales of XRP were unregistered securities offerings, whether Mr. Garlinghouse and Mr. Larsen knowingly or recklessly failed to recognize them as such, and whether Ripple had fair notice that XRP sales required registration.
Ripple’s attorneys are therefore seeking “a Local Rule 37.2 conference” and an end to the SEC’s “improperly withholding relevant, potentially exculpatory evidence.” Specifically, according to Ripple, the SEC is refusing to seek and produce only “a single document concerning Bitcoin or Ether – two virtual currencies that are closely analogous to XRP,” internal communications of any kind, and any documents from ten of the nineteen SEC employees proposed by Ripple.
What does the SEC withhold from Ripple?
Ripple charges that the SEC itself was a “central player in the market-wide discussion, analysis, and practice” of whether and under what circumstances sales of digital assets could be securities offerings. To that extent, the SEC’s conduct in the eight years preceding the filing of the lawsuit was highly relevant, which should be taken into account when considering the Howey test:
To consider whether the Individual Defendants knew or were reckless in not recognizing that Ripple’s sales of XRP were unregistered securities offerings, the Court must evaluate the reasonableness of those Defendants’ conclusions in light of the current regulatory environment.
According to Ripple, the SEC refuses to produce documents pertaining to Bitcoin or Ether and any “internal communications, including those directly related to the status of XRP.” In addition, the SEC is also apparently denying access to the files of former SEC Chairman Jay Clayton and two commissioners:
F urther, the SEC narrowed the scope of its production by handpicking nine custodians, excluding – among others – Chairman Jay Clayton, Commissioner Elad Roisman, and a leading internal critic of the SEC’s regulatory approach to cryptocurrency, Commissioner Hester Peirce.
Apparently, Ripple has received a tip from other market participants (possibly exchanges like Coinbase) that speaks in favor of Garlinghouse and Larsen and exposes the SEC’s ambivalent stance. At least that is what the following paragraph from the letter suggests:
Based on information gleaned to date, it is clear that the SEC was told by sophisticated m arket participants that XRP was not a security and solicited feedback on that position, but did not provide a contrary public statement until it filed its allegations in this case in December 2020.
During the pre-trial conference Ripple dropped the bombshell that one or more major exchanges in 2019 have contacted the SEC for an opinion on the status of XRP. However, the SEC only said that no decision had been made yet. Perhaps these communications are now part of what the SEC is hiding.