Jeremy Hogan on Ripple v. SEC_ Hinman Emails! Reply Briefs! Speculation! We Are Almost THERE!.

Hello and welcome to Legal Briefs. It's the Ripple versus SEC Fight Club edition because finally, over the last couple of days, Ripple and the SEC have taken on each other's positions and really come to blows as the Hinman emails have been handed over and we have now seen both the Ripple and the SEC reply briefs. No more tip-toeing around, Fight Club has begun. It was on the tip of everyone's tongue. Can I be next? We just gave it a name. Gentlemen, welcome to Cuddle Club. Cuddle Club, really? Well, we couldn't get the copyright for Fight Club. So we could violate Sesame Street's copyright but not Fight Club? What's YouTube coming to? Okay, welcome back and tonight we are going to get you up to date on the Ripple case. There is a lot to go over so this will be a little long because the fight is on. The big news was probably the Hinman emails and that was big but maybe even more important from a pure legal standpoint. We got to see the SEC's reply brief and we can evaluate how strong its reply was to Ripple's summary judgment motion and perhaps most importantly, we can now get a feel for what the likely outcomes are from this entire case but not yet, it's a lot and this is truly the culmination of the last two years. So we are going to start with the emails, then look at the SEC's response brief and then at Ripple's response brief and then we will conclude and speculate. And so Thursday night, I had just ate dinner with my family. It was just getting over my shock that I had no idea how to help my 13-year-old with her science homework when this popped up on my Twitter feed from the general counsel for Ripple. Quote, over 18 months and six court orders later, we finally have the Hinman docs, internal SEC emails and drafts of his infamous 2018 speech. While they remain confidential for now at the SEC's insistence, I can say that it was well worth the fight to get them closed, quote. And I said, thank God for that because then I could stop thinking about covalent bonds for a while. And I told my daughter, you're on your own and I got on Twitter and then I saw this from the Ripple CEO himself. Quote, the SEC wants you to think that it cares about disclosure, transparency and clarity. Don't believe them. When the truth eventually comes out, the shamefulness of their behavior here will shock you. Close quote. Wow, Garlinghouse had the chance to throw a punch and he sure did. Can't blame him. I mean, the SEC had been throwing free punches at him for two years now. So yes, the Hinman emails were actually given to Ripple but what exactly is in them? Well, some parts make it into Ripple's reply brief. So we do have some ideas. Looking at the bottom of page 48 of Ripple's brief, quote, contemporaneous SEC communications suggest that the SEC's own officials were well aware that the speech would lead to redacted and deliberately recommended giving industry participants redacted, presumably to give the agency more room to maneuver, close quote. So at least there we can infer that the first part says SEC officials were well aware that the speech would lead to confusion or something like that in the marketplace, even if we can't infer the second word. But put the guessing game aside for now and let's see what we know about the secretive emails for sure. First, we know the SEC fought tooth and nail not to produce them and now they have. But we also know that the emails are under seal so the public won't probably get to see them until December at the earliest. We also know that the emails are only really relevant to the fair notice defense and not to the issue of whether XRP is a security or not. We know that the SEC wants the judge to rule in its favor on the fair notice defense and now we also and finally know that Ripple wants a jury trial on its fair notice defense, not the judge to decide it and summary judgment and how do we know that? Let's look at Ripple's recent brief on page 43. Quote, Roman numeral three, defendant's fair notice presents genuine disputed issues of material fact for trial. In seeking summary judgment on defendant's affirmative fair notice defense, the SEC ignores overwhelming evidence showing that no reasonable person trying to apply the Howey test would have believed that defendant's offers and sales of XRP, most of which involve no contract at all, were investment contracts and thus securities. Close quote. Yes, Ripple is saying, we'll see you in court on the fair notice defense, SEC. We wanna run a bunch of SEC employees and prior employees, including Mr. Hinman, up on the stand and cross-examine them in a public forum on the guidance or lack thereof provided by the SEC and we wanna ask them on the stand why the SEC director of enforcement declared Ethereum a non-security knowing that it would cause all sorts of confusion in the marketplace and even having been warned about it by other attorneys at the SEC. Why indeed? So you could say that Garlinghouse's tweet was a declaration of war and declarations of war, as history tells us, are always made from places of strength. So let's move on to the reply briefs and take a look at why Ripple is feeling pretty strong right now in its position. Let's take a look at the SEC's reply brief to Ripple which was filed yesterday and which responds to Ripple's argument that in order for there to be an investment contract, there must be some kind of obligation flowing from Ripple to XRP purchasers. They call it a post-sale obligation of some sort. Now we talked about this argument in my last video and I concluded with this. If I was the SEC, I'd be hitting the law books tomorrow and hoping I can find a case that says the seller of an asset doesn't need to have legal post-sale obligations to the purchaser in order for there to be an investment contract. And so let's answer the big question, how did the SEC do in its legal research? Well, with over 75 years of SEC lawsuit history to pull from, I was expecting the SEC to string together a number of appellate cases in which the seller of the alleged security did not have any post-sale obligations to the purchaser. I expected them to say, for example, first in this case, the court said no post-sale