US SEC was Reportedly Warned that Investors May Lose Billions due to Enforcement Action Against Ripple, Legal Expert Claims

John E. Deaton, a lawyer focused on the blockchain and cryptocurrency sector (and other societal/legal issues), notes that the US Securities and Exchange Commission (SEC) was warned that investors could potentially lose billions, considering “the magnitude of an SEC enforcement action” against Ripple’s XRP, which is one of the largest digital assets in terms of market cap (at over $12.6 billion at the time of writing).

Deaton claims that the SEC, and its Chairperson (at that time), Jay Clayton, had been sent a letter, well before the filing of the action, from former Chief Joseph Grundfest.

Deaton pointed out that Grundfest had reportedly warned Clayton and the SEC that “the mere filing of the lawsuit, declaring XRP an unregistered security, ‘would result in an unprecedented scenario of billions of dollars in losses resulting from an exodus of intermediary market service providers.’”

Deaton confirmed that this is actually a direct quote from a former Chief who may have seen “all this coming.” Deaton further noted that the mass “exodus of intermediary market service providers” has now taken place.

He also mentioned that crypto exchanges Coinbase, Kraken, and nearly every other service provider has now halted XRP trading for US-based customers. Others, such as Bitwise and Grayscale even liquidated their XRP holdings, Deaton confirmed.

He continued:

“Remember, XRP has been publicly traded in the U.S. and globally for seven plus years with the SEC’s full awareness and implicit permission. The SEC was aware that XRP was being actively traded on over 200 exchanges globally, including in the U.S. Clayton was warned by Grundfest that if the SEC initiated an enforcement action declaring XRP an unregistered security, in present day, these exchanges would have no choice but to delist and/or halt XRP trading from fear of an SEC action against them.”

Deaton added:

“Grundfest informed Clayton that he was aware of no instance in which the simple announcement of a commission’s enforcement procedure has, absent allegations of fraud or misrepresentation, caused multi-billion-dollar losses of innocent third parties.” 

In the SEC’s complaint filing against American Fintech firm Ripple Labs, company CEO Brad Garlinghouse, and founder Chris Larsen there are reportedly no fraud allegations or those related to any type of misrepresentation, Deaton noted. He also mentioned that given that “no fraud was being alleged and the fact that XRP was allowed to be traded for over 7 years, Grundfest pleaded with Clayton stating that ‘no pressing reason compels immediate enforcement action’.”

However, Clayton and the SEC ignored this grave warning, Deaton claims. Even though billions of dollars in losses have been experienced by “innocent” investors, the SEC filed “the most significant SEC case in modern history,” Deaton claims. Given that no “exigency existed and there was no immediate need to file the case, Grundfest, himself, questioned Clayton’s and the SEC’s true motive,” Deaton added.

Grundfest also said that applying traditional securities’ laws to XRP but not Ethereum (ETH) “calls into question the ‘commission’s discretion,’” Deaton noted. He added that “in short, Grundfest was saying ‘if today’s XRP is a security, so is ETH.’”

Deaton further noted:

“[Grundfest] was basically going on the record and saying that not only did it NOT make any sense, but it would be fundamentally unfair for the SEC to file this action. He basically told Clayton and the SEC that if you file this case, claiming XRP is a security, it’s because of other reasons, unrelated to the law.”

Deaton added:

“Clayton and others were well aware that the mere filing of the enforcement action, not limited to specific distributions of XRP directly from Ripple, but alleging that all XRP constitutes securities, could prove to be a ‘Kill Shot’ against Ripple and XRP. Considering the magnitude of this case one would think that Clayton and the Enforcement Chief would certainly want to see it through. But, instead, they both left the SEC forever.”

As reported recently, Tetragon Financial Group Ltd. (LSE: TFG), a UK based investment firm with $2.35 billion in assets under management, has sued Ripple in Delaware courts.

Tetragon apparently had an agreement incorporated in its equity investment with Ripple that if XRP was deemed to be an unregistered security, Tetragon could get its money back.

In December, Ripple was sued by the US Securities and Exchange Commission regarding allegations of XRP being sold as an unregistered security.

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