This article originally appeared in Law360 July 25, 2022, and is republished here with permission.
In US Securities and Exchange Commission vs. Ripple Labs Inc., a discovery battle over claims of privilege by SEC Enforcement Division staff in combination with a recent United States District Court for the Southern District of New York decision, could make waves that will affect future litigation with the SEC.1
The parties clashed over various SEC privilege claims, and the battle lines were drawn in a June 14, 2018 speech by William Hinman, then SEC Division Chief Financial Officer, titled “Digital Asset Transactions: When Howey Met Gary (Plastic). 2 On July 12, the court issued another decision in favor of the defendants.
The ripple effects of the court’s most recent decision have the potential to affect the strategies of defendants currently litigating against the SEC and in the future. As noted below, the SEC has sought to use multiple claims of privilege and creative litigation tactics to prevent the production of internal communications related to Hinman’s speech, which the defendants in this case may be able to use to assist in their defense against the SEC allegations.
In addition to criticizing the SEC’s tactics, the court ruling strikes down the SEC’s claim of privilege at issue. Prospective defendants litigating against the SEC may be able to study the arguments advanced and summarized below and the decisions of this court to pursue by discovery certain internal communications between SEC personnel in various divisions and offices of the SEC. SEC to help them with their defense strategies.
Before discussing this speech and the parties’ discovery tactics, by way of background, on December 22, 2020, the SEC filed a lawsuit against Ripple Labs and two of its senior executives alleging violations of the filing provisions of the Securities Act and alleging that they have raised over $1.3 billion through a continuous unregistered offering of digital asset securities. These defendants have strenuously denied the allegations and actively pursued discovery against the SEC in support of their defenses.
Hinman’s speech has come to the fore in disputes between the parties over discovery, beginning with a notice and order issued by U.S. Magistrate Judge Sarah Netburn on January 13.3 Based on the defendants seeking an order to compel the SEC to produce certain documents that the SEC claimed to be protected by deliberative process privilege, the court granted the motion in part and denied it in part.
As for the aspect of the decision related to Hinman’s speech, the court ruled that emails regarding that speech or draft versions of it are neither pre-sentence nor deliberative agency documents entitled to protection. The court provided several bases for this aspect of its decision, but the primary basis appears to be that the speech expressed Hinman’s personal views, as evidenced by this footnote in said speech:
The Securities and Exchange Commission assumes no responsibility for any private publication or statement by any employee or commissioner of the SEC. This speech expresses the views of the author and does not necessarily reflect those of the Commission, Commissioners or other staff.4
After that ruling, the SEC requested a partial reconsideration or clarification of the January 13 court order that addressed the aspect of the ruling that deliberative process privilege did not protect emails and drafts related to the Hinman’s speech.
On April 11, the court rejected the reconsideration, but granted clarifications.5 In refusing to reconsider, the court said that “[h]After insisting that it reflects Hinman’s personal views, the SEC can no longer dismiss its own position.6
With respect to the clarification ruling, the court provided that for communications between staff discussing Hinman’s speech in the context of how it may involve other separate agency deliberations, but not deliberations about the content of Hinman’s speech, the SEC may seek permission to redact such communication from the production.
In response to the April 11 order, the SEC did more than comply with that order’s clarifying decision. On April 29, the SEC made a single-spaced, six-page submission respectfully asserting that attorney-client privilege protects internal documents related to Hinman’s speech.seven
The SEC responded to the clarification ruling in a five-line paragraph at the very end of the submission by requesting permission to redact two comments and offering to submit them for closed-door review. The remainder of this submission discusses in detail the arguments that solicitor-client privilege protects internal documents related to Hinman’s speech.
Unsurprisingly, and perhaps rightly so, defendants attacked this latest SEC submission on May 3 in a request to file a supplemental brief.8 Defendants point out that this was the SEC’s sixth filing opposing the Defendants’ August 10, 2021 contravention motion. Defendants further state that the court has twice dismissed objections to improper deliberative process privilege. of the SEC.