obligations were required and then here's another case where they said there were no post-sale obligations. And here's another one and here's another one. I did not see that in the SEC's reply brief. Instead, the SEC really struggled to be clear in responding to this issue despite most of its brief addressing the issue. And actually what we see in the reply is that the SEC simply mischaracterizes Ripple's argument and then proceeds to argue against the mischaracterization. And here is the summary of that from the SEC at the bottom of page 18 of the SEC's brief. Sorry about that, technical difficulties. Anyway, here is the reply from the SEC and we're looking at the bottom of page 18 of the SEC's brief, quote, left with nothing else. Defendant's argument boils down to the absurd contention that a written contract is required simply because Howie happened to involve written contracts, close quote. And so having set up that red herring, the SEC then moves forward in knocking it down by citing two cases in which there was no written contract but which the court held that there was a sale of a security. It's not until page 22 of its brief where the SEC directly addresses post-sale obligations and specifically cites to a case. And that case is none other than the SEC versus Kick Interactive case. Looking at page 22 of the SEC's brief, quote, while the private sales were governed by written agreements that acknowledged the investments were securities, the only documentation for the public sales were a, quote, terms of use agreement, which constituted the entire agreement between the purchaser and Kick. The agreement expressly disclaimed any obligations on the part of Kick. Despite this express absence of defendant's essential ingredients, namely post-sale obligations on the part of the issuer or the right of the investors to make demands on the issuer, the court determined the public sales violated section five, close quote. Fair enough. But the Kick case was only a trial level case and not binding on Judge Torres. And in fact, Judge Torres has already completely ignored the Kick case in another issue last year. So I kept reading and reading and reading and the SEC discusses other cases, but they never directly addressed the post-sale obligation argument again. In fact, if you search all 75 pages of the brief in Adobe for the phrase post-sale, it only comes up once, once. But if you search for written contract, it comes up 24 times. So what the SEC is doing is it's arguing that only written contracts can impose a post-sale obligation on the seller and ignoring completely that marketing materials, websites, white papers, and those types of things can absolutely impose obligations on people and companies. You learned that in the first year of law school contracts class. So if a sales brochure, for example, and you buy a car says you get free oil changes for three years and in reliance on that brochure, you buy the car, there was very arguably a contractual obligation there. So the SEC has staked its entire position on a bet that the judge doesn't see what it's doing and also that she has forgotten her first year of law school. And that's a bad bet, but perhaps the best option the SEC had. But moving on from the post-sale obligation issue, Ripple has another major issue it raised, which has now been fleshed out in the briefs and that is the common enterprise argument. And this one might even be better, at least it's more juicier than the first. Stay tuned, we're gonna talk about that. Now, as you know by now, the Howey test for whether something is a security requires an investment of money into a common enterprise. So how have the courts defined what a common enterprise is? Well, it depends which court you're in. If you live in California, common enterprise is defined very broadly. It makes me wonder why the SEC didn't bring this action in California where it'd be easier to win. No takesie-backsies. Because if you're in New York, in the Second Circuit, there is a case called the Revit case or Revet case. And it says that in New York, a common enterprise requires horizontal commonality. Now, what the heck is that you might ask? That's a great question. And let's take a look at the Revit case directly for our answer. Quote, in a common enterprise marked by horizontal commonality, the fortunes of each investor depend upon the profitability of the enterprise as a whole. Horizontal commonality ties the fortunes of each investor in a pool of investors to the success of the overall venture. In fact, a finding of horizontal commonality requires a sharing or pooling of funds. So in order to have horizontal commonality, which is the common enterprise, you have to have people spread out horizontally who pool their money into one central entity. And the outside investor's fortunes are tied together and dependent on the efforts of that entity with the money that they put in. I just found this handy graphic on the internet and it shows horizontal commonality pretty well. Look at these investors on the outside, all giving money to the guy with the light bulb in the middle. They've all lost the same amount and that's required in the horizontal commonality test. They were all pooling their money together with him and sharing in the profits and the losses. By the way, it's a bad idea to invest with a guy who doesn't realize the light bulb has already been invented. In any case, that is horizontal commonality and that is what Ripple argues the SEC is required to show here. And here is why Ripple says the SEC hasn't shown it. Looking at the bottom of page 22, quote, first and most significantly, the SEC has an abject failure of proof on its factual assertions that Ripple pooled the funds it received from XRP sales and deployed them to further the enterprise. Those assertions are accompanied by no citation to the SEC's rule 56.1 statement, nor does the SEC try to prove these facts anywhere in the more than 1600 paragraphs of that statement. Even if the SEC's legal theory were viable, it is not. It is no evidence to prove that legal theory. That is fatal to its motion. So what Ripple is saying is that there's no evidence that the money from sales of XRP was pooled together in order for Ripple to increase the value