(Reuters) - What you think of two newly unsealed legal memos in the U.S. Securities and Exchange Commission’s suit against Ripple Labs Inc probably depends on which way you were already leaning in this closely watched test of crypto regulation.
For Stuart Alderoty, general counsel at blockchain payments company Ripple, the 2012 memos from Perkins Coie to Ripple’s founders are evidence of the company’s good faith as it tried to launch digital tokens without clear guidelines on how existing federal laws would apply to cryptocurrencies.
Perkins Coie warned Ripple executives in February 2012 that if they followed their initial plan to sell tokens to investors in order to raise money to launch a crypto network, U.S. regulators were “highly likely” to deem the coins to be securities.
But when Ripple went back to Perkins Coie with a revised launch plan in October 2012, the law firm said in a second memo that it believed there was “a compelling argument” that the contemplated tokens would not be subject to federal securities laws, though Perkins Coie told Ripple there was still “some risk, albeit small” that the SEC would consider its crypto tokens to be securities, “given the lack of applicable case law.”
Ripple could minimize the risk, Perkins Coie said, by scrupulously avoiding promotion of its coins as an investment and by seeking a letter from the SEC confirming that the government would not treat the coins as securities.
Alderoty told me that Ripple sought Perkins Coie’s advice “because of a firm commitment to get things right, to be on the right side of the law, to act responsibly.”
The blockchain company didn’t just ask about securities laws, either, Alderoty said, but requested advice on complying with a range of banking, anti-money laundering and tax laws.
In the Ripple GC’s view, the SEC should have looked at the Perkins Coie memos and held his company up as an example of proactive compliance.
Instead, the SEC sued Ripple and two Ripple executives in December 2020 for selling more than $1.3 billion in unregistered XRP between 2013 and 2020. The agency has liberally cited the Perkins Coie memos as proof that Ripple knew full well that the government might deem its sale of the digital tokens now known as XRP to be an unregistered securities offering, but carried out those sale despite the risk.
Ripple initially opposed the unsealing of the Perkins Coie memos. Earlier this month, U.S. District Judge Analisa Torres of Manhattan ordered the documents to be released publicly because they feature prominently in briefs from both sides. Alderoty now contends that the unsealed documents demonstrate why the company was confident that XRP were not securities when the coins began to trade.
“The fact that you would have a government agency trying to take these memos and use them as a sword, or as a bludgeon, rather than applauding a company that was doing the right thing, as general counsel of the company, but also just a lawyer who’s been practicing for 35 years, I find that incredibly offensive,” the Ripple GC told me.
The SEC declined to comment on the unsealed memos and on Alderoty’s criticism. Perkins Coie partner Dax Hansen, who signed both 2012 memos to Ripple, did not immediately respond to my query.
Ripple co-founder and chair Christian Larsen is also a defendant in the SEC case. His lawyer, Martin Flumenbaum of Paul, Weiss, Rifkind, Wharton & Garrison said the unsealing of the Perkins Coie memos shows the SEC’s “distorted” characterization of the advice Ripple received. Larsen is accused of recklessly disregarding Ripple’s allegedly illegal sale of XRP. The very fact of the Perkins Coie memos, Flumenbaum told me, refutes that accusation.
“Getting a legal opinion is the opposite of reckless conduct,” Larsen’s lawyer said.
The government’s unredacted briefs -- including its opposition to Larsen’s motion to dismiss and the SEC’s motion to strike Ripple’s affirmative fair notice defense – contend that the Perkins Coie memos confirm that Ripple and Larsen were forewarned that the government would view XRP as a security if the company veered from the narrow path laid out in the memos. Perkins Coie signaled the pitfalls, the SEC argued, but Ripple and Larsen fell into them anyway.
For one thing, the SEC said, the company disregarded the suggestion in the October 2012 memo that Ripple request a no-action letter from the SEC “to provide further comfort that XRP are not securities under the federal securities laws.” Ripple did not request such a letter. (Larsen pointed out in his reply to the SEC that Perkins Coie was equivocal about the strategy because the SEC could stall or refuse the request.)
The SEC also argued that Ripple and Larsen disregarded the premise of the October 2012 memo, which assumed that the company would not sell XRP to consumers. Perkins Coie warned in its first memo that the SEC would likely deem the tokens to be securities if Ripple sold them to investors. The second memo reflected Ripple’s revised plan not to sell XRP directly to consumers. But the SEC said in its motion to strike Ripple’s fair notice defense that beginning in 2013, Ripple “quickly pivoted from distributing XRP for free to lucratively profiting by offering and selling XRP for consideration.”
According to the SEC, Ripple’s main business from 2013 to 2020 was selling XRP, even though the Perkins Coie memos had warned of the consequences of such sales.
Ripple and Larsen, of course, dispute the SEC’s characterization of their XRP sales, as well as the government’s characterization of the advice in the Perkins Coie memos. At best, Ripple said in its response to the SEC’s motion to strike, the memos show the unsettled state of the law governing digital assets. “They do not establish as a matter of undisputed fact that Ripple had constitutionally adequate notice that the SEC would view XRP as a security,” Ripple said.
It’s a good bet that Torres, the judge handling the case, ordered the Perkins Coie memos to be unsealed earlier this month because she plans to cite the memos in her rulings on Larsen’s dismissal motion and the SEC’s motion to strike Ripple’s affirmative defense. In the end, her take on the memos will be the only one that counts.
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