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Ripple Labs, its founder and executive chairman Chris Larsen, and CEO Brad Garlinghouse were sued by the Securities and Exchange Commission in December, accusing them of raising $1.3 billion through the sale of unregistered securities. The SEC’s complaint is based on the fact that XRP is a security, not a currency, and thus subject to strict securities laws.
In the most recent development, the SEC filed a response to the Defendants’ letters, citing a public statement made by Commissioners Peirce and Roisman. In the aforementioned response, the SEC put forward a few reasons in its attempt to highlight Ripple’s (otherwise) “unlawful conduct.”
— James K. Filan 🇺🇸🇮🇪 (@FilanLaw) July 21, 2021
According to the SEC, it was established by statute as a Commission of five commissioners, each appointed by the President within certain parameters. As a result, the agency contended that the relevant statement is neither a statement of the SEC nor a binding authority on this Court.
“Defendants’ arguments are tantamount to arguing that they cannot be found liable for violating a statute on the grounds of certain public statements by legislators who disagree with the statute.”
It’s worth noting that the aforementioned statements were about the SEC’s inability to clarify crypto-regulations across the board, which the defendants have highlighted via their Fair Notice defence.
The SEC went on to argue,
“Defendants ignore that the Second Circuit long ago held that even the full SEC may not waive the requirements of an act of Congress by supposedly “acquiesc[ing]” to illegal conduct.”
This is why, according to the agency, no defendants have been able to cite “even one case in the 88 years of securities laws holding that the SEC may repeal Section 5’s registration requirement by a supposed failure to issue a particular type of regulation or to bring a lawsuit sooner.” It went on to say,
“This baseless argument should be reject.”
Furthermore, it is worth noting that the agency disputed the claim that there is a significant lack of clarity in the application of securities laws (including the Howey Test), arguing that there is “all the notice that is constitutionally required.”
The letter went on to conclude that Ripple Labs and the individual defendants’ arguments are based on “an inaccurate legal theory,” with the same stating,
“Defendants’ arguments based on the Statement ignore that the SEC itself—through a vote of the five Commissioners—and other SEC Commissioners and officials have repeatedly warned those who sell digital assets to the public of the need to comply with the federal securities laws.”
Needless to say, the SEC’s response is diametrically opposed to what the individual defendants argued in their filings, with the latter claiming that the aforementioned statement supported their motion to dismiss “for failure to adequately plead that they allegedly aided and abetted Ripple’s offers or sales of unregistered securities.”
This contention, in fact, is at the heart of the defendants’ entire Fair Notice defence, a defence that cannot be overstated, according to Attorney Hogan.
“If the Fair Notice defense survives and Ripple wins, the SEC is going to have an uphill battle winning any other lawsuit they bring.”
In fact, Hogan was one of the many to react to the SEC’s response to the defendants citing Commissioner Peirce and Roisman’s statements.
The SEC dodges the argument. Where does this pleading address the “Statement” and Fair Notice defense head on? Not once. Because the SEC can’t! When you can’t argue the issue – dodge it (I’ve done this before). I would guess that Judge Torres is too sharp for this tactic. https://t.co/mm1vOFQ9ul
— Jeremy Hogan (@attorneyjeremy1) July 21, 2021