Court Denies SEC Motion to Strike Ripple’s Fair Defense

Judge Analisa Torres of the Southern District of New York has denied the Securities and Exchange Commission’s motion to strike Ripple’s fair notice defense.

The SEC filed this motion under the Federal Rule of Civil Procedure12(f), which states,

“The court may strike from a pleading an insufficient defense or any redundant, immaterial, impertinent, or scandalous matter. The court may act:

(1) on its own; or

(2) on motion made by a party either before responding to the pleading or, if a response is not allowed, within 21 days after being served with the pleading.”

Court denies SEC motion, citing “legally insufficient defense”

The SEC filed a motion in April 2021 to remove Ripple’s fair notice defense, the  purpose of which was to get the judge to issue a discovery order to the SEC to prove that the SEC  provided Ripple with fair notice that its distributions of XRP – since 2013 – would be prohibited under the securities law.

The SEC motivated the court to strike Ripple’s fair defense motion because it was a “legally insufficient defense on which Ripple cannot prevail as a matter of law,” adding some regulations to strengthen its argument. These regulations, the court said, failed to mention case laws where striking of the motion was done at the pleadings stage. Pleadings are formal documents submitted to the court, stating each party’s position in the lawsuit. The court also believed that the SEC had positioned itself to stagnate proceedings, increasing the expense, time, and complexity of the matter before it goes to trial.

The court says that the SEC failed to persuade them that the granting of Ripple’s fair notice defense would result in the SEC suffering undue prejudice.

The court order read: “The Court shall not conclude, at this early stage of the case, that Ripple’s defense is invalid. Accordingly, the SEC’s motion to strike Ripple’s fair notice affirmative defense is DENIED.”

What has happened so far?

Following the SEC’s initial filing of a lawsuit against Ripple in December 2020 for allegedly offering $1.3B worth of unregistered securities, in violation of Section 5 of the Securities Act of 1933, Section 5 (a) which concerns the “sale or delivery after sale of unregistered securities” and 5(c), which deals with the necessity of registering a security before offering it.

CEO, Brad Garlinghouse and co-founder, Christian Larsen, filed letters to judge Sarah Netburn to dismiss the lawsuit.

The SEC filed a motion to postpone the requirement to disclose its internal correspondence on bitcoin, Ether, and XRP until August 2021, fearing that such disclosure would reveal its views on crypto. They requested a 60-day extension for the fact discovery, which was granted.

Ripple then tried to interrogate William Hinman, former director of the SEC’s Division of Corporation Finance, who made incriminating statements about Ethereum, saying that he did not consider Ethereum a security. The SEC claimed that was Hinman’s opinion, not the agency’s, but still, Ripple hoped to subject Hinman to a deposition where he could apply his reasoning about Ethereum to XRP. The SEC filed a motion to prevent the deposition, which was denied by judge Sarah Netburn.

The case is expected to go to trial soon, and Garlinhouse said on Twitter, “And while we would have preferred the cases against Chris and me to end now, the SEC must now prove its claims. We are confident that ultimately all of them will be dismissed.”

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