The Irony of Interlocutory Appeal

By John E. Deaton.

Following Ripple’s victory in July, the Securities and Exchange Commission (SEC) scrambled to save face by filing an appeal that fits their narrative. In August, the SEC sent a letter of intent to move for interlocutory appeal to Judge Torres. The letter outlined the agency’s intent to seek interlocutory appeal on the Judge’s ruling that the defendants’ programmatic sales and other sales of XRP failed the Howey test.

As I wrote when the letter was sent, I expected Judge Torres to grant the motion, and that is exactly what she did. I believe the move allows the judge to fully explain her reasoning in the case, further making it “appeal-proof,” as well as providing her the opportunity to address anything Judge Jed Rakoff has said. Judge Rakoff, presiding over the SEC v. Terraform Labs case, rejected the company’s motion to dismiss, and disagreed with Judge Torres’ approach regarding Howey. The SEC alleges that Torres’ ruling could impact their other lawsuits, which are of a similar nature. However, this is the weakest of their arguments.

With the right to file a formal motion for an interlocutory appeal granted, Judge Torres can now distinguish between her actual ruling in the Ripple case, versus what Judge Rakoff purported it to be. It was the SEC who categorized the different sales, not Judge Torres.

Recently, the SEC has filed its reply memorandum in further support of its motion to certify interlocutory appeal, now claiming that it is only interested in an efficient adjudication of the case, unlike Ripple, who the SEC contends wishes to prolong litigation. (Laughable, I know).

The facts are as follows: the SEC is asking for a stay on everything—which by definition and operation, would automatically prolong the entire litigation. Similarly, as there is still a trial that needs to take place, an interlocutory appeal would not end litigation and would add an appeal to the overall process. Should an early appeal be granted, it will take another year and a half to two years for the U.S. Court of Appeals for the 2nd Circuit to rule on the issue.

If the SEC were to win at the 2nd Circuit, which I believe they won’t, then the case gets remanded back to Judge Torres, who would apply the facts of the case to the other Howey factors not yet analyzed.

In other words, even if the 2nd Circuit disagrees with Judge Torres’ analysis of Howey’s third prong, the SEC does not win at summary judgment. Instead, Judge Torres would then apply the investment prong and the common enterprise prong of the Howey test, again, further prolonging the case.

I believe Judge Torres could, should, and would, give the same result even after a successful SEC interlocutory appeal. The SEC then could ask for a second interlocutory appeal to the 2nd Circuit on Torres’ common enterprise analysis.

Now, if the SEC loses at the 2nd Circuit, the case comes back to Torres for trial. Then after the trial, there would be the usual appeal on all issues. The SEC’s claim that it wants faster adjudication than Ripple does, might be the dumbest argument I’ve heard yet. It flies in the face of its request for an early appeal, while asking for a stay!

This irony is exactly what the motion for interlocutory appeal boils down to. The SEC has attempted to regulate by enforcement through the courts, and now that the agency has received a ruling it deems incorrect, the SEC will spitball separate arguments from ongoing cases into its appeal process—delaying litigation across the board. These are the desperate tactics of a regulator who lost the case.

The SEC Is Not the King

By Frank Francone. (RealClear Policy). September 28, 2023.

In late 2020, the U.S. Securities and Exchange Commission (SEC) sued Ripple Labs, Inc. (Ripple), and two of its top executives, Brad Garlinghouse and Chris Larsen, alleging that the cryptocurrency XRP which is used by the company in its financial services products is a “security” under the Securities and Exchange Act of 1934. 

Dubbed “the cryptocurrency case of the century” by Forbes, the SEC sought billions of dollars from Ripple and its founders for seven years of XRP sales without registering the token with their agency. The civil filing, based on a sweeping legal theory that a digital asset itself is a security, immediately destroyed more than $15 billion dollars in wealth of innocent holders of XRP who had acquired the token on the secondary markets.

On July 13, 2023, Judge Analisa Torres rejected the SEC’s argument that sales of XRP on exchanges is the sale of a security. Torres ruled that sales by Garlinghouse, Larsen and the hundreds of thousands of secondary market traders of XRP on crypto exchanges were blind-bid transactions, where the parties do not know each other nor the provenance of the assets being traded. Therefore, they couldn’t have been securities. 

