SEC warns Court that a Ripple win on Fair Notice defense would nullify Howie Test

Rick Steves

Earlier this week, Ripple filed a SurReply that argues that the “more than seventy” lawsuits brought by the SEC against cryptocurrency firms don’t serve as Fair Notice for Ripple Labs.

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This SurReplay – made public on Twitter by attorney James K. Filan – responds to the Securities and Exchange Commission’s reply supporting its motion to strike Ripple’s fourth affirmative defense: lack of fair notice.

“In its Reply, the SEC relies on a report by Cornerstone Research, a private consulting firm, to argue for the first time that Ripple’s fair notice defense “fails” because, “[p]rior to suing Ripple, the SEC had already brought more than seventy cases that subjected other digital assets to the application of the federal securities laws.”

“The SEC asks this Court to take judicial notice of the “more than seventy cases” referenced in Appendix 1 of the report, which Cornerstone characterizes as “Cryptocurrency Enforcement Actions” — almost all of which the SEC never cited in its opening brief.”

“In any event, the SEC has mischaracterized the prior enforcement actions. If the Court were to consider the cases cited in the report, they support Ripple’s point that the enforcement action brought against it is unprecedented”, the document stated.

Attorney Jeremy Hogan, a lawyer siding with Ripple in this lawsuit, summed up the situation: “The SEC wants to argue that the 75 actions/lawsuits it brought against crypto companies the last 5-6 years somehow put Ripple on notice that XRP was a security.

“Very misleading. The Telegram, Kik, Paragon cases all involved an ICO in which sales were made to CREATE the ledger”, he said on Twitter.

Ripple never held an ICO because the XRP ledger was ALREADY in existence when Ripple was formed. So, prior lawsuits against companies that held ICOs do NOT tend to show that Ripple had Fair Notice that what it was doing was illegal. Ripple is making an important distinction here”, he continued.

Yesterday, the SEC fought back and responded to the defendant’s SurReply saying Ripple Labs’ argument is based on an incorrect characterization of the “fair notice” defense.

“Fair notice does not require such exact factual correspondence, and Ripple cites no case that suggests anything to the contrary”, the SEC stated, further citing a recent ruling (United States v. Zaslavskyi) rejecting criminal defendant’s contention that “the United States securities laws are unconstitutionally vague as applied to cryptocurrencies.

“Rather, the ‘abundance of caselaw interpreting and applying at all levels of judiciary, as well as related guidance issued by the SEC as to the scope of its regulatory authority and enforcement power, provide all the notice that is constitutionally required'”.

The SEC argued that giving in to the defendant’s fair notice argument would nullify the Howie Test and its progeny’s “flexible rather than…static principle” if a “fair notice defense can defeat any claim involving an investment product that is not identical to one previously deemed a security.

The Fair Notice affirmative defense is Ripple’s most important argument against the SEC’s accusations. The firm has called for a summary judgment on that defense. Attorney Jeremy Hogan has recently stated that if Ripple wins such judgment, the precedent “could save the industry from the SEC”.

The lawsuit between the SEC and Ripple is most likely ending in a pre-trial settlement. 96% of all SEC cases are settled before trial, of which 60% before litigation and 90% in discovery. Mr. Hogan has recently presented his view on what a settlement may look like. One of the main points is that it could bottleneck the flow of XRP.

Anyway, Ripple may still lose the lawsuit. CEO Brad Garlinghouse told CNN the firm is ready to march on without the XRP if it loses the legal battle against the US regulator.

In the meantime, the world keeps dealing with the emergency of the cryptocurrency ecosystem. El Salvador has just approved Bitcoin as legal tender, with unforeseen consequences.

In the United States, however, the American Bankers Association has just warned the Senate against central bank digital currencies, a much desired market for Ripple.

ABA said CBDC proponents take a “highlight reel” approach to describing CBDC, “cherry-picking all the perceived benefits, while downplaying the serious risks to consumers and our financial system.”

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