Sec. & Exch. Comm'n v. Ripple Labs, Inc.

SECURITIES AND EXCHANGE COMMISSION, Plaintiff, v. RIPPLE LABS, INC., et al., Defendants.

No. 20-CV-10832 (AT)(SN)

United States District Court, S.D. New York

September 21, 2021

ORDER

SARAH NETBURN United States Magistrate Judge

The Defendants move to compel the SEC to produce documents relating to the SEC's trading policies governing digital assets. See ECF No. 314. Specifically, Defendants seek production of (1) either anonymized or aggregated documents reflecting the SEC's trading preclearance decisions with respect to its employees' transactions in bitcoin, ether, or XRP, and (2) either redacted or aggregated annual certifications concerning SEC employees' XRP holdings. The motion is denied.

The Court previously ordered the SEC to produce trading policies regarding digital assets. See ECF No. 253. Accordingly, the SEC produced a January 16, 2018 memorandum that provided ethics guidance to SEC employees on digital assets. See ECF No. 314 Ex. A. Defendants represent and the SEC does not dispute, that before the issuance of this memorandum, the SEC had no trading policy regarding digital assets. See ECF No. 314 at 1. Four months later, on April 13, 2018, XRP was added to the SEC's "Watch List," a list of entities potentially subject to supplemental ethics rules. See id. at 2; ECF No. 335 at 4. Defendants further represent that SEC counsel stated during a meet and confer on August 25, 2021 that, after the formal order of investigation was issued as to Ripple on March 9, 2019, SEC employees could no longer trade XRP. ECF No. 314 at 3. According to Defendants, the SEC has refused to produce any documents bearing on this statement. Id

Rule 26 of the Federal Rules of Civil Procedure provides that parties may obtain discovery regarding nonprivileged matters that are relevant to any party's claim or defense and proportional to the needs of the case, considering a list of factors including "the importance of the discovery in resolving the issues[] and whether the burden or expense of the proposed discovery outweighs its likely benefit." Fed.R.Civ.P. 26(b)(1).

Defendants argue that individual trading decisions will, at a minimum expose the lack of clarity regarding XRP's status and whether the SEC believed XRP to be a security. Such evidence arguably would undermine the SEC's allegations that the Individual Defendants acted recklessly and would bolster the Defendants' fair notice defense. Defendants contend that they are entitled to know whether the SEC permitted its employees to sell, buy, and hold XRP "as market participants" during the relevant period. The SEC responds that the preclearance decision process does not involve any determination by SEC Ethics Counsel that a trade complies with the securities laws; indeed, the produced policy expressly confirms as much in bold. ECF No. 314 Ex. A at 1. The SEC further contends that its employees' trading activity reports are presumptively confidential.

Because the preclearance process does not consider whether an asset is a security, Defendants have not shown that such individual trading decisions bear on the issues in this case. Although the SEC's policies (or absence of policies) may provide relevant evidence related to fair notice or recklessness, how an Ethics Counsel viewed a trading decision is more likely to cause confusion or create collateral litigation disputes.

Moreover because the data related to Ethics Counsel's preclearance decisions is not sufficiently probative, it cannot justify the intrusion into SEC employees' financial conduct, even if anonymized or aggregated. The Privacy Act protects information retrieved directly or indirectly from a system of records like the SEC's Personal Trading Compliance System. While such information "may be released pursuant to court order, in making a decision to release such information, 'the court must accord proper weight to the policies underlying . ....