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Will SEC v. Ripple Restrain Federal Agency Candor?

Sept. 27, 2022, 8:00 AM

In the Southern District of New York, the Securities and Exchange Commission tries to blunt the effects of an order requiring it to produce internal documents relating to a 2018 speech on digital assets. As the judge considers dueling summary judgment motions in the case against Ripple Labs and its founders, it’s worth considering what role the court’s decision to release a draft SEC executive’s speech will play.

In asking the court to decide the case without proceeding to trial, the SEC recalled the court’s January decision to release a draft speech of William Hinman, then-director of the SEC’s Division of Corporate Finance. The agency claimed that this document is no help to Ripple.

The final version of Hinman’s speech discussed a concept that is central to the Ripple founders’ defense theory—whether assets that function solely as a means of exchange in a decentralized network are not a security, even if they could be packaged and sold as a security.

Regardless of the case’s eventual outcome, the decision to require production of SEC materials counsels changes in agency practice going forward.

SEC on the Offensive

In a January ruling, the court granted in part Ripple’s motion to compel the SEC to turn over certain documents, including an email attaching a draft of Hinman’s June 14, 2018, speech.

The SEC argued that the draft was predecisional and deliberative because Hinman had sought feedback from other SEC employees about the speech contents before giving it. The court considered the draft to be a personal statement by Hinman and not an agency document and required the SEC disclose it.

Ripple has subsequently argued that its founders took these words to mean that their token, XRP, was not in itself an investment contract or security in the eyes of the SEC, resurrecting the importance of the draft 2018 speech to the summary judgment briefings.

The SEC’s motion points out that relying on this particular statement did not work for a previous SEC defendant, Kik Interactive, and predicts it will not help Ripple, either. It remains to be seen whether the court may credit Ripple founders’ arguments that their prior understanding was reasonable.

Other Shielded Documents

Ripple’s step of requesting that the judge do a private review of the SEC’s internal documents was a rare challenge to the principles of deliberative process and privilege. While the draft speech was turned over to Ripple, many other requested documents were not.

Generally, documents reflecting an agency’s internal deliberative process leading up to a decision, whether prepared by an attorney or not, are protected from disclosure both in litigation and in response to Freedom of Information Act requests. The purpose of this protection is to secure internal agency give-and-take and preserve agency staff’s ability to communicate candidly about agency legal and policy decisions.

SEC documents that the court ultimately shielded from disclosure to Ripple included meeting notes that reflected “curated reporting and judgment” and internal recommendations on policy options, and attorney-client communications.

The SEC executive’s draft, by contrast, was his personal notes in preparation for a speech that would express personal views about offers and sales of a digital asset. He delivered these remarks only after the standard disclaimer that the speech expressed his views alone and not necessarily those of the SEC.

Impact on Agency Candor

While federal litigators well know that their investigative file will be turned over to the defendant, it was quite shocking for those of us litigating on behalf of the federal government at the time to imagine that presumably privileged material could be disclosed and potentially damage our agency’s positions.

But the Ripple court’s decision created guardrails that at least assuage fear of a long-term chill on candid agency communications. In continuing to shield many documents requested by Ripple from disclosure, the Ripple court drew a line between those documents “created by the agency on behalf of the agency” and those that reflected the thoughts or opinions of a single employee or executive, regardless of their role within the agency.

The court also left room for an individual employee’s views to be shielded if they bear on the formulation or exercise of policy-oriented judgment. Essentially, if the employee’s purportedly deliberative document clearly links to the consultative process, reflects agency policy, and if released, would inaccurately reflect or prematurely disclose the views of the agency, then it may be deemed deliberative process.

Finally, the court weighed whether the Ripple caes circumstances merited overcoming the qualfied privilege in order to yield to more important considerations, including a possible chill effect on government employees and their work. Despite due consideration of this possibility, however, some of the documents did not merit protection.

Overall, the Ripple court’s decision certainly does counsel changes to practice in agency investigations and litigation. Notes taken in meetings, especially those with third parties, should be a judgmental distillation of the facts, including personal observations and commentary, versus a quasi-transcript.

Drafts reflecting the opinions and remarks of individual employees should be carefully crafted and disclaimed to ensure that they do not adversely affect the agency’s position. And, defendants will likely be more aggressive in their efforts to seek disclosure of documents that may not qualify for the deliberative process privilege.

This article does not necessarily reflect the opinion of The Bureau of National Affairs, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.

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Liz Boison is a partner in Hogan Lovells’ Washington, D.C., office and a former federal cryptocurrency prosecutor who focuses on financial regulatory counseling, investigations, and litigation.