today is Aug 18, 2022

The battle over discovery escalates between SEC and Ripple over what might have been said about the XRP at Ripple’s all-hands meetings since 2014. Will there be popcorn?

In an escalating battle over discovery, the U.S. Securities and Exchange Commission is now seeking video and audio recordings of Ripple’s company meetings to bolster the agency’s case that the XRP is a security in violation of the law, according to a new legal filing. 

“The recordings may reveal efforts Ripple took to increase or maintain XRP’s price or to create expectations of profits in potential XRP purchasers, both of which are relevant… to prove whether XRP was offered and sold as a security,” SEC attorney Pascale Guerrier wrote in a letter to U.S. Magistrate Judge Sarah Netburn. “The recordings may contain statements that may be admissions by Ripple or the individual Defendants. The recordings are critical to the core issue in this case.”

The SEC is asking to review Ripple’s all-hands meetings such as its XRP markets, engineering, SBI town halls, and quarterly business reviews.

The SEC, which filed its lawsuit against Ripple in December 2020, has alleged that Ripple’s sale of XRP was an unregistered securities offering worth more than US$1.38 billion. The SEC also named Ripple’s CEO Brad Garlinghouse and executive chairman Chris Larsen as co-defendants for allegedly aiding and abetting Ripple’s violations.

At the heart of the lawsuit is whether transactions involving XRP constitute “investment contracts” and therefore securities subject to registration under Section 5 of the Securities Act of 1933. The outcome of the SEC’s lawsuit against Ripple and determination of XRP’s status is being closely watched by crypto companies and investors alike for its potentially far-reaching implications for the cryptocurrency industry.

Ripple wants SEC’s trading preclearance decisions

Separately, Ripple has also asked the court for the SEC’s trading preclearance decisions with regard to XRP, Bitcoin and Ether. Judge Netburn had, in June, granted Ripple’s request for the SEC’s trading policies on XRP and other cryptocurrencies. But Ripple now says it “cannot know whether the SEC actually prohibited or allowed transactions in XRP, bitcoin or ether without the preclearance documents, which the SEC has refused to provide.” The preclearance documents relate to digital assets transactions on a case-by-case basis.

“Defendants are entitled to know whether the SEC permitted its own employees to sell, buy and hold XRP as market participants during the very period the SEC now claims that Defendants violated the law and acted recklessly by selling XRP,” wrote Ripple’s attorneys in an Aug. 27 letter to Netburn. 

“Defendants are entitled to know whether the SEC ever prohibited its employees from trading XRP and if, as the SEC has orally suggested, that occurred for the first time only in March 2019,” Ripple’s attorneys wrote. “Defendants are also entitled to know whether the SEC’s approach to allowing employees to trade ether or bitcoin changed after William Hinman’s speech on June 14, 2018 — another issue that is highly relevant to this litigation.” Netburn has given the SEC until Sept. 3 to reply to Ripple’s letter.

Hinman, who served as director of the SEC’s Division of Corporation Finance from May 2017 to Dec 2020 declared in a 2018 speech that Ethereum was not a security. As part of its defense, Ripple is arguing that it did not receive “fair notice” that the SEC would be treating XRP differently from how it has treated other cryptocurrencies, like Ethereum. 

Recent rulings in discovery

Last week, Judge Netburn ruled to grant the SEC’s request to seal, or to prevent certain documents related to the lawsuit from being available to the general public. “Privilege Logs, the Amended Privilege Logs, and the highlighted portions of Director Hinman’s deposition transcript may be filed under seal subject to further reconsideration by the Court when it considers the merits of the underlying motion.”

Netburn also granted Ripple’s request to seal, on an interim basis pending the outcome of the underlying motion, certain documents related to the SEC’s letter-motion seeking access to communications between Ripple employees on Slack, a popular chat and messaging application used by businesses.

In a ruling dated Aug. 26, Netburn agreed to a joint request by the SEC and Ripple to delay the depositions of Garlinghouse and Larsen to after the close of the Aug. 31 fact discovery deadline. The deadline for expert discovery has also been extended to Nov. 12. 

“The motion to strike and motion to intervene are still pending and the expert discovery deadline will be extended,” said James Filan, a defense lawyer and former federal prosecutor who frequently comments on developments in the SEC v. Ripple lawsuit, in a tweet. “In my experience, anyone who thinks this case is settling anytime soon should reconsider.”

A telephone conference is scheduled for today at 12 p.m. Eastern time to discuss Ripple’s pending motion to compel the SEC to produce internal documents, which the agency says are privileged and therefore protected from disclosure.

See related article: Ripple: SEC ex-chief Hinman’s views on XRP are ‘dubious’

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