Jack Baughman, the lawyer representing Gemini, claimed in a post on Aug. 19 that the Securities and Exchange Commission (SEC) is struggling to prove its case against the exchange. According to the SEC lawsuit, Gemini’s crypto lending product Gemini Earn violated the securities laws by offering unregistered securities.
Baughman noted:
“The SEC is floundering. They can’t even decide what the security is.”
Baughman’s post comes a day after Gemini filed a reply brief to try and dismiss the SEC’s case against it.
The SEC’s Legal Challenge
The SEC’s lawsuit centers on Gemini’s introduction of the Gemini Earn program, which allows users to lend digital assets to Genesis under specific terms outlined in a Loan Agreement. According to the SEC, this arrangement constitutes the unlawful sale of unregistered securities — a claim Gemini vehemently denies.
Baughman’s legal challenge to the SEC’s lawsuit hinges on the requirement that the SEC must establish two critical elements: the existence of a security and the sale of such security. Baughman argues that the SEC fails on both fronts.
One of the key points of contention in this legal battle revolves around the SEC’s uncertainty regarding the nature of the alleged security. On one hand, the SEC contends that the Loan Agreement itself qualifies as a security. On the other hand, they assert that the entire Gemini Earn program is a security, a position that Baughman labels as ‘absurd.’
In the court filing, Gemini argued:
“…here is what the [SEC] Complaint never alleges, and what the SEC does not address in its opposition: how, when, where, and to whom were the MDALAs [Loan Agreements] sold? On what terms? At what point was there any “disposition” of any “interest” in the MDALA for value? The Complaint is silent on each of these points, and that silence is fatal to the SEC’s theory.”
Moreover, Baughman takes issue with the SEC’s definition of a “sale” in this context. He points out that the SEC never successfully identifies a sale. Instead, it resorts to broad claims that Gemini and Genesis “sold” their promise to pay interest in exchange for crypto assets. Baughman categorically refutes this assertion, emphasizing the distinction between a sale and a loan.
Baughman wrote:
“Not only is this factually wrong, it is ridiculous. A sale and a loan are different things. At some point words must mean something.”
With over three decades of experience in litigation, Baughman highlights the rarity of government entities adopting extreme positions in legal disputes. Typically, judges tend to dismiss outlandish arguments put forth by private parties. However, when government agencies like the SEC take unconventional stances, they often receive more serious consideration due to the deference granted to them in interpreting the statutes they administer, Baughman noted.
He emphasizes that regulatory bodies must act in the interest of everyone, including those they litigate against. He expresses concern that the current regulatory climate in Washington appears to have strayed from this principle, as agencies seem increasingly willing to “push the envelope” and pursue cases without restraint.
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