Crypto lawyer, but not your lawyer. Former AscendEX/ Paxful/SEC / Tweets are mine, not legal advice, etc.
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1/20 What’s next in the Ripple/SEC saga (TLDR; you are probably measuring this in months and not days).
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The Linqto CEO’s interview with @JohnEDeaton1 at XRP Las Vegas was both informative and somewhat cryptic. So here is a decoder ring to what’s likely next with Linqto.
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Judge Torres already addressed this issue in denying Ripple's argument at the motion to dismiss. SEC v. Ripple, 2022 WL 762966 (March 11, 2022). So it's just a matter of putting the transactions in Torres' buckets based on the facts of the individual transactions.
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20/20 Real monkey wrench would be if Torres said “yeah I’ll grant” but on further reflection decided not to. When it goes back to her, she denies the motion and back to 2d for continuation of appeal.
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5/20 Why do they want it? Because without it, the possibility of an IPO in the next 3+ years is basically zero. So while the “cool kids” are going public, Ripple practically cannot.
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1. Because many in CT do not know about some of the complexities associated with the federal securities laws beyond Howey, a brief thread on why the Ripple decision and appeal are much harder to unwind that merely telling Uniswap “we're not recommending enforcement” after a Wells
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3/20 It APPEARS (based on structure of the stay motion request), that there are 2 parts up for approval of the full Commission: 1) settlement of the case and 2) seeking an indicative ruling by Judge Torres.
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4/20 What is the indicative ruling? Whether Torres will modify the judgment she ordered to allow Ripple to engage in private sales of unregistered securities using certain exemptions that it cannot use as a violator of the securities laws.
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6/20 Step 1 is Ripple has to submit a written offer of settlement for the full SEC to decide whether to accept. As of last Friday when the motion filed, no mention of timing of that vote. Could be it has not been submitted and/or placed on calendar for a vote.
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11/20 With no real incentive to move fast there, assume 3-6 months for Torres to decide. And for reasons previously identified, no guarantee she decides to modify her injunction when nothing has changed.
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12/20 Second scenario is the 2 asks from Ripple are linked. If SEC only agrees to 1, SEC notifies 2d that stay should be lifted & a new briefing schedule is set.
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15/20 Torres has 3 options: (1) defer considering; (2) deny; or (3) state either that she would grant the motion if the appellate court remands for that purpose or that the motion raises a substantial issue.
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9/20 BUT, Ripple would then have to separately make a motion before Judge Torres after dismissal of the appeal (NOT an indicative ruling request) to modify her injunction. If Torres says no, Ripple has its settlement but sits on the beach for 3 years as a private company.
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8/20 Assuming they are independent, it is easier (and quicker), but FAR more risk to Ripple. If separate AND the SEC says OK to settle, but no to motion, then the agreement is signed and appeals dismissed in short order.
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19/20 Then sign the settlement agreement and file a voluntary dismissal with the 2d Cir. Call that a month.
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7/20 Black box is whether the 2 apparent asks – settlement plus indicative motion – are an accept/reject both or are independent.
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14/20 If SEC approves both, parties then file the motion for an indicative ruling before Judge Torres. This will likely not be quick. J Caprini took 6 months for a similar one in Litovich but J Parker only 3 weeks in Avilez on one where settlemt conditioned on vacating ruling.
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That's actually not how this works.
The injunction does not ban "institutional sales." It bars Ripple from violating Section 5 (sale of unregistered securities).
A "no action" letter is how you got the SEC's opinion of "can I do X consistent with the law." These are public.
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10/20 Realistic timing of this path: 1 month for approval, settlement of appeal & dismissal of appeal. After that ends, then mot filed with Torres.
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17/20 If she goes #3, then the parties go back to the 2d Cir. This time they ask for the appeals court to retain jurisdiction of the appeal, but remand back for purpose of Torres acting. Call it 2 weeks.
