Lawyer Discusses the Likely Result of SEC v. Ripple and Its Effect on XRP and Other XRP Coin Issues

Hello, this is attorney Jeremy Hogan and this week on Legal Briefs, Crypto Edition. XRP has returned lightsaber in hand ready to fight the evil empire. I wanted to use XRP strikes back for the thumbnail, but the analogy is backwards. In this legal brief, we have some very important insights on the SEC versus Ripple litigation. There is now a writ of mandamus filed by a third party against the SEC. We'll discuss that. Coinbase was also sued by a third party and we'll talk about that briefly and then wait until the end for the best part. Someone suggested I keep it the best for the last, where we talk about how the SEC rules process works and what I think is an inherent misunderstanding of it that I see online. And finally, at the end, we're going to analyze a prior settlement between the SEC and a cryptocurrency and see if we can apply the prior settlement to the Ripple and XRP situation. This will go fast. Hang on to your hat. First, on January 1st of this year, attorney John Deaton filed a writ of mandamus against the SEC in response to its lawsuit against Ripple. Now, let me start by saying that I think the petition is extraordinarily well done and attorney Deaton must have spent an entire week drafting this thing and the accompanying memorandum of law. The fact that he drafted a 90-page federal court petition in a week, superhuman. You have no idea how hard that is to do. Anyways, a petition for a writ of mandamus is fancy Latin for saying you are asking a superior court to tell a lower court to do something correctly. Now, I rarely see a writ of mandamus in the wild because they're so rarely granted and they're so rarely filed. You must have first an emergency situation and you must have no other effective remedy at law. Now, here the emergency situation arguably is that the owners of XRP have been decimated as to the value of their XRP due to the SEC's lawsuit and also because Coinbase and other exchanges are halting trading soon. That's coming up. Now, I'm going to tell you a little secret about reading the lawsuit. Start at the end where the prayer for relief is. That's where we start and here looking at the prayer for relief, the petitioners are first asking for an order from the court asking that XRP owned by petitioners is not a security for an order to that effect. It's a great way to phrase the prayer for relief because obviously the argument that the XRP being actively traded between individuals is a security is a really difficult argument for the SEC to make. Now, that being said, I don't think the petition will be granted for two reasons. First, in a minute we are going to talk about a concept called stare decisis, which means that once a court has ruled on an issue, lower courts must follow that ruling in the same way. So, if a superior court rules that XRP is not a security, the lower court must follow that opinion and so the court hearing the petition is being put in a position of having to rule essentially on the entire case and that's not really the purpose of a writ of mandamus. Otherwise, you could effectively move the case to an entirely new judge if you wanted simply by filing a petition for a writ. Now, the second reason I think the petition gets dismissed is because the second part of the prayer for relief revolves around money and I'm worried that the judge is going to find that there is a regular remedy in law in the form of a lawsuit for money. And speaking of a lawsuit for money, that lawsuit is coming. Trust me, I haven't seen it or heard about it, but I would bet a ton of that attorney Deaton is drafting the damages lawsuit as we speak. The reason why it wasn't filed right away is because of a rule called sovereign immunity, which the US of A inherited from English common law, where they used to say, the king can do no wrong. And it's the idea that you cannot sue the government unless the government allows you to. And in the US of A, that is governed by the Federal Tort Claims Act, which says that you can sue the government, in this case the SEC, for negligence or even some intentional torts, but you have to make the claim with them and give them six months to respond before you sue them. So I just made a claim against the post office myself. I sent it to them by mail. Is that ironic? Anyway, I'm certain that a claim has been made for damages against the SEC for the drop in XRP prices, but it won't be able to be filed until June of this year. So if you wonder why I think the petition is great, even though I think it's is because by Deaton getting this petition in front of the judge, he really gets to make his argument twice. The lawsuit will be reviewed now. And even if it gets dismissed, then he gets a second bite at the apple in June with the real lawsuit for damages. Now I call that good lawyering. Plus, you never know. Now briefly on to topic number two, I saw that Coinbase is getting sued in San Francisco for selling illegal securities. And the alleged damages are not the drop in XRP price, but for the commissions paid