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We interrupt our regularly scheduled FY 2021 U.S. Securities and
Exchange Commission (SEC) Enforcement overview to address a recent
discovery opinion in the closely followed SEC v. Ripple
Labs, Inc., et. al
 matter out of the U.S. District Court
for the Southern District of New York. In December 2020,
the SEC charged Ripple and two of its
executives with purportedly raising more than $1.3 billion through
an unregistered offering of digital asset securities. The crux of
the lawsuit involves whether Ripple’s token – XRP –
is a security under the federal securities laws. As with
two recent opinions out of the Southern District of
New York in 2020, the resolution of this matter will likely have
widespread impact across the digital asset and cryptocurrency
markets.

Last year, the parties exchanged blows on the scope of
discovery, including whether the SEC needed to turn over certain
internal communications. On Jan. 13, 2022, Judge Sarah Netburn
issued the court’s opinion on the
defendants’ motion to seek certain documents from the SEC that
the agency claimed were protected by various privileges, including
the “deliberative process privilege.” The defendants
argued that the agency failed to meet its burden to establish the
privileges and the documents needed to be produced. In this SECond
Opinions post, we explore the court’s holding around the
SEC’s deliberative process privilege argument and the
opinion’s far-reaching implications beyond the digital
asset/cryptocurrency space.

What Is the Deliberative Process Privilege?

The deliberative process privilege shields from disclosure
“documents reflecting advisory opinions, recommendations and
deliberations comprising part of a process by which governmental
decisions and policies are formulated.” SEC v.
Ripple
 Jan. 13, 2022 Opinion (Opinion), at
quoting NLRB v. Sears, Roebuck & Co., 421 U.S.
132, 150 (1975). “The privilege therefore distinguishes
between predecisional, deliberative documents, which are exempt
from disclosure, and documents reflecting a final agency decision
and the reasons supporting it, which are not.” Opinion, at
2-3 quoting U.S. Fish & Wildlife Serv. v. Sierra Club,
Inc., 
141 S. Ct. 777, 785-86 (2021). “Generally,
‘documents are “predecisional” if they were generated
before the agency’s final decision on a matter, and they are
“deliberative” if they were prepared to help the agency
formulate its position.'” Opinion,at 3 quoting
Nat. Res. Def. Council v. U.S. Env’t Prot. Agency
, 19 F.
4th 177, 184 (2d Cir. 2021).1 The privilege will
not apply to “purely factual” material not prepared to
assist agency decision-makers in taking discretionary action.
Opinion, at 6 quoting Grand Cent. P’ship v.
Cuomo, 
166 F.3d 473, 482 (2d Cir. 1999). The privilege,
however, may apply to factual material which is so
“interwoven” with the agency’s deliberative process
that segregating and releasing the factual portions of the document
would nevertheless reveal the agency’s “editorial
judgments.” Opinion, at 4 quoting Color of Change v.
U.S. Dep’t of Homeland Sec.
, 325 F. Supp. 3d 447, 455-56
(S.D.N.Y. 2018).

The deliberate process is qualified and construed narrowly by
courts. Opinion, at 4 quoting SEC v. Collins & Aikman
Corp, 
256 F.R.D. 403, 416 (S.D.N.Y. 2009). A court will
consider a variety of factors to determine if the documents in
question should be discoverable, including 1) the relevance of the
evidence sought to be protected; 2) the availability of other
evidence; 3) the seriousness of the litigation and the issues
involved; 4) the role of the government in the litigation; and 5)
the possibility of future timidity by government employees who will
be forced to recognize that their secrets are voidable. Opinion, at
citing Rodriguez v. Pataki,  280 F. Supp. 2d
89, 101 (S.D.N.Y. 2003).

Court’s Holding and Implications

In Ripple,  the court granted the
defendants’ motion in part and denied it in part. On balance,
the court sided with the SEC and found that most of the documents
in question were subject to the deliberative process privilege.
However, two aspects of the court’s holding around SEC staff
notes and speech-related communications could have
“ripple” effects across SEC enforcement cases more
broadly.

First, the court considered whether to protect from discovery a
set of notes prepared by staff in the SEC’s Divisions of
Enforcement and Corporation Finance and a counsel to an SEC
Commissioner. The notes in question involved three categories: 1)
notes from meetings between the SEC and third parties unrelated to
Ripple; 2) notes of meetings between SEC and other regulatory
agencies; and 3) notes of meetings between SEC and Ripple. The SEC
argued that the handwritten notes were fully protected because they
reflect the officials’ “priorities and interest in
particular topics or statements” and they involved a
“selective recording of information” that is
“inseverable” from their deliberative context. Opinion,
at 5. But the court rejected the SEC’s interpretation,
concluding that it could “conceivably extend to any notes
taken by an agency staffer during a meeting where topics relevant
to agency regulation are discussed (which would, presumably, be all
meetings)—even if the notes reflect only statements made by
non-agency third parties.” Id. at 6-7.