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18/20 Then back to Torres. If she has said she would grant the motion, smallish delay. She issues whatever decision she will write and the parties scurry back to the 2d Cir with a modified injunction (b/c appeal still open)
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16/20 If it is (1) or (2), then its back up to the 2dCir. Assuming Torres took 6 months from motion, argument on appeal likely around July 2026 and decision January 2027.
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Generally Ripple would stay payment of judgment pending appeal and might post a bond securing. If SEC loses, then the cost of the bond would typically be charged to it as part of the costs of appeal under FRAP 39 (at discretion of 2d Cir like any bill of costs).
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1000%. Ranking member of Banking would typically be the person with the most pull on who fills the "out of power" seat (eg Toomey with Uyeda - who was basically Toomey's counsel at Banking). In 2 months, Ranking Member will be Warren. Bring the popcorn.
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Might want to tell that to the OpenSeas guys (wire fraud for insider trading NFTs) or Avi Eisenberg (both securities and commodities fraud for Mango market manipulation)
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Exceptionally smart piece of legal drafting by Ripple’s counsel here for three reasons.
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#XRPCommunity #SECGov v. #Ripple #XRP BREAKING: The @SECGov has filed the Settlement Agreement Letter.
dropbox.com/scl/fi/ipvn7svlj…
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End/ Because EOD it will not be the rules that prevent them from getting rich – it will be the people who circumvented them and knowingly preyed on retail for their financial benefit that "kept them poor."
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9/ Assuming this to be the case, if I am either old management or someone who was shilling the company without a broker license, I would not be answering the door to strangers and checking both ways for men in suits before walking out of my house.
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The injunction itself (obey the law) has little practical impact. If Ripple's sales of XRP are legal (or not unregistered securities tranx), no issue. If illegal, then Ripple would be violating both an injunction and the law. So 2 violations versus one.
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11/ Normally, the resolution of a partially illegal offering like this could be fairly straightforward. The company would settle with the SEC and pay disgorgement of illicit profits plus some fine.
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15/ In simpler terms, SPV owners get some fraction of their initial purchase price of the interests.
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6/ When do people disclose “multiple” investigations without naming all the regulators? Generally when the other one or ones cannot be disclosed – such as when disclosure would violate grand jury secrecy obligations. In other words, 3-letter agencies like DOJ.
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7/ The other tell from the disclosure is that the new management is cooperating with these investigations. In other words, new management is more than willing to throw the old team to the wolves in order for the company potentially to survive.
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But what they do not want to say aloud is the company's designation as a "bad actor" by virtue of being subject to an injunction denies it the ability to use certain exemptions to securities tranx - making an IPO impractical and certain private sales of its shares more costly
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16/ But why cant the customers just get the “pre-IPO shares” they were told they were buying? That’s where the unaccredited comes into play. A distribution would likely violate the fed securities laws b/c there is no available exemption for that tranx.
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There will not be (and cannot be) some unwritten "understanding" b/w the parties that Ripple's sales are legally OK.
Ripple represented to Judge Torres a year ago at the hearing that they had restructured and new sales were in compliance with law as interpreted by Torres.
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14/ Assuming the SPVs survive, then the question is how those funds get chopped. One unwind option is to do a refund of customer’s interests. But if the prices charged were inflated, there will be an asset/liability mismatch.
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Substantively yes. Strategically no. Ripple feels it has Netburn on its side and she gave SEC a break on the real expert untimely report on merits. So cost $75K to have Debevoise write it in a $2B case. Netburn tosses it and say "SEC did not carry burden of proof so $0 damages".
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1/ The background is that Linqto advertised selling “pre-IPO shares” (ie unregistered private company shares acquired from company insiders or early investors). Customers were not actually acquiring the “pre-IPO shares.”
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21/ Unwinding this bowl of spaghetti is not going to be easy, quick, or inexpensive. Retail investors who rail against how sophisticated investor rules “prevent them from getting rich” are going to see why the rules exist.
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5/ Possibly the most interesting insight from the interview was the reference to “multiple” regulators being involved, with the SEC being called out specifically.
