Securities and Exchange Commission v. Ripple Labs Inc.

Background

The Securities and Exchange Commission brought claims under Section 5 of the Securities Act of 1933, alleging that the defendants offered or sold unregistered securities. The SEC alleged that the defendants’ transactions in XRP were investment contracts under the Supreme Court’s investment-contract test.

The court’s expert-discovery schedule provided for opening and rebuttal expert reports but did not discuss supplemental reports. Expert discovery was ultimately scheduled to end on February 28, 2022. On that date, the SEC served defendants with a supplemental report from Dr. Albert Metz. The report was prepared in response to reports from two Ripple rebuttal experts and provided a new empirical analysis based on previously compiled data. The defendants asserted, and the SEC did not dispute, that the report did not rely on information previously unknown or unavailable to Dr. Metz and did not correct his earlier reports.

Motion to Strike

The defendants moved to strike the report under Federal Rule of Civil Procedure 26(e), arguing that it was not a legitimate supplemental report. They asked the court to exclude it under Rule 37(c)(1). The SEC argued that the motion was an expert-testimony issue for Judge Torres and proposed reopening expert discovery instead.

Judge Netburn rejected the SEC’s argument that the motion had to be brought before Judge Torres. She held that magistrate judges in the district regularly decide similar disputes under Rules 26 and 37 as part of their supervision of pretrial matters.

Analysis

The court explained that experts may not continually strengthen or improve their opinions through repeated research. A report that does not rely on information previously unknown or unavailable to the expert is not an appropriate supplemental report under Rule 26(e). But excluding an expert report can be a harsh sanction. The court therefore considered four factors: the reason for the delay, the importance of the evidence, the prejudice to the opposing party, and the possibility of a continuance.

The first factor favored striking the report because the SEC did not adequately explain why Dr. Metz could not have anticipated the criticism from Ripple’s experts or why the SEC gave no notice that he planned to prepare a supplemental report. The second factor favored allowing the report because the court credited the SEC’s position that the report was important, while taking no position on its evidentiary value. The third and fourth factors did not strongly favor either side because the defendants had not shown overwhelming prejudice, no deadline for dispositive motions had been set, and no trial date had been established.

Considering the harshness of excluding the report, the court declined to strike it. The court nevertheless found that the SEC had acted improperly by serving an unauthorized supplemental report on the last day of discovery.

Order

The defendants’ motion to strike Dr. Metz’s supplemental report was DENIED. Expert discovery was reopened until May 13, 2022, for two limited purposes: the defendants could re-depose Dr. Metz for up to four hours about the analysis in his supplemental report, and the defendants could choose to file a supplemental report responding to that analysis.

Under Rule 37 and the court’s inherent powers, the SEC was ordered to pay the defendants’ reasonable expenses for filing the motion and re-deposing Dr. Metz, including Dr. Metz’s time under the parties’ prior cost agreement. The parties were directed to agree on a reasonable fee award or, if they could not agree, to follow the alternative procedure or file a fee motion by May 13, 2022. The clerk was directed to deny the motion at ECF No. 439. The court expressly took no position on the reliability or eventual admissibility of Dr. Metz’s supplemental report.