of XRP. Every fact in a case has to have a citation to the relevant evidence. So let's take a look at the SEC brief and see if it's cited to any evidence or is Ripple not being truthy here. Take a look at this paragraph from the SEC and the relevant part starts off with, moreover, Ripple did not segregate the funds it received from different XRP sales. Now from that point all the way down to the bottom of the paragraph, there are numerous factual allegations without reference to any piece of evidence about pooling of funds. Now that's a problem for the SEC because it's failing to meet an evidentiary burden that it has. But before you begin celebrations, I did look through the SEC's recent reply brief and it seems that the SEC has tried to fix that problem. Look at the bottom of the SEC's reply brief on page 27. Quote, horizontal commonality exists because Ripple treated investor cash indistinguishably in its accounts and spent it to find use and value for XRP, which benefited all XRP holders equally. See SEC blah, blah, blah, SEC 56.1. Now, at the end of that sentence, the SEC now has that citation to 56.1 included and that is the citation to the evidence or the alleged evidence. So this is new, so Ripple has not responded to this yet and we, the public, cannot see the actual evidence yet so we have no way to evaluate it. And so, unfortunately, in summation, I will have to give the common enterprise and horizontal commonality fight here an incomplete grade at this time. Let's see how SEC responds in three weeks in its last reply brief and addresses the alleged lack of evidence. But in the meantime, it's taken a long time to get here but we have arrived at the moment you have been waiting for, the legal brief's rampant and unsubstantiated speculation time. What's all this mean? First, we can see from the pleadings that Ripple is very, very confident that it can win on the section five violation issue and specifically on the there is no contract here issue that it spent a lot of real estate talking about in its brief. And maybe it's confident for good reason as the SEC honestly really struggled to deal with that issue in its reply brief. I was really honestly surprised by how much it struggled. Second, Ripple says there was something shameful in the emails it was finally able to get from the SEC but the emails will really be relevant only to Ripple's fair notice defense, which Ripple is wanting to go to a jury trial. Now, will it go to a jury trial? I don't know at this time. Ripple cites a case which apparently says that the issue is a jury issue but that goes against what I initially believed. So I'll withhold giving an opinion on that until we see how the SEC responds in a couple of weeks. But either way, the summary judgment issue on whether XRP is a security or not will be decided first. Except, and this is a remote possibility for me, but it's possible that the judge for some reason looks at the issues in the section five violation and decides that a jury trial is necessary to decide them. Now, this would be a disaster because it ruins the early 2023 timeline for resolution but I honestly don't see it happening. I'm just covering my butt by bringing it up, to be honest. But speaking of butts, since this is crazy speculation time, what about a resolution of the case? Well, I'm not going to hold back here. All the cards are on the table at this point. All major issues have been decided by the judge. The emails have been handed over. The parties know exactly how strong each side's position is. If the SEC doesn't want those emails made public between now and the end of the year is the time. As I've mentioned before, Ripple would certainly love to move on from this case and there's only one thing it requires. Let's hear it from Ripple's general counsel himself. We've said publicly since day one that this case settles if the SEC makes clear that Ripple's sales and distributions of XRP and XRP's trading in the secondary market does not constitute a security. If they're willing to acknowledge that, the case settles and settles very, very quickly. And there you have it. And so we can safely assume that the SEC has so far not agreed to settle with the stipulation that Ripple's future sales of XRP would not be considered sales of securities. And if you think about it, Ripple really has no wiggle room on this issue. So it's up to the SEC to really decide if the case settles or not. And in that light, the worse the litigation goes for the SEC, the better the chances are. And so you have to think that at this moment in time, if I was the SEC, I'd be thinking very hard about whether this is the hill I wanted to die on. Bad facts make bad law. And there are a couple big pitfalls in this case for the SEC, but it's decision time for them and we'll probably know shortly. But back to the case, there are still two things I'm waiting for and want to see. First, there's the SEC's response to Ripple's reply brief in regard to horizontal commonality. That will be filed November 15, and those will be the final briefs before the case goes to the judge for a decision. It won't happen, but technically the judge could rule on the case on November 16 if she wanted. But the last thing I want to see and that I think could really push this case in Ripple's favor is the amicus brief from attorney John Deaton. Whether you and I bought XRP expecting profits from the efforts of Ripple is still a major issue in the case and has been brought up in the pleadings already but I haven't talked about it yet because I'm waiting to see what 75,000 XRP purchasers have to say on the issue. I'd say that's fairly relevant, don't you? Looking forward to seeing it, John. You're almost there, almost there. And you too, my friends, you're almost there. The last briefs will be on November 15 and then it's just a waiting game. Almost there. Gary, are you there? Gary, are you a low risk kind of guy? Are you often on the move like me and have a need for speed? Are you tired of paying for that unnecessary friction? Do you have liquidity in your dating profile? Do you live by transparency? Do you prefer finality so you can sleep well at night? If you've answered yes, like you often do, choose Ripple, choose common sense. The choice is yours.