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2. The key thing to understand is – in addition to the other complexities – there is nothing that the SEC can do to fix a problem that Ripple has: Judge Torres’ injunction and decision not to give Ripple a waiver from the “bad actor” provisions.
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It's the injunction not the decision Ripple needs amended. Ripple asked for a waiver of the bad actor disqual. She refused bc said Ripples continued issuance of unregistered ICs showed recidivism. Significant handicap
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4/ The allegations by the current management (resurfaced from a lawsuit filed against the company) is that old management illegally sold to unaccredited investors and used some other illegal sales tactics such as undisclosed markups, market manipulation, etc.
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3/ Because these interests in SPVs were unregistered securities, they had to be sold pursuant to an exemption to the federal securities laws. Generally this means that they had to be sold only to accredited investors.
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10/ But what about the customers and their “ownership” of these “pre-IPO shares”? Well, for starters, none of them actually own any shares in these companies. They bought interests in the SPVs and would only get the shares as a distribution after a triggering event.
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17/ The CEO referenced potentially converting these SPVs to “closed end funds” – a fund that would be registered and thus be available to both accredited and non-accredited. That could solve the distribution problem.
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12/ If DOJ wants a piece, then it’s a corporate plea or a non-prosecution and possibly a corporate monitor (see Binance).
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13/ That is step one of where the “how bankruptcy remote are the SPVs” might be tested. Because few companies have the free cash to pay significant fines and disgorgement when that money was “spent” on former exec bonuses and referral incentives.
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19/ And what about class action lawyers circling like vultures? Assuming there were regulatory violations, the investors would have a right to “recission” (ie get their money back).
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De novo means that the panel gives zero deference to any determinations of either fact or law by the district court. So the "she made the decision appeal proof" claims were wrong from day 1.
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I'm skimming the Ripple brief while watching the Islanders game and the stunning absence is no reference to Morrison. I guess that, contrary to a lot of speculation, all the violation tranx did have the necessary jurisdictional nexus.
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18/ But that solution requires a lot of $$$. And where does that money come from once the govt gets its disgorgement, fines etc? Highly doubtful that there is a war chest deep enough for that.
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Beautiful to see a company and a foundation working together to create a better quality of life for so many.
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8/ Waving corporate privilege and giving any advice received about how the old team should have done things which was ignored? Done. Full open kimono on doc requests? Done. That’s how you get the chance to survive.
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2/ Rather, customers were buying interests in an SPV established by Linqto and the SPV held the shares. Hopefully properly organized and maintained such that it would be bankruptcy remote from Linqto.
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Unless and until a majority of the Commission approves a settlement, there is no deal. And until a filing voluntarily dismissing an appeal is filed and stamped by the clerk, the appeal is not "dropped" "dismissed" "closed" or any other word you want to use.
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20/ This would include transactions where the underlying “pre-IPO” shares have since been deemed worthless.
But if successful would also bind people who want to “let it ride” and say “just give me my Ripple shares.”
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Form Ds are private plcmts usually to accredited (you have to do a reg a type mini prospectus if non-accredited). Exchanges serve as gatekeepers to protect retail (why pink sheets exist). So the “we are an exchange but want no listing stds” is bid Cong aint gonna hit
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3. After the SJ rulings, Ripple could have avoided this problem by settling. SEC regularly gives these waivers as part of a settlement, so it likely would have been part of a deal. I don’t know if there were any discussions, but if yes my guess is that sticking point was $$$$
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You should realize this is a harder question than other cases.
1. does SEC ask 2d Cir for permission to dismiss the appeal and allow Ripple to continue its appeal (so it has to defend and make same argues it won with at DCT)?
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7. There are three grounds for moving to modify an injunction: (a) change in law; (b) change in facts; and (c) manifest injustice if injunction continues. No law and no fact material to the injunction has changed – so manifest injustice if allowed to continue it must be.
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5. So appeal it was. If successful on appeal, the injunction effectively disappears b/c there would be no underlying violation so entire final judgment gets reversed.