Read the full piece by Frank Francone in RealClear Policy here: “The SEC Is Not the King”

Grayscale, Ripple court rulings ‘big black eyes’ to the SEC: Cato Institute’s Jennifer Schulp

By CNBC. September 27, 2023.

Jennifer Schulp, the director of financial regulation studies at the Cato Institute’s Center for Monetary and Financial Alternatives, who testified before lawmakers a few weeks after FTX filed for bankruptcy, weighs in on crypto regulatory developments in the U.S. She also discusses the impact of the recent Grayscale and Ripple rulings on the industry.

Watch the video here: “Grayscale, Ripple court rulings ‘big black eyes’ to the SEC: Cato Institute’s Jennifer Schulp

The SEC Chooses to ‘Regulate’ Cryptocurrencies Via Lawsuit

By Hassan Tyler. (RealClear Markets). September 5, 2023.

Over the last two Administrations, successive chairmen of the Securities and Exchange Commission (SEC), from both political parties, have led the agency through an erratic and confusing approach to regulating cryptocurrencies. What both chairmen had in common was a decision to not use rulemaking and public engagement to write a clear playbook for market participants, but to aim discretionary lawsuits at specific crypto companies and crypto trading exchanges to regulate the market instead.

Unfortunately, one of the SEC’s highest profile crypto lawsuits has backfired by pulling back the curtain to show several officials ignoring the law and apparent conflicts of interest as they picked winners and losers in the nascent industry.

Last month, Ripple Labs notched a landmark legal victory against a December 2020 SEC enforcement action where the agency alleged the cryptocurrency XRP qualifies as an investment contract in Ripple and that all sales, including on the secondary markets, are unregistered securities. Judge Analisa Torres ruled that only early institutional sales of the XRP token that were specifically packaged as investment contracts fall under the SEC’s jurisdiction. 

Read the full piece by Hassan Tyler here: Real Clear Markets: “The SEC Chooses to ‘Regulate’ Cryptocurrencies Via Lawsuit”

Ripple Retort: Legal Team Opposes SEC Request for Ruling Appeal

By Martin Young. (Be In Crypto). August 17, 2023.

Ripple Refutes SEC Review 

Ripple chief legal officer Stuart Alderoty said

“There is no extraordinary circumstance here that would justify departing from the rule requiring all issues as to all parties to be resolved before an appeal.”

An interlocutory appeal occurs when a ruling by a trial court is appealed while other aspects of the case are still proceeding. Moreover, they are only permitted under specific circumstances, which are laid down by federal and state courts.

On Aug. 9, the SEC sent a letter to Judge Torres claiming an “Interlocutory review is warranted here.”

It requested the judge put the case on hold during the appeal. The reasons it gave were that multiple other pending court cases that could be affected depending on the appeal’s outcome.

On July 13, the court ruled that XRP was not a security when sold to the public on an exchange but was a security contract when sold to institutional investors.

Read the full article here.

When tackling crypto, the SEC should be wary of overreach

By Brooke Masters. (Financial Times). August 15, 2023.

For more than a century now, US watchdogs have policed the financial landscape, seeking to protect investors from potential fraud and the consequences of their own blind optimism.

Most of their efforts to ensure that investors get accurate information about what is happening to their money are focused on familiar products, such as stocks and bonds. But every so often an explosion of interest in new investments forces a debate about the regulatory perimeter and whether to expand it. This is one of those moments.

Right now, the US Securities and Exchange is fighting on multiple fronts to bring enforcement cases involving cryptocurrencies, while a completely separate lawsuit is seeking to upend more than 30 years of practice in the leveraged loan market.

The laudable goal is investor protection. The volatility of bitcoin and other tokens and the implosion of the FTX crypto exchange have cost investors billions; and a bankruptcy trustee is seeking to recover money for loan investors left holding the bag when a drug testing firm went belly up after being investigated for fraud.

Read the full article here.

How The SEC’s Charge That Cryptos Are Securities Could Face An Uphill Battle

By Maria Gracia Santillana Linares. (Forbes). August 14, 2023.