On May 13, the defendants submitted their response to the SEC’s April 29 letter and said that after losing the deliberative process privilege claim to prevent production that “[n]now the SEC is back to a theory [attorney-client privilege] it was not raised in several briefings.9
Defendants advanced the following arguments in support of the non-application of solicitor-client privilege: (1) Hinman gave the speech in his personal capacity; (2) communications about the substance of his personal remarks are outside the scope of the attorney-client relationship; (3) the communications at issue do not involve any confidential information concerning the SEC as an agency justifying protection by this privilege; and (4) the SEC has no standing to assert this claim because the lien belongs to Hinman.
On May 18, the SEC filed its response in support of its April 29 submission. On June 7, the court held another hearing and, on July 12, issued its ruling, which included criticism of the SEC’s tactics.ten In the ruling, the court’s decision boiled down to two issues: the attorney-client relationship and the predominant purpose of the documents.
Regarding the existence of an attorney-client relationship in connection with Hinman’s speech, the court provided the following analysis:
This issue is made unnecessarily complicated by the litigation tactics of the SEC. The SEC distanced itself from the speech to avoid discovery and sought to prevent Hinman’s deposition on the grounds that whatever he said in the speech had nothing to do with the SEC’s position. The hypocrisy in arguing before the Court, on the one hand, that the speech is irrelevant to the market’s understanding of how the SEC will regulate cryptocurrency, and on the other hand, that Hinman requested and obtained legal advice from SEC counsel in writing his speech, suggests that the SEC adopts its litigation positions to achieve its desired goal, and not out of staunch allegiance to the law. The Court, however, need not determine whether Hinman was a “client” of SEC attorneys because the evidence establishes that the predominant purpose of the communications was not to provide legal advice.11
The court went on to “find that the documents were not primarily intended to solicit or provide legal advice.”12 In coming to this conclusion, the court differentiated between policy advice and legal advice with the following conclusion:
The law is settled on the fact that political advice – as if it is a good or bad idea to make a particular public statement as a public figure – or communication advice – as if a statement corresponds to the position of the agency – legal advice is not protected, even when offered by lawyers.
Accordingly, the predominant purpose of the communications was not to provide legal advice to assist the SEC in the conduct of public business. Documents must be produced.13
The SEC’s aggressive tactic in challenging the defendants’ motion to compel, while disappointing, is not surprising. The SEC’s internal processes are opaque, and the SEC has taken broad positions regarding claims of privilege in past contentious cases to protect these processes and related communications from discovery.
As for Hinman’s speech, the SEC lost not once, but twice — then lost again a third time with a renewed assertion of attorney-client privilege.
Was it worth it for the SEC?
The court’s decision is based on the overriding purpose of communicating the policy, not legal advice. While the Division of Enforcement serves to enforce federal securities laws, the SEC’s internal and external communications also deal with policy relating to the securities industry.
One policy we have seen developed and implemented in recent years is regulation by enforcement. This policy was acknowledged in the speeches. With this ruling as a potential precedent, defendants litigating against the SEC may be able to pursue discovery of internal communications related to these speeches, other speeches, risk alerts, FAQs, and other forms of political communications. from the SEC to help them with their defense strategies.
1 See https://www.sec.gov/litigation/complaints/2020/comp-pr2020-338.pdf.
2 See https://www.sec.gov/news/speech/speech-hinman-061418.
3 See SEC v Ripple Labs, Inc. et al. , Case No. 20-CV-10832, ECF No. 413.
4 See https://www.sec.gov/news/speech/speech-hinman-061418, fn. 1.
5 See SEC c. Ripple Labs, Inc. et al., Case #20-CV-10832, ECF #465.
6 Identifier. to the P. 9.
seven See SEC c. Ripple Labs, Inc. et al., Case #20-CV-10832, ECF #473.
8 See SEC c. Ripple Labs, Inc. et al., Case #20-CV-10832, ECF #477.
9 See SEC c. Ripple Labs, Inc. et al., Case #20-CV-10832, ECF #480.
ten See SEC c. Ripple Labs, Inc. et al., Case #20-CV-10832, ECF #531.
11 Identifier. on pages 6-7.
12 Identifier. to the P. seven.
13 Identifier. to the P. 8.
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