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Stuart Alderoty gives the U.S. Securities and Exchange Commission his toughest fight against crypto regulation in one of the industry’s most important tests, even as the FTX debacle grips the trading world. digital assets.

Alderoty, a 63-year-old lawyer, has spent most of his career working for traditional financial players. As chief legal officer of payments company Ripple Labs Inc., he is now at the center of a scorched earth litigation and public relations battle against the SEC, its chairman, Gary Gensler.

“They want to wield power that the law doesn’t otherwise give them,” Alderoty said in an interview in Washington before FTX went bankrupt.

The Ripple case is a keystone in the growing debate on the regulation of an industry that is sometimes compared in the Wild West. It could soon enter a new phase: a federal judge is considering the duel motions of Ripple and the SECONDeach asking for the case to be resolved in their favor.

Stuart Alderoty

Photo: Ripple Labs, Inc.

Ripple claims to have already spent around $100 million defending the case and, in effect, protecting the entire crypto industry from what it calls SEC overregulation. Alderoty turned to a list of well-known outside attorneys, including the Obama administration’s SEC Chairman Marie-Jo White and his former deputy, Andrew Ceresney.

Meanwhile, the “crypto winter” descending in digital asset markets this year, and the highly publicized FTX collapsehas the SEC touting its efforts to protect investors.

Crypto Cooling

The SEC’s closely watched lawsuit against Ripple is expected to provide the first “conclusive ruling on whether or not a crypto asset is a security,” said Tibor Nagy, a New York litigator who has represented crypto clients. crypto industry.

The SEC accuses Ripple, its CEO Bradley Garlinghouse and the San Francisco-based company’s co-founder Christian Larsen of misleading investors by failing to register Ripple’s XRP, one of the 10 Biggest Crypto Tokens– as a security.

Ripple has raised over $1.3 billion through an unregistered token offering, the the agency said in his trial, deposit in December 2020.

The company argue that XRP is not an “investment contract” and is therefore not subject to the authority of the regulator. Allowing the SEC to regulate the token as a security would open the door to treating other assets — like cars, diamonds, and soybeans — as securities, Ripple said in court documents.

The SEC feels vindicated by its approach to crypto regulation. The agency announced on November 15four days after FTX filed for bankruptcy, that it filed 760 lawsuits this year that led to a $6.4 billion record in fines and monetary recoveries for investors, up 64% compared to 2021.

Gary Gensler, Chairman of the United States Securities and Exchange Commission.

Photo: Melissa Lyttle/Bloomberg

Regulators often seek to show the public they are tough on alleged bad actors after a financial disaster, said Gary De Waal, former chairman of Katten Muchin Rosenman’s capital markets and regulatory practice. Besides FTX’s demise, other crypto-related legal issues have emboldened the SEC, he said.

DeWaal quoted a November Victory by the SEC in a federal case in New Hampshire against blockchain payment network LBRY Inc. He said the decision could expand the agency’s offer to classify digital tokens as securities within its jurisdiction.

An SEC win against Ripple “would have a real chilling effect on the crypto space,” DeWaal said.

The SEC and Gensler, who have made no secret of their desire to be the best american crypto cop, declined to discuss the Ripple case. Gensler told Bloomberg News in a interview published on December 1 that crypto investors should adopt SEC regulations.

allies and adversaries

Alderoty, who grew up in Brooklyn and now lives on the Jersey Shore, join Ripple as the top lawyer in 2019. He said he had “given up 30 years of networking” in more traditional Wall Street legal roles to try something new.

He enrolled in college and law school, both at Rutgers University in New Jersey, taking various jobs. He fought California bushfires, drove a forklift through a light bulb factory, and memorized all the U.S. ZIP codes in the pre-digital era while working for United Parcel Service Inc.

Alderoty then served as General Counsel for CIT Group Inc., a financial services company sold at First Citizens BancShares Inc.—and North American Chief Legal Officer at HSBC Holdings PLC. He was also a litigator for American Express Co. and LeBoeuf, Lamb, Greene & MacRae, a precursor to a Manhattan law firm that famous passed away.

In 2010, Alderoty was part of a Consultative Committee convened by the United States Chamber of Commerce to consider the views of future Supreme Court Justice Elena Kagan on business issues following her nomination for a seat on the High Court.

Alderoty donated $10,000 to groups supporting Rep. Liz Cheney (R-Wyo.) in the last election cycle as the veteran lawmaker faced attack from her own party during Cheney’s role to the January 6 Committee. He also contributed $4,800 to a campaign for Senate Majority Leader Chuck Schumer (D.-NY), according to federal election records.

