Ripple lawyers' advice on digital tokens set for unsealing in key SEC case

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Signage at the headquarters of the U.S. Securities and Exchange Commission (SEC) in Washington, D.C., U.S., May 12, 2021. REUTERS/Andrew Kelly

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(Reuters) - Was the blockchain company Ripple Labs Inc forewarned by its own lawyers that its contemplated sale of XRP digital tokens would trigger regulation under federal securities laws?

That question is at the heart of the closely watched U.S. Securities and Exchange Commission lawsuit accusing Ripple and two top executives of conducting an unregistered offering of $1.3 billion in XRP between 2013 and 2020.

There is no dispute that Ripple sought advice in 2012 from an as-yet unidentified global law firm in 2012, as the company contemplated the launch of a new digital token, nor that the law firm submitted two memos to Ripple analyzing the legal issues that could arise from the launch.

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But Ripple and the government have offered widely divergent accounts of exactly what Ripple’s outside counsel said in the two memos, which have been docketed only under seal. The SEC contends that the documents show that Ripple and its then CEO, Christian Larsen, were well aware of the risk that XRP would be deemed a security under federal law. But Ripple and Larsen, who is now Ripple's chairman, say regulators are mischaracterizing the memos. They said the documents show that Ripple’s lawyers ultimately concluded its tokens were not securities.

The memos, in other words, are sure to be key evidence in a case that is widely considered to be a critical test of the SEC’s ability to regulate cryptocurrency offerings through enforcement actions.

And now, thanks to a ruling last week from U.S. District Judge Analisa Torres of Manhattan, we don’t have to rely on either side’s description of the advice Ripple received from its outside counsel in those 2012 memos. Torres held that the legal advice in the two memos must be unsealed and released publicly by Feb. 17.

That is not what Ripple or Larsen wanted. Both argued in letter motions to Torres that the memos should remain under seal. Larsen counsel Martin Flumenbaum of Paul, Weiss, Rifkind, Wharton & Garrison told the judge that the memos “reflect the proprietary internal business strategies, analyses, impressions and concerns of a private company and its founder,” and that there was no good reason for the public to see them. Ripple argued in a letter brief from Michael Kellogg of Kellogg, Hansen, Todd, Figel & Frederick that the documents contain “competitively sensitive” information and are not actually material to the case.

Torres, however, pointed out that even Ripple and Larsen have made an issue of the memos in their filings. Ripple’s answer to the SEC’s complaint, for instance, asserted that a “reasonable reader” of the advice it received from its lawyers “actually would have concluded that XRP were not a security.” Larsen, who attached the memos as sealed exhibits to his motion to dismiss the SEC case, similarly argued that the 2012 documents never said XRP were investment contracts or securities. (Larsen says much, much more about the memos in his dismissal motion, but the publicly filed version redacts nearly all of it.)

Ripple and Larsen, Torres said, both urged her (as did the SEC) to review the memos in full in weighing their arguments to dispose of the case. So there’s no doubt, the judge said, that the memos are judicial documents, and therefore presumptively public.

Interestingly, as the SEC noted in its brief urging the judge to unseal the 2012 memos, Ripple and Larsen did not press arguments in their seal motions that the memos are privileged. As I’ve reported, the company claimed in an early status report in the SEC litigation that the memos were shielded by privilege even though they had been disclosed to third parties in 2013. The SEC told Torres that those disclosures were quite extensive – Larsen and another Ripple executive circulated the legal advice to third parties on at least 19 occasions – so Ripple had waived any potential privilege claim.

Ripple seems to be making the best of Torres’ decision to make the memos public. In an email statement, Ripple general counsel Stuart Alderoty said that when the documents are released, they “will show that in 2012 Ripple received a legal analysis that XRP was not an investment contract.”

It’s “baffling,” Alderoty said, that it took the SEC eight years, while XRP traded globally, to declare its contrary view. “We look forward to the public having access to these documents as we continue to vigorously defend this case,” Alderoty said. Larsen counsel Flumenbaum did not respond to my request for comment.

The SEC has also said the public needs to see the memos, at the very least so the commission can show that it has not mischaracterized the documents. The commission told Torres that the memos provide important support for its motion to strike Ripple’s affirmative defense that the SEC failed to provide fair notice.

The SEC’s crypto regulation, as I mentioned, could be hobbled if Ripple’s fair notice defense succeeds. Right now, because of extensive redactions in the publicly filed version of its motion to strike, it’s impossible to see why the commission believes the 2012 memos from Ripple’s lawyers undercut the company’s claim of inadequate notice. That brief, and many of the other filings discussing the memos, will be refiled with fewer redactions next week, according to Torres’ unsealing order.

That should give everyone following this case a better idea of the significance of those 2012 memos.

Read more:

At the heart of the SEC’s case against Ripple, a dispute over legal advice

In discovery disputes, Ripple forces SEC to play defense

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Alison Frankel has covered high-stakes commercial litigation as a columnist for Reuters since 2011. A Dartmouth college graduate, she has worked as a journalist in New York covering the legal industry and the law for more than three decades. Before joining Reuters, she was a writer and editor at The American Lawyer. Frankel is the author of Double Eagle: The Epic Story of the World’s Most Valuable Coin.