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So many things wrong here, but let’s start with the easy ones.
1. You cannot pay judgements that a federal court ordered to be paid in cash in some other means unless you get the court to modify its judgment (FRCP 62).
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This might be a test of adherence to traditional norms (largely maintained by minority party's ability to gum things up in Senate). Trump could do “two GOP, two Ind” and comply with statutory requirements.
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More likely the delegation approving the formal order of investigation (subpoena docs, take testimony etc) Whether that was specific to Consensys or an "in the matter of anyone who ever sold ETH" is the $1MM question.
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If true, I think this would be a real test of what Ripple really wants/believes.
SCOOP: Off of @EleanorTerrett's scoop from yesterday on the @Ripple - @SECGov settlement negotiations, one issue that is being weighed by the commission is whether $XRP continues to trade and have a utility that makes it more a commodity and not a security. I am told the @ethereum example is key; $ETH was obviously issued as an ICO; its characteristics on issuance was no different than $XRP--both used to finance the buildout of a platform, yet Ripple got sued and Ethereum didn't because $ETH had since morphed into a commodity. What is being discussed now is the comparison between the 2 cryptos. The SEC believe Eth trades as pure commodity. They are trying to determine if the commission can make that case w $XRP.
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Ripple's "$10MM penalty + no disgorgement is reasonable compared to other crypto actions" is going to get blown up when J Rakoff drops a $1B+ number on Terra. SEC asking for $5B+ there and he is likely going to drop a hammer.
$400-550MM v. Ripple will then look reasonable.
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Are you saying a balance sheet which lists all your assets but only some of your liabilities isnt how it's supposed to be done?
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Step #2 on how to sell to institutions is incorrect. If you are enjoined from violating the securities laws you are deemed to be a "bad actor" that is disqualified from using certain exemptions (including Reg D) for 5 years.
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4. After the final judgment was issued, Ripple had a choice of either appealing or moving Judge Torres to reconsider her ruling. It wasn’t really a choice - all they could do was say “please reconsider b/c we think you are wrong.” Saw how well that went for SEC in interloc.
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Commissioners can remain in their seats up to 18 months after a term's expiration, or until a replacement is confirmed. So they will probably do a re-nomination (or nominate someone else) right before the term expires - i.e. start of June. See Hester Pierce in June 2020.
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4/4: Stresses that the settlement specifically includes that her SJ decision would not be vacated. That sidesteps the decisions refusing to vacate on grounds that legal opinions have precedential value and would deter future frivolous filings.
This is REALLY good lawyering.
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3. If you argue "I designed it so once released I cannot change it" but you set it up so when it runs your personal $ counter goes brrrr, courts are going to find ways to hold you responsible. See #1.
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Only person who can extend a filing deadline in 2d Cir is the court clerk and that is only due to “extraordinary circumstances” (example in rule is death in immediate family). And request for extension does not toll any deadlines (so would still file today if no answer).
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R owes zero to them legally so Co can treat them like cannon fodder bc no fiduciary duty.
But it's example 5000 of how all the traditional assumptions got blown up by tokens as faux equity.
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4a. Ripple would contend that likelihood of future violations significantly changed since sales of XRP could “never” be violative of securities laws going forward. Tougher to handicap that one, but I’d lean toward she grants it.
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For ex, what if the SEC drops its appeal, Ripple drops its cross, the parties settle for $0, and the SEC moves the district court to rescind the injunction (and court agrees). So puts Ripple (less atty fees - a big "less") back to where it was 5 years ago.
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6. Alternative now is to move Judge Torres to modify her injunction. Issues there are (a) does she still have jurisdiction – answer there is probably yes; and (b) what’s the basis for asking.
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You are making the SEC's case for it when you say this is not "independent". The govt uses "summary witnesses" like this is complex tax/fraud/securities cases all the time that are not "expert" witnesses. The 2 big distinctions are they do not opine and are not independent.
