SEC v Ripple: An Important Win for Ripple

As the legal fight between Ripple Labs and the Securities and Exchange Commission (“SEC”) drags on over whether Ripple’s XRP cryptocurrency is a security, Ripple may have landed a key blow.

Recently, Judge Netburn ruled (decision here) that the SEC must provide to Ripple an email containing a draft speech by former SEC director William Hinman (the “Draft Speech”) along with additional records around the preparation of the speech.

The Draft Speech is from 2018 and is on the topic of whether ether (the token that facilitates operations on the Ethereum network) was a security. In the version of the speech that was ultimately presented, Hinman told the audience that in his view, ether was not a security.

In coming to this decision, Judge Netburn distinguished between the SEC’s internal analysis of XRP (which remains protected under deliberative process privilege) and the personal opinions of its employees:

[t]he personal views of agency employees are not protected by the privilege unless they bear on “the formulation or exercise of policy-oriented judgment.

In determining that the Draft Speech was Hinman’s personal opinion and therefore not privileged, Judge Netburn potentially gave Ripple an important victory. Although the Draft Speech is Hinman’s personal view and not that of the SEC, it could contain analysis between Hinman and others that will be problematic for the SEC to overcome.

However, even if the Draft Speech contains nothing new, it (along with the actual speech) could still be persuasive as Ripple can use them to argue:

a. that even though the Draft Speech is personal opinion, it is the personal opinion of an SEC director and should be given significant weight;

b. for an inference/link between the views of the SEC and Hinman as both parties determined that ether was not a security;

c. that Hinman’s opinion in the Draft Speech should be weighted as expert evidence and not simply as evidence given by a lay person; and

d. most importantly, that it would have been (or should have been) obvious to Hinman and the SEC that Hinman’s speech (whether personal opinion or not) would be interpreted as market guidance. This gives further credence to Ripple’s fair notice defence (that the SEC failed to provide fair notice to Ripple that XRP would be viewed as a security).

Although not determinative, the production of the Draft Speech will likely bolster Ripple’s arguments and cause concern in the SEC camp. As this action progresses, we look forward to continuing to provide coverage and to later discussing how this would have played-out in Canada.

This article is not financial advice.

Kevin Stenner and Mihai Beschea