As the smoke clears from the first exchange of volleys between the Securities and Exchange Commission and the world’s two largest cryptocurrency exchanges, Binance and Coinbase appear to have run out high-caliber legal arguments in their defense.

The U.S. regulator sued the two companies in June, alleging they were operating as unregistered securities exchanges and facilitating trading in cryptocurrencies that should have been registered as securities. The agency has been staunch in its contention that most digital assets–except for bitcoin and possibly ether–are securities and subject to its oversight as are exchanges on which cryptocurrencies trade.

Binance and Coinbase beg to differ, and they offer several arguments. The most potent, according to lawyers following the case, has to do with whether cryptocurrencies are meant to provide their owners with profit derived from the labors of others. If they do not meet that definition, then they are not securities. That might be enough to torpedo the government’s civil suits against the exchanges or at least narrow the scope of which of the 19 tokens it cited in the actions really are any of the SEC’s business.

Read the full article here.

The SEC Fought the Law and the Law Won

By Roslyn Layton. July 27, 2023. (DC Journal).

After three years, the cryptocurrency case of the century — SEC v. Ripple — ended victoriously for the people the U.S. government is supposed to protect: consumers and small investors. 

The case pitted the Securities and Exchange Commission against a leading U.S. crypto innovator. It also tested America’s leading financial regulator against 90 years of federal law and jurisprudence.

Fortunately, the law won. The ruling by Judge Analisa Torres of the Southern District of New York schooled the SEC in the law that created the agency and leaned into the 1946 Howey Supreme Court decision that defines the SEC authority. A security under the Howey test exists only when there is “an investment of money in a common enterprise with a reasonable expectation of profits to be derived from the efforts of others.” Hence, most of the purchases of XRP cryptocurrency were not securities trades.

Unfazed by the enormous public attention on the case, Torres focused specifically on the SEC’s accusations against Ripple and its two senior executives about their sales of the XRP cryptocurrency dating back a decade and strictly applied the law.

Read the full article here.

Ripple Proves the SEC Must Reevaluate Its Regulatory Approach

By John Deaton. July 17, 2023. (Bloomberg Law).

The SEC should take a federal judge’s rejection of its claim that all XRP sales are unregistered securities transactions as evidence it needs to change its regulatory approach to cryptocurrencies, says attorney John Deaton.

US District Judge Analisa Torres of the Southern District of New York issued a landmark ruling in SEC v. Ripple Labs Inc. on July 13, delivering a critical and hard-fought legal win to digital asset holders and crypto developers in the US. On the most important legal questions at stake, it was a total victory for them—and a devastating blow to the SEC’s ambition to bring an entire asset class under its thumb.

The SEC had alleged that all sales of Ripple’s XRP cryptocurrency are unregistered securities transactions in violation of Section 5 of the Securities Act. The regulator based this on a grossly overbroad legal theory that anyone who buys XRP in the world, by whatever means, is investing in the company Ripple.

“The XRP traded, even in the secondary market, is the embodiment of those facts, circumstances, promises, and expectations and today represents that investment contract,” the SEC told the court, in a breathtaking grab at regulatory turf over crypto via lawsuits rather than through rulemaking or legislation.

In the end, Judge Analisa Torres rejected the SEC’s theory, citing the generally accepted understanding of securities law established in the 1946 Howey decision, which defined a security as an “investment of money in a common enterprise with a reasonable expectation of profits to be derived from the efforts of others.”

Read the full article here.

Ripple notches landmark win in SEC case over XRP cryptocurrency

By Jody Godoy. July 13, 2023. (Reuters).

Ripple Labs Inc did not violate federal securities law by selling its XRP token on public exchanges, a U.S. judge ruled on Thursday, delivering a landmark legal victory for the cryptocurrency industry that sent the value of XRP soaring.

XRP was up 25% after the ruling, according to Refinitiv Eikon data.

But the ruling was also a partial win for the U.S. Securities and Exchange Commission, which has brought scores of cases against crypto developers, although Ripple Labs is by the far the largest to be decided by a judge. U.S. District Judge Analisa Torres ruled that Ripple violated federal securities law by selling the cryptocurrency XRP directly to sophisticated investors.

Read the Full Article Here.