Alderoty said he favors reasonable regulation of the crypto industry, but the SEC is playing politics instead of pursuing sound policy. He and Garlinghouse argue that Congress, not unelected agency heads, should set the standards.

Both Ripple executives said the company spent a lot of money to make this happen. Garlinghouse said the $100 million figure includes legal fees, as well as discovery and expert witness fees incurred during the litigation with the SEC and the one-year period before its enforcement action. Lobbying costs are separate, the CEO said.

Mary Jo White appears during a 2014 House Financial Services Committee hearing.

Photo: Andrew Harrer/Bloomberg

White and Ceresney, a pair of Debevoise & Plimpton partners, are part of the legal team defending Ripple. The same goes for Michael Kellogg, founding partner of Kellogg, Hansen, Todd, Figel & Frederick, whose notable clients have included the Crown Prince of Saudi Arabia.

Alderoty declined to detail the hourly bills of prominent Ripple litigants.

Debevoise and King & Spalding have collectively handled more than 50% of Ripple’s litigation in US federal courts over the past five years, according to data from Bloomberg Law. Over 20 other companies also represented Ripple during this time, including Boies Schiller Flexner; Cooley; K&L Gates; Quinn Emanuel Urquhart & Sullivan; and Skadden, Arps, Slate and Meagher & Flom.

Ripple spent $810,000 in the first three quarters of this year on lobbyists, including those at Michael Best & Friedrich and Williams & Jensen, according to Senate disclosures.

Garlinghouse, acknowledging the difficulty of predicting legal proceedings, said he hopes for a resolution of the dispute between Ripple and the SEC by early 2023.

In the meantime, he said, the company is operating as if it has already lost the business by focusing on international markets. About 95% of Ripple’s business is done overseas, Garlinghouse said, in places like Brazil, Dubai, Japan, Singapore, Switzerland and the UK. Ripple recently sought to expand to the European Union in filing for a business license in Ireland.

“People considering starting a crypto or blockchain business should not do so in the United States,” Garlinghouse said.

Cleary Gottlieb Steen & Hamilton partner Matthew Solomon and lead attorney Alexander Janghorbani, another pair of former SEC litigants— are representing Garlinghouse in the SEC case, while Larsen has retained a legal team led by Michael Gertzman and Martin Flumembaum of Paul, Weiss, Rifkind, Wharton & Garrison.

Flumenbaum has advised many high-profile clients, such as the former junk bond trader Michael Milken and one deceased son disgraced financier Bernard Madoff. Flumenbaum initially agreed to represent the founder of FTX Samuel Bankman Friedbut last month backward on what Paul Weiss called a “conflict”.

An “already confused space”

The cross-border collapse of FTX and associated implosion from BlockFi created spam waves for Ripple, which faces the SEC in a much different environment than the one in which the lawsuit was filed two years ago.

Ripple said in a statement that it has no “significant exposure” to the bankruptcies of FTX and BlockFi. The company said it does not expect its business-to-business operations to be affected.

Despite the industry’s hopes for a ruling that would finally end the uncertainty, the court’s eventual ruling in the Ripple-SEC case could add more “ambiguity to an already confusing and ambiguous space,” it said. DeWaal, citing the conflicting ways regulators have approached crypto.

Nagy noted that while a “victory for the SEC would be a harbinger of more regulatory action”, Ripple “appears to be playing the long game” and is likely to take the case to the appellate courts. , if necessary.

Ripple is working with lawmakers and regulators around the world to identify areas of common interest, Alderoty said. He also promised that the company would remain aggressive in the SEC litigation.

Ripple recently prevailed in a month discovery fight on internal SEC communications related to a Speech of June 2018 by William Hinman, former head of corporate finance at the SEC. Alderoty called Hinman’s speech a seminal event that muddy the waters as to how the US Ranks Digital Assets.

The “Hinman documents” remain confidential, but Alderoty has said that he feels more confident about Ripple’s legal arguments after receiving them.

Hinman, who returned last year to Simpson Thacher & Bartlett, declined a request for comment.

Over the past few weeks, Alderoty has used the insolvencies of FTX and BlockFi to regularly take on the SEC on Twitter. Ripple’s top lawyer intends to keep the pressure on Gensler.

“His insistence on elevating the SEC’s quest for effective regulation in this country is causing serious financial damage,” Alderoty said. wrote last month.

The deal is SEC v Ripple Labs Inc.SDNY, No. 1:20-cv-10832, 22/12/2020.

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