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SEC: Statement of Acting Chair Allison Herren Lee on Contingent Settlement Offers


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Statement of Acting Chair Allison Herren Lee on Contingent Settlement Offers

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Feb. 11, 2021

In consultation with the Divisions of Enforcement, Corporation Finance, and Investment Management, today I am taking action to reinforce the critical separation between the Commission’s enforcement process and its consideration of requests for waivers from automatic disqualifications that arise from certain violations or sanctions. To ensure that these processes remain fair and serve investors’ interests, the Division of Enforcement will no longer recommend to the Commission a settlement offer that is conditioned on granting a waiver. This return to the division’s long-standing practice ensures that the consideration of waivers is forward looking and focused on protecting investors, the market, and market participants from those who fail to comply with the law.

I don't pretend to understand the import of this move, but lawyer Jesse Hynes who has opined on the Ripple case seems to think it could change the background:

@Pablo can you shed some light?

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I don't understand what Jesse is getting at - he's trolling at this point. The disqualification applies to directors and officers who request a waiver of automatic disqualification as part of the fina

It might be worth remembering that each of Ripple, Chris and Brad must have separate lawyers and be represented individually. That's the only way this could proceed. They can't share the one legal tea

It seems that SEC Commissioners Peirce and Roisman have a different opinion from Chair Lee: Statement of Commissioners Hester M. Peirce and Elad L. Roisman on Contingent Settlement Offers

1 hour ago, PunishmentOfLuxury said:

Statement of Acting Chair Allison Herren Lee on Contingent Settlement Offers

I don't pretend to understand the import of this move, but lawyer Jesse Hynes who has opined on the Ripple case seems to think it could change the background:

@Pablo can you shed some light?

I don't understand what Jesse is getting at - he's trolling at this point. The disqualification applies to directors and officers who request a waiver of automatic disqualification as part of the financial settlement. 

Disqualifications guard against future participation in certain activities by those entities or individuals whose misconduct suggests they cannot be trusted. The SEC is simply saying that the decision to waive these disqualifications should be done by a separate team who specialise in considering the broad impact on the company and individuals. These factors are not the same factors involved in the prosecutions and should not be influenced by the prosecution team's desire for a "quick win".

Waivers cannot be used as a bargaining chip in settlement negotiations. That necessarily means it will be much harder for Ripple, Brad and Chris to seek waivers as part of their negotiations.

Maybe Jesse is suggesting that the SEC  should focus its attention on the past status of XRP and leave open the question of the current and future status of XRP so that the SEC can create a new set of crypto rules that will apply to XRP, ETH and every other token and ICO. It's one option amongst several other contenders. But this has nothing to do with the disqualification question...

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This is the problem with ALL authorities. Their use of language is probably THE worst. 

 

To add, it looks like the SEC are trying to change the rules as things go on. I honestly don't believe that they believe they can win at all. 

Edited by NMNR
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1 hour ago, Pablo said:

I don't understand what Jesse is getting at - he's trolling at this point. The disqualification applies to directors and officers who request a waiver of automatic disqualification as part of the financial settlement. 

Disqualifications guard against future participation in certain activities by those entities or individuals whose misconduct suggests they cannot be trusted. The SEC is simply saying that the decision to waive these disqualifications should be done by a separate team who specialise in considering the broad impact on the company and individuals. These factors are not the same factors involved in the prosecutions and should not be influenced by the prosecution team's desire for a "quick win".

Waivers cannot be used as a bargaining chip in settlement negotiations. That necessarily means it will be much harder for Ripple, Brad and Chris to seek waivers as part of their negotiations.

Maybe Jesse is suggesting that the SEC  should focus its attention on the past status of XRP and leave open the question of the current and future status of XRP so that the SEC can create a new set of crypto rules that will apply to XRP, ETH and every other token and ICO. It's one option amongst several other contenders. But this has nothing to do with the disqualification question...

I am completely at sea with understanding this.

What jumps out at me again is that BG and CL's interests conflict with the interests of the company they are supposed to be managing (and the interests of Ripple's customers and client's who SEC are supposed to be protecting).   Personally I think SEC should simply say they have no interest in negotiations with Ripple until BG and CL are completely outside the negotiation procedure's, which I think would also mean outside from management positions inside Ripple)

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2 hours ago, Pablo said:

Waivers cannot be used as a bargaining chip in settlement negotiations. That necessarily means it will be much harder for Ripple, Brad and Chris to seek waivers as part of their negotiations.

If RIpple want to settle, then any agreement will have to include waivers on disqualifications so that the founders and company can continue selling (but possibly with restrictions on amounts, timing and public disclosure) - by moving the decision on who can grant a waiver to a separate body - it takes away one of the cards in the SEC's hands - they can't use it as a bargaining chip directly but are reliant on a decision from elsewhere. Ripple will want it anyway, but they are more likely to get it from a 3rd party? yes?

