SEC v. Ripple: Court Rejects Defendants' Fair Notice and Vagueness Defenses

DISCUSSION

II. Analysis

B. Defendants’ Offers and Sales of XRP

5. Defendants’ Due Process Defenses

Defendants each assert a “fair notice” defense, claiming that the SEC violated their due process rights; Larsen and Garlinghouse also assert an as-applied vagueness defense based on the same due process principles. See Defs. Opp. at 43 & n.28; see also ECF No. 51 at 97–99; ECF No. 462 at 97–99; ECF No. 463 at 103–05.

“A fundamental principle in our legal system is that laws which regulate persons or entities must give fair notice of conduct that is forbidden or required.” FCC v. Fox Television Stations, Inc., 567 U.S. 239, 253 (2012). This clarity requirement is “essential to the protections provided by the Due Process Clause of the Fifth Amendment,” and “requires the invalidation of laws that are impermissibly vague.” Id. Laws fail to comport with due process when they (1) “fail[] to provide a person of ordinary intelligence fair notice of what is prohibited,” or (2) are so standardless that they authorize or encourage “seriously discriminatory enforcement.” Id. (citation omitted).

This “assessment cannot be conducted in the abstract; rather . . . the party claiming a lack of notice [must] show[] ‘that the statute in question provided insufficient notice that his or her behavior at issue was prohibited.’” ECF No. 440 at 8 (quoting Copeland v. Vance, 893 F.3d 101, 110 (2d Cir. 2018)). “[T]he evaluation of any fair notice defense is objective—it does not require inquiry into ‘whether a particular [party] actually received a warning that alerted him or her to the danger of being held to account for the behavior in question.’” Id. at 10 n.5 (quoting United States v. Smith, 985 F. Supp. 2d 547, 587 (S.D.N.Y. 2014), aff’d sub nom. United States v. Halloran, 664 F. App’x 23 (2d Cir. 2016)).

The Court rejects Defendants’ fair notice and vagueness defenses as to the Institutional Sales. First, the caselaw that defines an investment contract provides a person of ordinary intelligence a reasonable opportunity to understand what conduct it covers. See Copeland, 893 F.3d at 114. Howey sets forth a clear test for determining what constitutes an investment contract, and Howey’s progeny provides guidance on how to apply that test to a variety of factual scenarios. See Smith, 985 F. Supp. 2d at 588 (“[I]t is not only the language of a statute that can provide the requisite fair notice; judicial decisions interpreting that statute can do so as well.”). That is constitutionally sufficient to satisfy due process. See United States v. Zaslavskiy, No. 17 Cr. 647, 2018 WL 4346339, at *9 (E.D.N.Y. Sept. 11, 2018) (“[T]he abundance of caselaw interpreting and applying Howey at all levels of the judiciary, as well as related guidance issued by the SEC as to the scope of its regulatory authority and enforcement power, provide all the notice that is constitutionally required.”).

Second, the caselaw articulates sufficiently clear standards to eliminate the risk of arbitrary enforcement. Howey is an objective test that provides the flexibility necessary for the assessment of a wide range of contracts, transactions, and schemes. Defendants focus on the SEC’s failure to issue guidance on digital assets and its inconsistent statements and approaches to regulating the sale of digital assets as investment contracts. See Defs. Opp. at 45–52. But the SEC’s approach to enforcement, at least as to the Institutional Sales,[20] is consistent with the enforcement actions that the agency has brought relating to the sale of other digital assets to buyers pursuant to written contracts and for the purpose of fundraising. See, e.g., Telegram, 448 F. Supp. 3d 352; Kik, 492 F. Supp. 3d 169. Moreover, the law does not require the SEC to warn all potential violators on an individual or industry level. See Dickerson v. Napolitano, 604 F.3d 732, 745–46 (2d Cir. 2010) (“Courts ask whether the law presents an ordinary person with sufficient notice of or the opportunity to understand what conduct is prohibited or proscribed, not whether a particular [party] actually received a warning that alerted him or her to the danger of being held to account for the behavior in question.” (cleaned up)).

Accordingly, the SEC’s motion for summary judgment is GRANTED as to the Institutional Sales and otherwise DENIED, and Defendants’ motion for summary judgment is GRANTED as to the Programmatic Sales, the Other Distributions, and Larsen’s and Garlinghouse’s sales, and DENIED as to the Institutional Sales.

[20] Because the Court finds that only the Institutional Sales constituted the offer and sale of investment contracts, the Court does not address Defendants’ asserted fair notice defense as to the other transactions and schemes. The Court’s holding is limited to the Institutional Sales because the SEC’s theories as to the other sales in this case are potentially inconsistent with its enforcement in prior digital asset cases. See Upton v. SEC, 75 F.3d 92, 98 (2d Cir. 1996).