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Attorney discusses worst-case scenarios of SEC lawsuit against Ripple Labs

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  • For attorney Jeremy Hogan, the most likely outcome of the SEC lawsuit against Ripple is a settlement with a large fine.
  • The SEC could restrict XRP sales from escrow. 

Jeremy Hogan of the Orlando (USA) law firm Hogan & Hogan ran through what he considers to be the most likely worst-case scenarios for Ripple Labs in its case against the U.S. Securities and Exchange Commission ( SEC) in a YouTube video. At the outset, he stated with regard to the assessment of XRP as a security under U.S. law that there can never be a blanket “determination.”

The status, he said, is always a snapshot in time. To underscore this argument, Hogan cited an analogy from former SEC chief Clayton during a 2018 speech:

In his speech Clayton said that if someone sells you a token to allow you to use their laundromat, that is not a security.  BUT if someone sells you and ten other people tokens they can use at a laundromat that is still being built and then uses the proceeds of the sale to build the laundromat and you expect to be able to sell the tokens to another guy with for more money once the laundromat is completed, THAT is a security.

But once the laundromat is built, any sales of tokens at that time are not sales of securities – those are just a kind of currency.  So as Clayton says at the bottom of the story “Just because it’s a security today doesn’t mean it’ll be a security tomorrow.

The lawyer believes that “this is exactly what we’re seeing with the sale of XRP.” As more use cases for XRP are created and the XRP ledger becomes more decentralized, it is less likely that XRP will be a security.

Like former SEC Commissioner Joseph Grundfest, Hogan also questions the “true motive” of the SEC’s action against Ripple. In his testimony, however, Hogan went in a different direction, agreeing with Ripple Labs CEO Brad Garlinghouse that there could be an “attack” on the entire crypto industry behind the lawsuit.

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If you wanted to control an industry that involves over a thousand different companies many of which are decentralized and difficult to control – which is the more efficient way to control it?  Suing each company individually or by controlling the handful of large markets where those companies goods are traded?

The worst-case scenarios for Ripple

In addition, Hogan is optimistic that XRP will not be classified as a security. The SEC “did not file a request for a Declaration from the court that XRP is a “security,” which the SEC could have requested from the court but did not.” Therefore, Hogan concludes:

That clued me in that the effect of this lawsuit was going to be limited to monetary damages and effect only the XRP in escrow.

Further, the lawsuit could end with no “clear winner,” as prior SEC lawsuits indicate. Like other legal experts, Hogan speculates that a settlement between Ripple and the SEC is the most likely outcome of the case. To figure out what this might look like in a worst-case scenario, Hogan took his cue from the cases against Paragon and Kik Interactive.

In the Paragon lawsuit, there was a financial settlement and an injunction for violating securities laws. On the legal implications, Hogan said:

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This clued me in that even a bad settlement would only effect the XRP held by Ripple in escrow and that was probably the sticking point in settlement negotiations.

The lawsuit against Kik was litigated to the end by SEC and ended in a “100% defeat” for Kik. However, he said that this is precisely why the ruling is interesting, because it shows that “even in a worst-case scenario, there is still a mechanism for selling XRP in escrow that could allow Ripple to continue to expand its use of XRP while limiting Ripple’s “dumping” of XRP on the market.” On the most likely outcome, Hogan thus stated:

My conclusion was that the MOST likely outcome of the SEC lawsuit would be a settlement involving a large fine or penalty for sales from 2013-14 and maybe 2015 and some sort of control or limitation on the sale of the escrowed XRP.  And that’s a conservative conclusion on my part.  That conclusion would hurt Ripple no doubt but would by no means be a deathblow.

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Ripple Vs SEC

Court Orders SEC to Answer Ripple’s Interrogatories

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Ripple, however, has failed to bury the SEC in paperwork, with the judge granting the agency’s motion for a protection order against “unduly burdensome” requests

Magistrate Judge Sarah Netburn has ordered the U.S. Securities and Exchange Commission to answer some of Ripple’s hotly-contested interrogatories, which are meant to determine whether or not the plaintiff’s contentions can be supported by facts. 

The agency will have to specify why the company’s XRP sales are investment contracts:

The SEC’s legal theory is not an excuse to avoid responding to Defendants’ factual inquiry. Nor is it a basis to answer a different question than posed.

In addition, the SEC will have to state whether it believes that Ripple’s efforts were key to boosting the price of XRP.

