SEC clashes with Ripple Labs over access to documents
As the lawsuit brought by the United States Securities and Exchange Commission (SEC) against Ripple Labs and its executives continues at the New York Southern District Court, the parties have been engulfed in another discovery dispute.
According to a Letter Motion filed by the SEC in the Court earlier today, the regulator is seeking to prevent the defendants from accessing certain information. The regulator requests an order that resolves pending discovery disputes and bars the defendants from seeking irrelevant, privileged SEC staff materials that this Court already ruled are not discoverable.
According to the SEC, the defendants are seeking to ignore the limitations of a Court’s Order and to mire the SEC in indefinite discovery disputes and, if successful, document review. The SEC seeks to prohibit Defendants from: (1) obtaining internal SEC staff communications the Court already excluded from production, (2) searching SEC staff personal devices, and (3) adding custodians.
The SEC notes that the Order required the regulator to search the external emails of 19 custodians for documents related to XRP, Bitcoin, and ether, but denied the defendants’ requests for internal SEC communications as not relevant to “how the market is considering XRP and how the individual defendants, how it affects their reasonable belief,” and given “the potential to seriously chill government deliberations.”
Rather than meet and confer about whether the SEC should review and produce or log certain internal documents reflecting agency views, the defendants wrote the SEC with a laundry list of documents, including the very same internal emails that the Court ordered the SEC did not have to review and produce—and not just with respect to Bitcoin, ether, or XRP, but with respect to “cryptocurrency” generally, and asking for the inclusion of a 20th custodian that was not subject to the Order or the parties’ prior discussions.
Further, at a later meet and confer on April 16, 2021, counsel asked that the SEC search the personal devices and email accounts of the 19 SEC custodians, although federal law requires officials using personal devices to copy communications onto official agency accounts. The Individual Defendants threatened to withhold their own documents should the SEC refuse.
“If not constrained now, Defendants have shown that they will continue to ignore the Court’s rulings and demand more endless, burdensome, and unnecessary discovery,” the SEC warns.
Let’s recall that the SEC’s Complaint alleges that, in an unregistered offering of securities, Christian A. Larsen and Bradley Garlinghouse obtained at least $600 million of investor funds from selling a digital asset security called XRP, while orchestrating Ripple’s sales of another $1.4 billion of XRP.
The SEC asserts two claims against the individual defendants: violations of Section 5 of the Securities Act of 1933, 15 U.S.C. § 77e, as to their unregistered offers and sales of XRP, and aiding and abetting Ripple’s violations, which requires proof of knowing or reckless conduct (scienter).
At the heart of these claims is the SEC’s contention that XRP are “investment contracts” and therefore securities, which requires an investment of money into a common enterprise with a reasonable expectation of profits from the efforts of others.