Ripple’s “Fair Notice” Defenses Are “Improper”, Says SEC to Judge for XRP Lawsuit

The U.S. Securities and Exchange Commission (SEC) has issued a letter calling Ripple’s defenses against its allegations “improper.”

In a letter (filed on March 9) to Honorable Judge Analisa Torres of the U.S. District Judge Southern District of New York, the SEC tries to strike Ripple’s “fair notice” defenses and other motions to dismiss the lawsuit.

The SEC previously filed a suit against the Californian FinTech firm, alleging that Ripple had acted illegally in distributing XRP, which it deems an unregistered security, to investors. In this letter, the SEC says:

“The SEC alleges that Ripple violated Section 5 of the Securities Act of 1933 for failing to register certain offers and sales of XRP. To adjudicate this strict-liability claim, the Court must decide a single issue—whether Ripple offered and sold XRP as “investment contracts” as the Supreme Court defined the term in SEC v. W.J. Howey & Co., 328 U.S. 293 (1946).“

The SEC then offered its own summary of Ripple defense team’s core arguments:

“Ripple seeks to avoid liability for its unregistered offering by diverting the Court’s attention with a number of affirmative defense arguments sounding in equity but all pigeonholed into the label ‘fair notice.’ Ripple’s arguments ask the Court to conclude both that the term “investment contract” is not sufficiently defined, such that Ripple lacked notice that its conduct could be prohibited, and that the SEC should have stopped Ripple sooner.“

The SEC wants Judge Torres to “set a joint briefing schedule” for the SEC’s motion to strike and the upcoming motions to dismiss by Brad Garlinghouse and Chris Larsen.

The SEC then talked about the Howey test:

“… this case turns on a straightforward application of a well-settled legal test—set forth more than 70 years ago in the Supreme Court’s Howey decision and applied in many decisions since—to the facts of Ripple’s offers and sales of XRP to public investors, to determine if they were offers and sales of securities… Here, Ripple essentially capitalized its entire business by selling a digital asset security to the public while promoting to investors the potential for profits based on Ripple’s future efforts. Yet Ripple now claims surprise that the SEC filed this enforcement action.“

Here is what the SEC finds objectionable about Ripple’s argument:

“Ripple’s argument is, in essence, that the term ‘investment contract’ as defined through decades of case law is void for vagueness. However, that argument has been repeatedly rejected by courts.“

The SEC then addresses Ripple’s “fair notice” defense:

“… Ripple argues that the SEC failed to provide Ripple ‘due process and fair notice’ because SEC staff allegedly met with industry executives and failed to tell them that XRP was a security… Ripple instead posits that the SEC staff has an obligation to affirmatively warn industry participants about violations of other participants—even if the staff is in the process of conducting a nonpublic investigation—a requirement that does not exist in our legal system.“

The SEC also does not buy Ripple’s argument that calling XRP security would stifle innovation:

“Ripple’s Amended Answer complains that the SEC is stifling innovation. But innovation cannot come at the expense of investor protections provided by long-standing law.“

Finally, the SEC makes the following proposal to the judge:

“The Individual Defendants, seeking to move to dismiss certain claims of the SEC’s Complaint, argue that they, too, were confused about the securities laws, that they believed Ripple’s FinCEN settlement somehow meant they did not have to comply with the securities laws, and that the SEC ought to have instituted this case earlier…

“Because the Individual Defendants’ proposed motions to dismiss and the SEC’s proposed motion to strike overlap as to these ‘fair notice’ issues, the SEC respectfully proposes a schedule where the parties file opening briefs simultaneously, within thirty days of Ripple’s response to this letter (approximately April 19, 2021), that the parties’ opposition to the motions be due approximately 30 days thereafter, or May 19, 2021, and replies fourteen days thereafter.“

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