SEC insists on access to fin records of Ripple execs
As a part of its action against Ripple Labs, the United States Securities and Exchange Commission (SEC) is seeking access to the financial records of Ripple executives Christian A. Larsen and Bradley Garlinghouse. On March 17, 2021, the SEC tried to nix an attempt by the defendants to subpoenas relating to their financial condition.
The document, filed by the SEC with the New York Southern District Court and seen by FX News Group, represents a request to the Court to deny the letter motion by the defendants to quash the subpoenas. The SEC argues that the financial records directly relate to several elements the SEC must prove to prevail in its action.
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.
The SEC seeks financial records for at least three relevant reasons.
First, because XRP transactions appear as pseudonymous transactions on a blockchain, the individual defendants’ bank records are the only reliable way to de-anonymize their movements of XRP and determine exactly how much they raised from their XRP sales to the public.
Second, the SEC anticipates that financial records will show whether the individual defendants personally funded efforts to increase the value of XRP, which is relevant to the “efforts of others” prong of the Howey test.
Finally, financial records will show how much the defendants—who insist they had no idea their conduct was wrongful—enriched themselves relative to other income, which bears on the powerful, personal financial motivation they had to look the other way when confronted with the legal consequences of their conduct.
The SEC is not seeking records of how much money is “spent at the grocery store every week”, and is willing to have Individual Defendants redact transactions of less than $1,000. Nor is this a “fishing expedition,” the regulator notes.
The regulator stresses that the individual defendants enriched themselves with hundreds of millions from the public. Their attempt to shield their financial records from the SEC and the Court (casting requests for them as “trolling” and a “fishing expedition”) is troubling, the Commission says, adding that the defendants’ motion to quash should be denied.