However, Ripple’s interrogatory about whether or not the XRP Ledger was fully functional prior to the start of the securities offering has been denied for being too vague:

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The Court agrees that this interrogatory seeks relevant information. But Defendants’ interrogatory is too vague for the reasons identified by the SEC.

Netburn has also granted the SEC’s motion for a protective order, which allows the regulator not to respond to all of Ripple’s “unreasonably burdensome” interrogatories.

The agency claimed that covering all the 29,947 requests would take 104 days without “breaks or sleep.”

Earlier this week, the court also granted the SEC’s motion to extend the expert discovery deadline to Jan. 14, 2022, despite Ripple’s protestations.

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Ripple CEO Says the SEC Helped Ethereum to Surpass XRP as No.2 Crypto

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  • Ripple CEO aired his opinion on the crypto market and regulations.
  • Brad Garlinghouse said the US SEC granted Ethereum regulatory green light.

At the DC Fintech Week virtual conference on October 21, Ripple CEO Brad Garlinghounse aired his thoughts on the state of the crypto market and regulations. Besides, he holds a grudge over the financial regulator’s approach to Ethereum.

In addition, Garlinghouse declared that the US Security and Exchange Commission (SEC) granted Ethereum regulatory green light that enabled it to surpass his firm’s XRP token.

Likewise, the Ripple boss feels that his firm has been played out. But, at the same time, Ethereum’s subsequent success is at least in part down to more favorable treatment by the US SEC. Also, Garlinghouse stated that it is affecting its market. He said,

“Within the last few years, XRP was the second most valuable digital asset. As it became clear the SEC had given a hall pass to ETH, ETH obviously has exploded, and that clarity has helped.”

To clarify, XRP was the second-largest crypto asset by market cap in late December 2017. But, currently, it has dropped to seventh place while Ethereum has kept the second spot ever since.

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Furthermore, the reason why XRP dropped is the US SEC pursuing Ripple over claims that XRP is unregistered security. In fact, in January, Ripple filed a Freedom of Information Act request with the US SEC demanding to know why it didn’t consider ETH security.

As a result, later in July, a district judge allowed the firm to depose a former official who declared in 2018 that ETH was not a security.

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Ripple CEO reinstates SEC bias towards ETH, claiming XRP could’ve been No.2

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It is not news that the ongoing XRP lawsuit has got the better of Ripple’s XRP token. Ripple CEO, Brad Garlinghouse recently questioned the SEC’s bias towards Ethereum, claiming that XRP would’ve been at the No. 2 position instead of ETH if it weren’t for the commission’s partial crackdown. Garlinghouse spoke at the DC Fintech Week virtual conference yesterday, arguing that the U.S. Securities and Exchange Commission alleged Ripple’s XRP as unregistered security while granting Ethereum a regulatory free pass, which in turn helped ETH shoot through the roof.

“Within the last few years, XRP was the second most valuable digital asset. As it became clear the SEC had given a hall pass to ETH, ETH obviously has kind of exploded and that clarity has helped.”

XRP secured the position of the second-largest crypto asset by market capitalization during the latter half of 2017. However, the token has dropped down to seventh place while Ethereum stands strong as No. 2. Furthermore, Garlinghouse claims that the SEC’s exclusively aggressive anti-crypto stance to allegedly protect the consumers is in fact anti-investors. Referring to the XRP lawsuit, Ripple CEO emphasizes that “nearly 50,000 U.S. people who hold XRP who are trying to sue the SEC for ‘protecting them’”.

XRP Holders left with bearish and frozen funds

Earlier this week, Attorney Deaton Filed a Letter Motion on behalf of the XRP Holders (Movants) that contended SEC’s extension request, with the main argument concerning the XRP holders’ frozen funds because of the consistent postponement of the lawsuit’s final verdict. During the ongoing bull run, XRP remains considerably bear because of the regulatory crackdown on Ripple. However, the court has overlooked the community’s concern and granted the extension explaining that in lieu of pending motions, extra time will only facilitate both parties to complete pending fact discovery and thoroughly prepare for upcoming expert depositions.

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“The lack of liquidity within the United States, coupled with the mass de-listings prevents XRP Holders from trading, selling, transferring, or converting their XRP. It is because of this de facto in place seizure of their property that XRP Holders took the extraordinary step to seek intervention as defendants… Any delay in the underlying action marks yet another day XRP Holders do not have access to their funds.”, wrote Deaton.

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