Securities and Exchange Commission v. Ripple Labs Inc.

Background

The Securities and Exchange Commission (SEC) sued Ripple Labs Inc., Bradley Garlinghouse, and Christian A. Larsen. The SEC alleged that the defendants unlawfully offered and sold securities in violation of Section 5 of the Securities Act of 1933. It also alleged that Garlinghouse and Larsen helped Ripple violate Section 5.

During discovery—the pretrial process for exchanging information—the defendants requested documents concerning a June 14, 2018 speech by William Hinman, then the Director of the SEC’s Division of Corporation Finance. The SEC asserted that the documents were protected by the deliberative process privilege and attorney-client privilege.

Magistrate Judge Sarah Netburn previously ruled that emails and drafts concerning the speech were not protected by the deliberative process privilege and ordered their production. She later denied the SEC’s request to reconsider that ruling, clarified the ruling, and ruled that attorney-client privilege also did not protect the documents.

The SEC objected to those rulings. Under the governing standard, a district judge may overturn a magistrate judge’s ruling on a pretrial matter only if it is clearly erroneous, contrary to law, or an abuse of discretion.

Relevance

Judge Torres agreed with the SEC that the documents were not directly relevant to whether the defendants received notice of the alleged violations or whether Garlinghouse and Larsen knew particular facts about Ripple’s offers and sales of XRP. But discovery relevance is broad. The defendants argued that the documents could provide impeachment evidence, including against Hinman if he testified.

The court held that the documents might be relevant for that purpose. It therefore found no clear error or legal mistake in Judge Netburn’s relevance ruling and overruled the SEC’s objection on that issue.

Deliberative Process Privilege

The deliberative process privilege is an executive privilege that can protect predecisional and deliberative agency documents—documents created before an agency decision and intended to help the agency formulate its position.

Judge Torres held that Judge Netburn did not clearly err or act contrary to law in finding that the privilege did not protect the internal speech documents. The documents primarily concerned Hinman’s personal views about how securities laws applied to digital asset offerings, rather than an SEC position, decision, or policy. The court also agreed that the documents were not an essential link in SEC policy deliberations about regulating digital asset offerings.

The court further rejected the SEC’s arguments that Judge Netburn applied the wrong legal test, failed to focus on a specific agency decision, or had to consider whether disclosure would reduce candor within the SEC. Judge Torres concluded that the SEC had not met its heavy burden of showing clear error. She overruled the SEC’s objections concerning the deliberative process privilege.

Attorney-Client Privilege

Attorney-client privilege generally protects communications whose predominant purpose is requesting or providing legal advice. The SEC argued that Judge Netburn improperly required the advice to assist the SEC in making decisions or acting lawfully, rather than informing Hinman’s conduct, and improperly characterized the communications as policy or communication advice.

Judge Torres rejected those arguments. She explained that Judge Netburn had recognized that legal advice must guide future conduct or assess past conduct. But Judge Netburn had found that the SEC lawyers’ advice was intended to inform Hinman about the law so he could draft an accurate speech and also to provide policy and communication advice. After reviewing the documents, Judge Torres was not firmly convinced that their predominant purpose was interpreting and applying legal principles to guide or assess conduct.

The court therefore found no clear error in Judge Netburn’s attorney-client privilege ruling and overruled the SEC’s objection on that issue.

Disposition

Judge Torres overruled the SEC’s objections to all three prior orders and directed the SEC to comply with those orders, including the order requiring production of the internal speech documents.