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 2 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 5 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.