Although the court concluded that the notes of meetings between
the SEC and other agencies are “precisely the kind of
‘give-and-take’ contemplated by the privilege,” the
court found that the SEC had not demonstrated that notes of
meetings between the SEC and third parties were prepared “to
help the SEC formulate its
position.” Id. at 7-8.2 The
court specifically noted that “[f]act gathering from third
parties is not an inherently privileged activity” and the SEC
had not presented evidence to suggest they satisfied the definition
of either “predecisional” or
“deliberative.”3 Id. at
8.

Given the frequency with which SEC staff obtains information
from third parties to carry out daily responsibilities, the ruling
opens the door to potential discovery of “purely factual”
staff notes in other proceedings. Importantly, the court noted that
such notes may be protected “where they reflect a curated
reporting obviously prepared to assist [agency] decision
makers,” (Opinion, at 6 quoting Phillips v. Immigr.
& Customs Enf’t, 
385 F. Supp. 2d 296, 302-03
(S.D.N.Y. 2003)). However, this necessarily means that such
assessment should be done on a case-by-case, fact-specific basis.
As such, the opinion could be a harbinger of multiple discovery
motions for SEC staff notes in a variety of SEC enforcement actions
in the near future.

Second, the defendants challenged the SEC’s deliberative
process privilege assertion concerning email communications about a
draft speech by the former Director of the agency’s Division of
Corporation Finance. In the email, the former Division Director
sought comments from other SEC employees about the speech’s
contents before he presented it. As a general matter, documents
related to how an agency communicates its policies to the media or
public fall within the scope of the privilege. Opinion, at
13 citing Fox News Network, LLC v. U.S.
Dep’t of the Treasury, 
739 F. Supp. 2d 515, 545
(S.D.N.Y. 2010). However, personal views of agency employees are
not protected unless they bear on “the formulation or exercise
of policy-oriented judgment.” Opinion, at 14 quoting
Tigue v. U.S. Dep’t of Just., 
312 F.3d 70, 80 (2d.
Cir. 2002). One of the key factors considered by the court is
whether the document at issue “reflect[ed] the personal
opinions of the writer rather than the policy of the agency.”
Opinion, at 14 quoting Grand Cent. P’ship, 
166 F.3d at 482.

The court found that the emails concerning the speech, and draft
versions of the speech itself, were neither predecisional nor
deliberative. Opinion, at 14. Importantly, the court seized on
standard disclaimers by the agency and former Director that his
views did not represent the agency’s. Id. As
anyone who has read or listened to a speech or presentation by any
member of the agency knows, every agency
employee provides this disclaimer before every 
speaking engagement. Accordingly, the court’s finding opens the
door to a potential flood of discovery motions seeking drafts of
speeches, public statements and other formal comments and related
communications to peek behind the curtain into viewpoints by key
agency leaders on various issues. Importantly, however, the
court’s opinion is limited to the specific facts at issue, a
point buttressed by the court’s contra holding concerning draft
talking points and Q&As for SEC officials’ use in
communicating with the public. Opinion, at 15. It remains to be
seen whether this ruling will result in discovery motions in other
matters seeking this type of material, but the opinion certainly
provides an opening.

Footnotes

1 The agency need not demonstrate that the record
relates to a specific decision, but rather must related to a
specific decision-making process and was generated before the
conclusion of the process. Opinion, at 3 citing Nat. Res.
Def. Council, 
19 F.4th at 192. Aimed at promoting candor
within the agency, the privilege protects documents that reflect
decision making process related advisory opinions, recommendations
and deliberations. Opinion, at 4 citing Hopkins v. U.S.
Dep’t of Hous. & Urb. Dev., 
929 F. 2d 81, 84
(2d. Cir. 1991).

2 The court found that the deliberative process
privilege applied to the third category because the notes could
reveal the SEC’s internal thought processes and because Ripple
was present at the meetings, reducing the need for the documents.
Opinion, at 8.

3 The court noted that the SEC had not submitted any
declarations from the note-takers about their method or manner of
note-taking. It will be interesting to monitor in future matters if
the agency includes such declarations going forward to bolster its
privilege claims. The court left open the possibility for the SEC
to seek leave of court for limited redactions in these documents at
a later date. Opinion, at 22.

The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.

(Excerpt) Read more Here | 2022-01-20 08:46:19

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