Securities and Exchange Commission v. Ripple Labs Inc.

Background

The Securities and Exchange Commission sued Ripple Labs, Inc. and other defendants under Section 5 of the Securities Act of 1933, alleging that they offered XRP through unregistered securities transactions. The SEC alleged that the transactions involved investment contracts under the legal test described in SEC v. W.J. Howey Co.

Ripple and Christian Larsen moved to compel the SEC to supplement its answers to eleven of Ripple’s interrogatories and two of Larsen’s interrogatories. An interrogatory is a written question that a party must answer in writing under oath. The defendants sought information about the SEC’s theories of liability and about their fair-notice and extra-territorial defenses.

The SEC separately sought a protective order relieving it from responding to 29,947 requests for admission. Requests for admission ask a party to admit or deny stated facts or the authenticity of documents. The requests were served in three sets: the Fourth Set, containing 776 requests primarily about fair notice; the Fifth Set, containing 309 requests primarily about the extra-territorial defense; and the Sixth Set, containing 28,862 requests concerning more than 1,500 contracts.

Rulings on the motion to compel

The court stated that the discovery dispute was not the proper forum for deciding how the Howey test applied to the case and took no position on those underlying legal issues.

The court granted the motion concerning Ripple Interrogatory No. 2. The SEC had to identify specific contractual terms that it contended created an expectation of profits for XRP purchasers, rather than relying only on references to implicit or explicit promises.

The court granted the motion concerning Ripple Interrogatory No. 11, which asked whether Ripple’s efforts were necessary to increase XRP’s price.

For Ripple Interrogatory No. 6, the motion was granted only insofar as the SEC had to supplement its response so that it complied with the requirement that interrogatory answers be separately and fully provided in writing under oath. The court did not otherwise find the SEC’s response evasive or incomplete.

For Ripple Interrogatories Nos. 17 and 19, the motion was granted only insofar as the SEC had to provide separate, verified responses without incorporating unverified statements or answers to other interrogatories. The same limited ruling applied to Ripple Interrogatories Nos. 3, 7, 18, 22, 23, and 24, and Larsen Interrogatory No. 4.

The motion concerning Larsen Interrogatory No. 5 was denied without prejudice. The court found that the question about when the XRP Ledger became fully functional sought relevant information but was too vague. The parties were ordered to meet and confer in good faith to clarify the question.

Rulings on the protective-order motion

The court ordered the SEC, after a reasonable inquiry, to authenticate documents when it could do so. It denied the protective order as to the Fourth Set of requests. The SEC had to admit or deny the requests, or make a reasonable inquiry if it lacked enough information. The time to respond to that set was postponed until 30 days after a ruling on the defendants’ motion to strike their fair-notice defense.

The court also denied the protective order as to the Fifth Set. It found that the requests related to the defendants’ defense under Morrison v. National Australia Bank Ltd. and were substantively reasonable.

The court granted the protective order as to the Sixth Set on burden grounds. It also granted protection because the requests were cumulative and duplicative of another form of admissible evidence, particularly in light of the court’s order requiring a response to Ripple Interrogatory No. 2.

Disposition

The court stated that both motions were granted in part and denied in part. The defendants’ motion to compel was granted as to Ripple Interrogatory Nos. 2 and 11, denied without prejudice as to Larsen Interrogatory No. 5, and granted insofar as the SEC had to provide verified, separate responses to the other specified interrogatories. The SEC’s motion for a protective order was granted as to the Sixth Set and denied as to the Fourth and Fifth Sets. Unless the order provided otherwise, the SEC had 45 days to respond to the discovery demands.