SEC Loses Motion to Gain Access to Ripple's Legal Files

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In the latest development in the ongoing Ripple lawsuit, Judge Netburn has dismissed the SEC’s request to access Ripple’s legal memos.

Judge Rules In Favor of Ripple

The Securities and Exchange Commission (SEC) has been denied access to Ripple’s files in the ongoing lawsuit regarding the firm’s XRP sales.

Sarah Netburn, the judge presiding over the case, denied the SEC’s motion to access all of Ripple’s documents that reference legal advice the company sought over the legality of its XRP sales.

The latest update is yet another ruling in connection with the discovery process, a pre-trial procedure where each party collects evidence to make their case. In Dec. 2020, the SEC filed a lawsuit alleging that Ripple had raised $1.3 billion from selling unregistered securities in the form of XRP.

At the beginning of May, the SEC filed a request with Judge Netburn in the context of its discovery efforts. The filing aimed to make Ripple obliged to produce its legal conversations from 2012, the same year the company was formed. That year, Ripple executives sought advice from two law firms on whether the offer and sale of the digital asset XRP were subject to U.S. federal security rules. In return, Ripple received three legal memoranda from the firms.

In the motion, the SEC wrote that Ripple had refused to share one of the three memos during the agency’s investigation (Ripple had cited attorney-client privilege, a legal rule that keeps all communication between a lawyer and their clients secret). Ripple also withheld or redacted at least 657 documents between April 2013 and August 2018 on the basis of the same privilege, the SEC had reported.

While the attorney-client privilege is applicable in all legal cases, it may be implicitly waived when a defendant claims they acted in “good faith” and is unaware of committing a violation. Consequently, the attorney-client privilege can be relinquished so the subjective state of mind can be scrutinized for good faith. 

This was the argument the SEC used in the motion it filed with the court. The SEC claimed that the defendants had waived the right to maintain client-attorney privilege after they put forward the fair notice defense. The SEC claimed that Ripple’s fair notice was an “artfully pleaded” good faith defense and needed access to its legal documents so it could refute the defense.

The documents would further help the agency verify whether the defendants, Ripple executive chairman Chris Larsen and CEO Brad Garlinghouse, were aware of potential violations tied to XRP sales before the ongoing lawsuit was filed.

In response, Judge Netburn ruled in favor of Ripple, stating that the request may not be relevant. She reasoned that Ripple did not raise good faith belief for their defense, and hence client-attorney privilege cannot be waived.

Rather than good faith or the mental state of the defendant, the fair notice defense focused on the SEC’s inactions of not providing a warning to all market participants that XRP could be a security under the Howey test, Netburn argued. In her ruling, she wrote:

“Ripple focuses on the SEC’s failure to provide fair notice to the market about the Commission’s state of mind as to whether XRP qualified as a security. It is not clear that such a defense even requires that a defendant act in good faith.”

Although Netburn ruled that SEC’s request was invalid, she added that if Ripple raises its good faith beliefs to support its fair notice defense in the future, the SEC may renew its request to the Court.

In April, Netburn denied the SEC’s request to investigate the personal bank records of Ripple’s executives. The SEC has taken several strikes at Ripple’s fair notice defense. Last week, the agency alleged that Ripple engaged in “lobbying efforts” to alter public perception of XRP’s regulatory status. The judge’s response to the claim is still pending.

Disclosure: The author did not hold the digital asset mentioned in this article at the time of press.

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