Ripple lawsuit heats up: SEC takes aim at heart of Ripple’s legal defense

Rick Steves

“To the SEC’s knowledge, no federal court has accepted a defendant’s argument that the term fails to provide the constitutionally required notice; indeed, in the realm of offers or sales of digital assets, at least two district courts in this Circuit have rejected that argument”, the regulator stated.

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The SEC has filed a motion to dismiss Ripple’s “lack of due process and fair notice” defense that the XRP token could be deemed a security.

The SEC v. Ripple lawsuit has been filed with twists every other day, which in turn feeds the market sentiment of the XRP. Even co-founder and CEO Brad Garlinghouse’s recent words provide some insight into the emotional rollercoaster for XRP holders and other stakeholders.

“What I don’t want is for you to worry. We will get through this, and we will prove our case in court. We have a phenomenal legal team and as I said, we are on the right side of the law, to begin with. Know, however, that the legal system is slow, and this is just the beginning of a long, civil process.”

Despite Mr. Garlinghouse’s hopeful words, the Securities and Exchange Commission is now on the attack and has just asked the court to dismiss Ripple’s fourth affirmative defense of “lack of Due Process and fair notice” based on the grounds of being legally insufficient.

“The thrust of Ripple’s defense is that the SEC was obligated to but did not specifically warn Ripple that it was violating the law before the SEC filed suit […] This defense — focused on what the SEC did not do before it filed this enforcement action — is legally insufficient and should be stricken.”

“Ripple’s contention that the SEC must warn a market participant about its legal violation, or that the SEC must issue regulations or guidance before the SEC can exercise the authority Congress conferred on the SEC to enforce the securities statutes, finds no support in the Due Process Clause or any other principle of law”, the SEC continued.

“The implications of Ripple’s defense—that to prosecute violations of the securities laws the SEC must provide specific notice of the illegality of certain conduct in advance of filing its action—turns the statutory regime on its head, and the Due Process Clause requires no such result.”

“To the SEC’s knowledge, no federal court has accepted a defendant’s argument that the term fails to provide the constitutionally required notice; indeed, in the realm of offers or sales of digital assets, at least two district courts in this Circuit have rejected that argument”, the regulator added on the filing.

CFTC eyes SEC v. Ripple for regulatory clarity

A few days ago, CFTC Commissioner Stump has expressed the CFTC’s attention to the lawsuit filed by the SEC against Ripple Labs and its co-founders for having sold more than 14.6 billion XRP tokens worth $1.38 billion in an unregistered offering, according to the complaint.

“The question of whether XRP is a security will be crucial. XRP is similar to bitcoin and other digital assets but also different in key respects, which prompted the SEC’s investigation. Bitcoin was an open software project launched by a pseudonymous creator calling himself Satoshi Nakamoto. XRP was created, sold initially, and backed by the company known as Ripple.

“I am watching the outcome of this case closely because it will help to establish the scope of the SEC’s authority in the digital assets space”, Commissioner Stump said, drawing attention to SEC Commissioner Hester Peirce’s work regarding the application of the “Howey test” to digital assets, which provides the framework for determining whether certain assets are securities.

In the context of the SEC’s lack of clarity, XRP holders’ lawyer John E. Deaton said it “doesn’t take an expert to see that plenty is very wrong, very corrupt and very outrageous about the SEC’s lawsuit against Ripple”.

He has recently published an op-ed stating his belief that the regulator is misleading the court as it secretly targets all XRP holders with its SEC v. Ripple lawsuit. John E. Deaton’s published the accusatory text against the SEC as the regulator welcomes Gary Gensler as its new Chair.

Not only the regulator is being attacked for having filed the complaint the day before Chairman Jay Clayton left his position, but for accusing Ripple’s co-founders of bad faith while also being unclear about the security status of XRP, in what Brad Garlinghouse called “ironic”.

Most recently, the SEC raised eyebrows for protesting against a subpoena on One River Asset Management, which hired ex-SEC Chairman Jay Clayton after he filed the complaint against Ripple the day before leaving office.

Brad Garlinghouse and Chris Larsen, Ripple’s co-founders, have recently filed twin motions to dismiss the case against them.

 

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