SEC slams Ripple for attempt to avoid liability
The legal action brought by the United States Securities and Exchange Commission (SEC) against Ripple Labs continues at the New York Southern District Court.
Shortly after Ripple tried to nix the SEC’s complaint, the regulator has made it clear that it will oppose the defendant’s arguments. This is indicated by a letter submitted by the SEC on March 9, 2021.
In particular, the SEC slams Ripple for using “Lack of Due Process and Fair Notice” as an affirmative defense argument.
The SEC alleges that Ripple violated Section 5 of the Securities Act of 1933 for failing to register certain offers and sales of XRP. To adjudicate this strict-liability claim, the Court must decide whether Ripple offered and sold XRP as “investment contracts”.
According to the SEC, Ripple seeks to avoid liability for its unregistered offering by diverting the Court’s attention with a number of affirmative defense arguments pigeonholed into the label “fair notice.” Ripple’s arguments ask the Court to conclude both that the term “investment contract” is not sufficiently defined, such that Ripple lacked notice that its conduct could be prohibited, and that the SEC should have stopped Ripple sooner.
The regulator says that these allegations – also the basis of Ripple’s attempts to seek a multitude of privileged SEC deliberations – will lead to “wasteful forays” in this litigation, and should be stricken.
The SEC notes that Ripple essentially capitalized its entire business by selling a digital asset security to the public while promoting to investors the potential for profits based on Ripple’s future efforts. Yet Ripple now claims surprise that the SEC filed this enforcement action.
Ripple’s argument is, in essence, that the term “investment contract” as defined through decades of case law is void for vagueness. However, that argument has been repeatedly rejected by courts, the SEC stresses.
Next, Ripple argues that the SEC failed to provide Ripple “due process and fair notice” because SEC staff allegedly met with industry executives and failed to tell them that XRP was a security.
The SEC says that:
“Rather than acknowledge its own obligation to follow the law, Ripple instead posits that the SEC staff has an obligation to affirmatively warn industry participants about violations of other participants—even if the staff is in the process of conducting a non- public investigation—a requirement that does not exist in our legal system”.
Finally, the regulator notes Ripple’s complaints that the SEC is stifling innovation. But innovation cannot come at the expense of investor protections provided by long-standing law, the SEC concludes.