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.