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As Stuart Alderoty posted , Ripple and the SEC “will revisit this issue with the Court, together.”
Bold post minutes after Torres bitch slap to say that majority of the Commission will vote to sign onto Ripple's motion a second time.
Might be a little over his skis there.
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"They" have not told the public a settlement had been reached or the terms. Ripple did. Since that time a month ago the only stmt by the SEC was their filing in court that Ripple and the STAFF had reached an "agreement in principal" that was not final.
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Do an issuer have fiduciary duties to token holders? The "we are not a security under Howey" game was "we have no obligations to you; hope the token has some utility in an ecosystem we have no obligation to build".
It 1000% screwed the incentives, but those were the rules.
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Does it now have to do the same for Terra (which did not appeal but settled after losing at trial)? What about LBRY? How about the 100 or so settled actions since 2013?
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VERY mixed bag (so it eye of beholder)
- more tailored and technically appropriate disclosure framework for tokens
- incentivizes TradFi players to get involved as custodians or dealers (win for incumbents)
- It does not address how DeFi would (or could) be regulated.
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It would be ironic if Earn participants now agree with the SEC that the Earn program was a securities offering to get the 546(e) safe harbor because the withdrawals were “the transfer of cash or securities made to complete [a] securities transaction.”
Celsius Network has officially sued me and thousands of innocent users in New York courts this week. Every single person & entity in crypto needs to be fighting alongside us against this bs. Because if we lose, it will affect every user of a cex.
We are every day people who used the platform as normal, not insiders, not bad actors, and because we happened to take our money off the platform 90 days before they declared bankruptcy they are trying to clawback all those funds plus more because they are suing for June 14, 2024 market rates, not 2022 rates. WTF!!
They are asking for outrageous sums of money, basically my entire net worth is what I'm being sued for, for doing absolutely nothing wrong.
At first I thought this was a scam and then some shakedown, but now that the suit is actually filed, I have to spend thousands to retain an attorney.
In addition, they have more than doubled the amount of money they are suing for because they changed the ask to current pricing of btc/eth vs originally asking for 2022 pricing. They are causing emotional turmoil, because they can. It's insanity.
The lawyers say they are going to give the money to other users of the platform and spread it around, but that's a fucking joke, those folks will get fractions of a penny on the dollar. All of this money will go into pockets of lawyers. This lawsuit will destroy the lives of thousands of innocent people.
Everyone in the industry needs to unite against this. We need to get this case tossed. @cobie
@GCRClassic @zachxbt @brian_armstrong @justinsuntron @jespow
These are the lawyers making everyone's life hell. Along with Cam Crews of the Celsius LOC.
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12. Option (a) is IMO unlikely to be helpful.
Option (b) has the chance to fix this issue, but the downside is probably another $125MM or more in penalties in about 24 months if Ripple loses.
Not a lot of good options there.
- end
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Which REALLY makes me wonder about the Binance case and why that is going on in limbo for so long. Argues were basically same time as CB and both CB and a tentative for Kraken have been issued in the interim.
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This is a variant of rinse + repeat from Binance. The "we are not based anywhere" led to 2d Cir saying "welcome to the US" in Williams.
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Nope - it was effectively "assume all the facts Empower says are true are in fact true, still too tangential." Empower did not and could not allege Hinman actually owned ETH. So they had this bank shot series of links that OIG said "just too attenuated even if true."
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Sometimes one man’s “hack” is another man’s “I used the protocol as designed / not my fault if devs dumb / code is law.”
The “Lazarus stole the funds - please return” cases are easy. The edge cases are the hard ones.
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If #2 is true, why is Ripple fighting so hard to get it vacated?
#3 is not true - there are other individuals and entities (Terra, DoKwon, etc) that are subject to the same or even more onerous injunctions. Voorhees was barred from making BTC security offerings for 5 years
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Formal orders are the authority to start an INVESTIGATION into whether there were violations - not determinations. You can say it was odd to approve the ETF while they were trying to determine if ETH was sold as an IC. But not that it had been at that time.
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