to Coinbase for the sales. I know those commissions can add up because I use Coinbase. It's not cheap. In any case, we are starting to see the repercussions of the SEC lawsuit. And I imagine there will be many more such lawsuits shortly. I'm certain Coinbase is following the recommendations of its corporate counsel who a corporate counsel or in-house counsel are almost always very conservative in what they recommend you do or don't do. If you are a corporate counsel, and I know many, and you are asked to give an opinion and you tell Coinbase to stop the sales and you are wrong, Coinbase might lose some commissions. But if you tell them to keep selling XRP and you're wrong, then Coinbase suffers a legal tragedy and you get sued for malpractice. So in-house or legal counsel always err on the side of caution. And that's why most of the exchanges are not going to trade XRP anymore because corporate counsel telling them to. Okay, I want to move on to issue number three, because before we run out of time, I think this is key. You really have to hear this. Over the weekend, I had a couple hours of free time. Yes, I could find some free time sometimes. And I found out some really interesting things. Let me start by dispelling a narrative that I have seen online that the SEC lawsuit will somehow lead to greater clarity for the crypto or XRP community. In fact, in order to understand what is likely to happen to Ripple and XRP, you have to understand what the SEC does and doesn't do. The SEC does its job primarily in two ways. First, as an administrative body, it makes rules related to securities. And this is what I think many people are thinking of when they say we need more clarity related to the crypto blockchain business. They are thinking that the SEC will release a rule that lays out how a cryptocurrency can be bought and sold and what the companies are supposed to do. Now, I went to the SEC website and it has a page which talks about its rulemaking process. And let's take a look. As you can see, the process of the SEC making a rule on something like for example, a cryptocurrency regulation would start with a concept release, which apparently throws out a couple different ways to approach a problem. That is then followed by a proposed rule, which is then voted on after public comment. And if it's adopted, it becomes a final rule. Now note that only final rules are rules. There are many statements and opinions that come out of the SEC, which are not binding. And in fact, I want to take a look at one from the former head of the SEC, Mr. Clayton back in 2017. Now, Mr. Clayton says many interesting things in this statement. But let me highlight a couple things for you. First, he says that in regard to cryptocurrencies in general, quote, it has been asserted that cryptocurrencies are not securities and that the offer and sale of cryptocurrencies are beyond the SEC's jurisdiction. Whether that assertion proves correct with respect to any digital assets that is labeled as a cryptocurrency will depend on the characteristics and use of that particular asset, close quote. So what is he saying? He's saying that whether a coin is a security or a currency hinges on the particular facts of how each is used. That's exactly what we said in our last video on the topic. Now, he says the exact same thing when talking about initial coin offerings or ICOs. Quote, a key question for all ICO market participants. Is the coin or token a security? As security law practitioners know well, the answer depends on the facts. The facts. The reason why there is not even a proposed rule from the SEC on crypto is because they know the SEC knows that there is no way they can make a bright line rule. It's not possible. I mean, it's not even legally possible, really, because the second job, the second hat, so to speak, that the SEC wears is to enforce the laws on security. Those laws were passed by Congress a long time ago, and the SEC has no discretion but to enforce them. And the law is that the sale of securities must be regulated. And the SEC's second job is to litigate violations of securities laws. And that's where Ripple is finding itself currently. And what I'm getting at is that I don't believe the Ripple litigation will end with a dismissal of the case and formation of an administrative rule, because those are two completely separate functions of the SEC. There's the rulemaking function. And then here's the enforcement function. And they're not together. They're not combined into one. So whether XRP is a security is squarely a legal issue that will depend on the specific facts of each coin and usage. And the only clarity will be brought by the courts and stare decisis, meaning there will have to be extensive litigation before cryptocurrencies get a feeling for which projects will have litigation brought against them and which will not. Meaning if the judge or jury finds that certain aspects of how Ripple dealt with XRP coins back in let's say 2013-14 meet the Howey test, and those transactions were sale of securities, then future courts could find that ICOs that happened in a similar way