Deaton Explains Why “SEC May Have Snatched Defeat From Jaws of Victory”

The attorney believes that the SEC failed to carry out a specific Howey analysis, focusing too much on the token instead of the circumstances surrounding the sale.

Attorney John E. Deaton, as previously reported, had asserted that the only victory the United States Securities and Exchange Commission would likely claim in its case against Ripple is that the blockchain payments company sold XRP as a security from 2013 to 2017.

In a lengthy Twitter thread yesterday, the lawyer representing over 75,000 XRP holders as a friend of the court in the case gives more insight into the reasoning behind his claims.

In the thread, Deaton explains that the market regulator fails to apply a specific Howey analysis by specifying transactions that represented security offerings. Instead, he says the market regulator attempts to use what he describes as the equivalent of a but-for test to claim all XRP sales represent securities. According to Deaton, the SEC’s theory is that because Ripple put in the effort to help create a secondary market for XRP, all XRP constitutes securities regardless of the circumstances of the sale. The lawyer bases this on a claim made by the SEC in its summary judgment motion.

“Defendants do not dispute that they offered and sold XRP in exchange for ‘money,’ which suffices to establish the ‘investment of money’ aspect of the Howey test,” the SEC wrote. “Defendant’s statements and efforts as to XRP…establish the other aspects of the Howey test as a matter of law.”

For context, the but-for test is commonly used in tort and criminal cases to show culpability by proving that an outcome results from a party’s action and would otherwise not be the case if the party acted differently.

In addition, Deaton points out that the SEC puts undue focus on the token, XRP, to sidestep a proper Howey analysis. The lawyer shows that the market regulator argues that XRP represents both the investment contract and the common enterprise. The lawyer faults this noting that it is not how Howey is applied as the circumstances of the sale usually determine if an offering represents an investment contract.

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Recall that Deaton has often emphasized that the underlying asset of an investment contract can not, on its own, represent a security. Notably, per a report from the attorney, he convinced the judge of this in the LBRY case, forcing the SEC to commit to it on record.

Consequently, the attorney believes that SEC could have had a straightforward and winnable case if they had conducted a proper Howey analysis guided by the circumstances of the sale, which will narrow things down to specific transactions, not all XRP sales, as it currently claims.

“This is why I said the SEC may have snatched defeat from the jaws of victory,” Deaton wrote in the thread, disclosing that he points out to Judge Analisa Torres that the SEC’s claims in the Ripple case are possibly the broadest and the farthest reaching the regulator has made in any enforcement action.

As both parties have submitted all required briefs in the case and await a court ruling, speculations about the possible outcomes have dominated conversations. Deaton has expressed that a jury trial is likely.

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