So in a way it make settlement easier? no?

Edited by jbjnr
s/staff/company/
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28 minutes ago, jbjnr said:

If RIpple want to settle, then any agreement will have to include waivers on disqualifications so that the founders and company can continue selling (but possibly with restrictions on amounts, timing and public disclosure) - by moving the decision on who can grant a waiver to a separate body - it takes away one of the cards in the SEC's hands - they can't use it as a bargaining chip directly but are reliant on a decision from elsewhere. Ripple will want it anyway, but they are more likely to get it from a 3rd party? yes?

So in a way it make settlement easier? no?

Ripple have divided their lawyers into three groups, in a way already decoupling the interests of BG and CL from the interests of Ripple labs.  The Ripple labs lawyers have no stake in looking after the interests of BG and CL.  The lawyers of Ripple labs have already thrown BG and CL under a bus (well told them that they are on their own), but Ripple go on behaving as if they have not done this.  Pretending BG and CL can continue to be managers of Ripple Labs is not looking after their shareholders, clients or customers, it is a lie!

 

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27 minutes ago, Julian_Williams said:

The lawyers of Ripple labs have already thrown BG and CL under a bus (well told them that they are on their own), but Ripple go on behaving as if they have not done this. 

It might be worth remembering that each of Ripple, Chris and Brad must have separate lawyers and be represented individually. That's the only way this could proceed. They can't share the one legal team. Ripple has no choice in this because each of the defendants has separate factual matrices to address and there would be obvious conflicts of interest to defend all 3 by the same legal team.

Also, the Ripple defence was careful not to pin this on Chris or Brad which they could have easily done. They could have argued that the execs acted outside their authority and that Ripple has no liability for rogue employees. But they didn't do that so we have to assume they want to give Chris and Brad room to mount a defence.

The big question now is whether Chris and Brad try to throw Ripple under the bus by saying they acted solely with the approval of investors, board etc etc. I doubt we'll see that either.

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10 minutes ago, Pablo said:

It might be worth remembering that each of Ripple, Chris and Brad must have separate lawyers and be represented individually. That's the only way this could proceed. They can't share the one legal team. Ripple has no choice in this because each of the defendants has separate factual matrices to address and there would be obvious conflicts of interest to defend all 3 by the same legal team.

Also, the Ripple defence was careful not to pin this on Chris or Brad which they could have easily done. They could have argued that the execs acted outside their authority and that Ripple has no liability for rogue employees. But they didn't do that so we have to assume they want to give Chris and Brad room to mount a defence.

The big question now is whether Chris and Brad try to throw Ripple under the bus by saying they acted solely with the approval of investors, board etc etc. I doubt we'll see that either.

Thanks @Pablo, as always your response give interesting clarity!  I think you are describing a version of the prisoners dilemma? 

Basically BG and CL have a common interest with Ripple in sticking together and not stabbing each other in the back, but each party might stab the other in the back to get a better deal.  This is a situation they have created through their behaviour, and it is their customers, clients and shareholders who are the fall guys for the situation they have created. 

In my opinion this situation needs to be called out so that there can be clarity in the negotiations.  BG and CL should not be playing these games.  I have no sympathy, but I guess a lot of investors are empathetic towards CL and BG and do not agree with my personal stance. 

Edited by Julian_Williams
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2 hours ago, Pablo said:

It might be worth remembering that each of Ripple, Chris and Brad must have separate lawyers and be represented individually. That's the only way this could proceed. They can't share the one legal team. Ripple has no choice in this because each of the defendants has separate factual matrices to address and there would be obvious conflicts of interest to defend all 3 by the same legal team.

Also, the Ripple defence was careful not to pin this on Chris or Brad which they could have easily done. They could have argued that the execs acted outside their authority and that Ripple has no liability for rogue employees. But they didn't do that so we have to assume they want to give Chris and Brad room to mount a defence.

The big question now is whether Chris and Brad try to throw Ripple under the bus by saying they acted solely with the approval of investors, board etc etc. I doubt we'll see that either.

I was originally anticipating Ripple board potentially throwing Chris and Brad underneath the bus, but like you mentioned that looks like that will not happen. I am expecting Chris and Brad would not be able to throw Ripple Board under the bus, even if they wanted.  So they will most likely be sailing this ship together against the SEC.

