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After the SEC sought “additional discovery” from the court a few days ago, many in the community are anticipating Ripple Labs and the regulatory agency to reach an agreement shortly. The SEC has now filed its Memorandum of Law in support of its Motion to Strike Ripple’s “fair notice” affirmative defense in the continuing SEC v. Ripple litigation, which is the latest move in the ongoing case.
The SEC has repeatedly criticized the defendants’ “fair notice” assertions in earlier letters. In its recent brief, the regulatory authority added a slew of reasons why Ripple’s fair notice defense is illegal.
For starters, the SEC has maintained for some time that it has been prosecuting businesses for securities law breaches involving “cryptocurrencies” and other digital assets. The SEC further claimed that the general public was already aware that the regulatory agency had filed a large number of proceedings regarding digital assets.
“Ripple’s “fair notice” defense fails, in the first instance, because of the large number of digital asset cases the SEC brought before suing Ripple.”
The SEC said that at the time it sued Ripple in December 2020, both Ripple and the public were aware of the SEC’s “routinely changing security laws violations” involving “novel” and “previously unregulated” investment products. The SEC stated, using previous comparable instances as precedents, that any firm that provided a wide range of investment goods was given “ample notice” that its investment goods may be subject to federal securities laws.
Ripple previously agreed to a settlement with the Department of Justice and FinCEN. The SEC, on the other hand, maintained that the settlement did not involve it or federal securities laws.
In its defense, Ripple also cited a statement by the SEC’s then-Director of Corporation Finance in which he indicated his view that Bitcoin and Ether are not now sold as securities. The defendants have repeatedly claimed that XRP is a comparable asset to both BTC and ETH. The SEC, on the other hand, maintained that the then-director had not specifically referenced XRP.
The defendants also cited one incident from their discussion with the operator of a digital asset trading platform in which SEC employees “declined to opine” on whether or not XRP was a security. In response, the SEC stated in its memorandum,
“Notably, during the last two events, the SEC’s non-public investigation into Ripple was well underway, a relevant fact known to Ripple.”
Ripple’s “entire” fair notice defense, according to the SEC, is being sustained on the Upton v. SEC lawsuit. According to the SEC, however,
“The circumstances of Ripple’s violations differ greatly from Upton.”
The agency additionally contended,
“Ripple is unable to cite a single decision that applies Upton’s holding to defeat SEC charges in a district court action.”
As a matter of fact, the courts have uniformly refused to apply Upton to negate security law violations. Using the SEC v. Kik Interactive Inc. lawsuit as its precedent, the SEC went on to highlight that Judge Hellerstein “wisely rejected” the defendants’ Upton defense “as a matter of law.”
Needless to say, the SEC’s latest assertions fueled a lot of reactions online. Popular attorney Jeremy Hogan, for instance, suggested that the SEC had “mischaracterized” Kik Interactive’s “void for vagueness” defense as an “Upton” defense. He further added that the judge did not strike the same from the pleadings stage. Nonetheless, the regulatory body argued,
“Sustaining Ripple’s Upton defense would prejudice the SEC.”
The SEC concluded its memorandum by stating,
“The Court should decline the opportunity to provide future defendants a road map for flipping the onus of SEC enforcement actions that would fundamentally alter the nature of Section 5 litigation.”