By Roslyn Layton. April 8, 2021. (Forbes)
Some agency chairs find an ambiguous statute hard to resist. They overinterpret their authority to regulate, and Congress too often goes along. The backstop of this excess is the courts, provided that the aggrieved have the wherewithal to defend themselves against the gargantuan administrative state. This familiar story is playing out in the U.S. Securities and Exchange Commission’s (SEC) lawsuit against cryptocurrency innovator Ripple, but the buck stops with Magistrate Judge Sarah Netburn whose discovery hearing in U.S. District Court for the Southern District of New York on Tuesday exposed the SEC’s unfounded and flawed arguments and some inconvenient truths for former SEC Chair Jay Clayton and former SEC Corporation Finance Division head William Hinman.
The hearing showed that the case the San Francisco fintech was based on an illogical premise. It alleged that XRP, the digital currency that Ripple uses for cross-border payments, has been an unregistered security since 2013 and that the SEC was just getting around to saying so on the last day of Clayton’s tenure last December. With this late in the game regulatory determination, the SEC now deems that every Ripple sale for seven years was an illegal securities trade. And that Ripple, its two top executives named in the suit, along with millions of retail holders, should have known this all along, even though the agency never did. Due process and fair notice were thrown out the window to get the case across the transom on the day that Clayton walked out the door.