were also sales of securities as a matter of law. Stare decisis means that the exact same issues don't have to be re-litigated. Now, that sounds bad for XRP, right? Wrong. To understand why this is, we need to take a deeper dive into the actual lawsuit against Ripple. Now, let's take a look. And what did I tell you earlier about reviewing a lawsuit? Start at the end and look at the prayer for relief and see exactly what the plaintiff is asking for. So let's take a look. Roman numeral one, the SEC asks for an order that Ripple stops selling XRP. That is primarily what is being asked for. Two, the SEC asks for disgorgement, which is a gross sounding way of saying giving back the money made by the sale of XRP. Now, who would the money be disgorged to? The buyers of XRP. Now, the third request is essentially the same as the first, and Roman numeral four is again asking for money this time as a penalty. Now, when I read the prayer for relief a second time this weekend, something jumped out at me, and that is under federal law, you can request something called a declaratory judgment, and a declaratory judgment requests or asks for an order clarifying something, like you can ask for a declaratory judgment clarifying a contractual provision, immigration court, you can clarify an individual's legal status, or in this case, possibly a declaration that XRP is a security and not a currency. So I looked at and I said, where's the request for a declaratory judgment in the Ripple lawsuit? It's not there. Now, understand that in a lawsuit, a judge cannot grant something that is not requested. The omission of a request for declaratory judgment tells me that the SEC is not after XRP. They don't want what for whatever reason, something saying XRP is a security, all they want is to punish or maybe to enforce the law as to Ripple and the other two defendants. In other words, the effect of a verdict in this case will be minimal as to XRP. In fact, it would have almost no effect whatsoever, except as to how it affects Ripple. So our worst case scenario has now gotten much better, I think. But as you know, my thesis on the situation is that Ripple would be smart and want to reach a settlement and that a trial and a verdict is not likely. So I thought to myself, well, what would a settlement look like? Because I always want to dig deeper on these things. So in my practice, if I was advising a client, I would try to find prior settlements between persons like my client and the plaintiff. And guess what? We have a settlement we can look at in the public record in the case of SEC versus Paragon Coin. And let's go ahead and take a look. Now, the Paragon Coin case was much more of a slam dunk case than the Ripple case. Of course, there wasn't much of a fight that the defendants apparently put up or they didn't really have the resources. I'm not sure, but it was a completely different situation than the Ripple litigation. So let's look at the settlement that was reached first. In paragraph 50B, the defendant is required to set up claim forms for people who bought the Paragon Coins so that the profits could be paid back to them and have those claims monitored by the SEC. Next, jumping down to paragraph A, the settlement orders that Paragon Inc. seize violating the securities laws. Part B, there requires the payment of penalties in the amount of $250,000. Again, just like in the Ripple lawsuit, there is nothing here that would be seen as a declaration or anything creating any precedent as to whether XRP out in the wild is a currency. It only reflects what Paragon did and mainly requires them to stop that activity and give back the money that was made. Now, the big question is, what effect would a verdict or settlement that looks like this have on Ripple? And perhaps more importantly, what effect would it have on XRP, its value and its usage? And I'm very sorry, but I am not qualified to answer that question. I know I'm disappointing you, but I'm sure with more knowledge of Ripple and the XRP community can jump in and answer that question for me. So someone out there, lend me a hand. But it's not that bad a result. And if it's not that bad a result, why the drama? Why did the coin price just drop by over 50%? And finally, one more super interesting issue. Briefly, stay with me on this one. This is good. My understanding is that Ripple still holds almost 60% of the XRP coins that exist. If there is a chance that Ripple will not be allowed to release the coins as they have been doing in the past, and it's actually within the court's power to order that they not be allowed to release the coins at all. So just a quick question for anyone with a better understanding of XRP and Ripple than myself. What would happen if at the end of this process, if Ripple survives in some form and XRP survives, but Ripple is not allowed to do anything with the billions of coins that it holds? What if the supplies that's out there right now will be all there ever is? What would happen to the price of XRP in that scenario? Now answer me that question in a way that I like, and I'll probably start buying XRP tomorrow.