Ripple Labs is under fire after the U.S. securities regulator accused the company of undermining a regulatory probe into whether the XRP token is an unregistered security.
In December, the U.S. Securities and Exchange Commission (SEC) filed suit against Ripple Labs, CEO Brad Garlinghouse and co-founder Chris Larsen for conducting a $1.3 billion unregistered, ongoing digital asset securities offering. Ripple also stands accused of distributing billions of XRP in exchange for non-cash consideration, including labor and market-making services.
On Monday, the SEC asked Magistrate Judge Sarah Netburn of the Southern District of New York for a pre-motion conference at which the SEC intends to seek an order compelling Ripple Labs to produce relevant communications between Ripple staffers on the Slack messaging platform.
The SEC claims that Ripple agreed to produce responsive Slack data involving some 33 custodians but the company now “suddenly refuses to do so.” The SEC further claims that this refusal came despite Ripple admitting on July 30 that a “data processing mistake” had resulted in a “massive quantity of [Slack] data” being neither collected nor searched under the original request.
Ripple had promised to search Slack data involving some 33 designated document custodians, which the SEC later agreed to reduce to 22. Ripple then reneged, declaring that it would only search Slack messages related to the two execs named in the suit along with some of the communications of just six other custodians.
The SEC believes Ripple is withholding the Slack data on purpose, as the motion request includes redacted sections related to testimony offered by a couple Ripple staffers, including CTO David Schwartz, regarding the company’s extensive use of the application. The motion notes that the volume of Ripple’s Slack message data exceeds that of the company’s email productions.
Ripple goes full Mr. Magoo
The SEC says the “relatively few” Slack documents Ripple has produced to date demonstrate that staff were discussing the company’s “desire to create speculative trading in XRP,” the “central importance of XRP sales to Ripple’s overall business” and the token’s regulatory status.
With the window for fact discovery rapidly drawing to a close, the SEC argues that Ripple’s data cockup and refusal to honor its stated commitments have been “highly prejudicial” to the SEC’s investigation. For instance, the SEC says it has already deposed 11 Ripple witnesses based on incomplete communications records, which limited the SEC’s ability to “refresh Ripple employees’ dwindling recollections.”
The SEC notes that many Ripple execs “frequently testified that they did not recall many critical facts” while being deposed. The unquestioned star of this forgetful faction was former CFO Ron Will, who offered a ‘can’t recall’ response to over 250 SEC questions.
The SEC rubbishes Ripple’s attempts to restrict the number of Slack messages it provides based on the cost of this data retrieval, which Ripple reportedly estimates at “several hundred thousand dollars.” The SEC notes that Ripple’s original XRP issuance raised around $1.4 billion, and the company continues to raise around $150 million per quarter from additional XRP sales. The SEC also notes that Ripple has no less than seven insurance policies with which to cover its legal costs.
Bottom line, the SEC says Ripple can’t be allowed to “reap a reward from its discovery mistakes and refuse, at the last minute, to search for the documents it long ago agreed to search.” The SEC maintains that the benefit of Ripple conducting this search “outweighs the burden that the search will impose” and forking over this data will “ameliorate the prejudice the SEC has already suffered.”
Collateral damage
While the SEC may have a good shot at convincing Judge Netburn of the need to compel Ripple to honor its original commitments, Ripple has won a few procedural arguments during this protracted legal fight. Chief among these is Netburn’s July decision that Ripple could depose former SEC exec William Hinman regarding the agency’s crypto-related policies.
In 2018, Hinman raised eyebrows by declaring that the BTC and ETH tokens didn’t meet the definition of a security, in part because the networks on which they functioned were “sufficiently decentralized.” Ripple attorneys promptly argued that this was proof that the SEC was inconsistently applying its definitions, with the effect of picking crypto winners and losers.
A public statement in July by two current SEC commissioners—Hester Peirce and Elad Roisman—acknowledging a lack of clarity in the SEC’s digital currency policies further boosted Ripple’s belief in the righteousness of its cause. The SEC pooh-poohed this view, saying the commissioners’ comments didn’t represent an official SEC statement, while the SEC had issued official warnings regarding the need for digital asset sellers to comply with federal securities laws.
Ripple filed a motion of its own on Tuesday, asking Judge Netburn to spank the SEC for its delays in handing over internal documents related to the agency’s alleged confusion over how to treat digital assets, including XRP, BTC and ETH.
At any rate, Ripple’s token rivals likely don’t appreciate the company’s strategy of denying all wrongdoing while hedging that, if Ripple is guilty, so are a lot of other technologies. We half expect the respective braintrusts at those so-called ‘decentralized’ BTC and ETH networks to be frantically funneling any dirt they have on Ripple execs straight to the feds in a bid to keep this legal shotgun aimed solely at its original target.
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