  • SEC has plenty of communications documented directly involving Chris and Brad intending to sell XRP like an investment contract, that did not involve Board members or meetings. So they have shown intent to take these actions, outside of the Board.
  • I believe Chris is the ring leader for hiring Brad and majority of the Board members.  He can't try to throw anyone under the bus, when there is clear evidence he was running the show.
  • The board members currently have 7 seats, which Chris and Brad are 2 of them.  I believe other Board members have joined and left in the past few years.  Board meetings typically document decisions made and potentially voting results on the decisions.
    • Major decisions like what to do with XRP is unavoidable to be discussed at the Board meetings, since it was the primary source of revenue for the organization to be profitable.
    • We know at least majority of the Board (if not all) agreed for Ripple to proceed forward with these actions.
    • If Chris and Brad wanted to try and throw the Board under the bus, they would need to show they had record of voting against the Board when they were approving actions that violated SEC laws.  Which is safe to assume they were not doing this.

 

Then with other investors, they would have even more difficult position on this.  For example with Tetragon contact giving them a clause to cancel the contract if XRP is claimed a security. Now Tetragon is in a separate lawsuit against Ripple, which all stems from Ripple and executives taking actions that did not follow SEC regulations.  Which Tetragon clearly went out of their way to protect themselves from damages if Ripple and their executives ever sold XRP like a security.

Edited by wogojump
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WOW messy - but that's the law for you, ultimately this has to be settled in a way that does not hurt the whole of crypto, which ruling XRP as a security surely will. Which in turn means, no matter what some individuals may or may not have done, XRP has to be ruled on either way, if the SEC rule it a security then they are shooting themselves and the USA in the proviabial foot and just causing a massive headache and an expensive red tape nightmare for both themselves and everyone else and ultimately the USA may get left behind whilst the rest of the world, digitally moves on so to speak.

Edited by HAL1000
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6 hours ago, Julian_Williams said:

Thanks @Pablo, as always your response give interesting clarity!  I think you are describing a version of the prisoners dilemma? 

Basically BG and CL have a common interest with Ripple in sticking together and not stabbing each other in the back, but each party might stab the other in the back to get a better deal.  This is a situation they have created through their behaviour, and it is their customers, clients and shareholders who are the fall guys for the situation they have created. 

In my opinion this situation needs to be called out so that there can be clarity in the negotiations.  BG and CL should not be playing these games.  I have no sympathy, but I guess a lot of investors are empathetic towards CL and BG and do not agree with my personal stance. 

You know where I stand my friend, but here is the thing the more I find out the more this seems like an orchestrated move for control.  BG & CL were baited and they took the bait this is on them and the only way Ripple the company comes out of this smelling like roses they will have to address the Brad  & CL situation.  It may come out that Brad and CL may have to distance themselves from the business activity of Ripple.  The more I look at this the more to me this seems like it is going to go the governments way and I don't mean Ripple being declared a security but I do mean a company more aligned with the United States government dictating the rules and regulations of how XRP is governed around the world. It kind of makes sense why coinbase stopped trading entirely if you look at it that way.  I believe Coinbase has always had an inside track on policy moves coming down from the US government as it relates to crypto. I really don't see Brad and CL coming out in the end of this in their respective positions.  The trap was set, they took the bait no matter how subtle and innocent they want to make it look, this opened the door for the Government to come in.  They(USA Government) are not looking to kill xrp but put it in a position where they can strongly dictate policy to do this you have to put your people in places where this can get done.  The XRP Ledger and XRP are open source but the entity that is the most active in building on that framework is Ripple. This is all speculation but I do believe the general thought coming out is that leadership will have to change because if this fiasco could happen now while things are in it's infancy , what is the potential of this happening when the stakes are even higher with the current leadership.  It's not that BG is or is not doing a good job but can he be trusted moving forward to not go Maverick again just because he perceives no response as a good response. The SEC suit is BS but it's kind of like the sabretooth tiger following the mastodon into the tar pit  right now. I'm long on XRP but that does not mean I'm long on Ripple leadership.  I believe that XRP being the conduit for cross border settlement on a federated level is in play, but I also believe the SEC mess here is just a smokescreen for getting the people dynamics in place in a hostile manner. Anyone knows in war you suppress the peoples will with negative propaganda first, stifle communications to cater it to your agenda, then put your resources in play for control.  XRP has seen all this except the last scenario which is in play now. The US Government has took the hands off approach for years because they knew greed would open the door for a slam dunk scenario.

Edited by RikkiTikki_is_Back
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Jeremy Hogan's interpretation of the SEC announcement:

TL;DW: This 180 degree policy shift is directly related to the Ripple settlement negotiations. Kik Interactive was given the waiver of being allowed to sell their 'securities' under regulation D as part of their settlement. Hogan conjectures that Ripple wanted that same waiver, but were denied it. To avoid accusations of the SEC playing favourites, Lee had to come out with a broad policy statement that everyone will henceforth be denied such a waiver as part of a settlement. If Ripple wants to sell XRP to accredited investors under regulation D, they will have to get permission from another division of the SEC, which is not guaranteed.

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