Hinman Investigation: The Chance for the SEC to Get Something Right

By John E. Deaton.

It didn’t just take a village. It took an army of activists, lawyers and everyday citizens to demand, insist and even sue the Securities and Exchange Commission to be transparent. From the moment William Hinman got on that stage in San Francisco on June 14, 2018, to declare that Ethereum’s native token, Ether, is not a security, something just didn’t seem right.

Indeed, that speech didn’t appear on Hinman’s official SEC calendar. The SEC has also forcefully refused under several chairman – including current Chairman Gary Gensler – to ever prejudge the status of a digital token with one very glaring exception: Hinman’s speech on Ether.

After six years, many lawsuits and tens of thousands of messages flooding into Washington, we learned today that the SEC Office of the Inspector General (OIG) is “in the final stages” of an investigation into the clear appearance of impropriety and conflicts of interest around Hinman’s speech and his many actions as SEC Director of Corporation Finance. My further understanding is that the investigation will delve into how the SEC ethics staff handled Hinman’s documented actions, or failed to.

It started with hundreds of internet sleuths working together in what I call decentralized justice. We discovered quickly that Hinman’s annual financial disclosures at the SEC showed he was receiving millions of dollars in payments from his old law firm, Simpson Thacher. We also learned that Simpson Thacher was a member of the Enterprise Ethereum Alliance, a group with the sole purpose of promoting Ethereum. Dozens of videos were located that had Hinman and other SEC officials, as well as key investors and stakeholders in Ethereum, saying in their own words what was happening in front of the cameras and behind the scenes around what Hinman called “the Ether speech”. I put them all together in a Video Library on the CryptoLaw website, and the evidence of possible conflicts of interest took shape.

At the same time, the excellent legal team defending Ripple, Brad Garlinghouse and Chris Larsen against the SEC’s lawsuit on the XRP digital token were locked in a long discovery fight over getting the internal emails and drafts of Hinman’s speech. That took years because the SEC fought so hard to hide the Hinman documents, defying so many court orders to produce them, that Magistrate Judge Sarah Netburn called them out for their lack of “faithful allegiance to the law.” As amicus counsel for 75,000 XRP holders in that case, I couldn’t agree more with Judge Netburn’s conclusion.

In August 2021, the government watchdog organization Empower Oversight jumped into the fight, with Freedom of Information Act requests and lawsuits when the SEC refused to comply. It took them years to force the SEC to produce the emails that proved how Hinman fought to receive million in payments from Simpson Thacher. They showed he was warned repeatedly he had a “criminal financial conflict” if he ever had any contact with that law firm, and he ignored them.

The Hinman emails obtained by Empower Oversight show he met over and over with Simpson Thacher, including with the head of their China office – Chris Lin – when his client had a pending IPO application before his division. The emails also showed direct contact between Joseph Lubin, one of the highest profile third party promoters of Ether, and Hinman before the 2018 speech.

In May 2022, Empower Oversight sent a referral of evidence about these conflicts to the SEC OIG. For almost two years, the group has been requesting internal communications about that referral and has been locked in litigation with the SEC to get compliance with those requests. That’s why today’s news confirming the OIG investigation is so important, and such a vindication for the thousands of people who have worked so hard to make this government agency transparent and compliant with the law.

I will not prejudge the SEC OIG’s investigation, nor should anyone else. They have pledged to give a redacted version of their final report to Empower Oversight, which means it will be made public for us to review ourselves.

But one thing is very clear. We must have our ethics rules followed by public officials like Hinman. When they are not followed, the law must be enforced. America is greatest when we have a level playing field and we allow the best technologies and innovations to compete fairly. And we must always stand up against gross government overreach.

This is the chance for the SEC to get something right for once. I hope the OIG issues a complete, fair and well-reasoned report which shows the kind of faithful allegiance to the law that the SEC Enforcement Division and Division of Corporation Finance have clearly failed to show to date.

The Hinman Documents Reveal a Deceitful SEC

By Roslyn Layton, PhD. June 13, 2023. (DC Journal).

In February, I filed a motion to intervene in SEC v. Ripple Labs, the first big crypto enforcement action filed in December 2020 by the Securities and Exchange Commission (SEC). I have written two dozen stories about the serious implications of the case, particularly on the sweeping regulatory overreach at the heart of the SEC’s arguments and the naked power grab it represents.

The agency spent most of the last two years fighting Ripple’s attempts to obtain internal SEC emails and documents on the drafting of a 2018 speech given by then-Director of Corporation Finance William Hinman where he introduced a long list of “what we look at” when determining whether a digital asset is a security.

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SEC Slapdown Is A Wake-Up Call To Congress

By Roslyn Layton. July 17, 2022. (Forbes)

On July 12, the U.S. District Court rejected the Security Exchange Commission (SEC) request to withhold documents on the so-called Hinman speech of 2018. In a highly anticipated ruling in the ongoing SEC v. Ripple case, Magistrate Sarah Netburn denied the SEC’s motion citing attorney-client and deliberate process privileges. The judge slammed the agency for hiding documents which could answer questions in front of the court. She called the behavior so egregious that it impugns the agency’s “faithful allegiance to the law.”

Congress should heed her forceful, deliberate words. The House Financial Services Committee holds an oversight hearing on the SEC Enforcement Division next Tuesday. Chairwoman Maxine Waters can ask them directly where their allegiance lies– with the public and the law—-or their own personal interest.

Read full article here.

SEC Can’t Shield Ex-Official’s Speech Drafts, Ripple Says

By Elise Hansen. May 16, 2022. (Law360)

The U.S. Securities and Exchange Commission can’t use attorney-client privilege to shield early drafts of former official Bill Hinman’s speech about cryptocurrencies, since Hinman gave the speech in his personal capacity, Ripple Labs told a New York federal court.

Attorney-client privilege doesn’t cover communications about Hinman’s personal remarks, and Hinman can’t be considered a “client” of the SEC’s attorneys for activities outside his official duties, Ripple and its executives argued Friday.

The letter was the latest shot in the discovery battle between the SEC and Ripple after the agency accused the blockchain-based payments company and its executives of violating federal securities laws in their sales of Ripple’s signature digital asset, XRP.

Read the full article here.

Empower Oversight Requests SEC-OIG Conduct Investigation into the Failure of the SEC’s Ethics Office to Prevent Cryptocurrency Conflicts of Interest by Senior Staff

By Empowr Oversight. May 10, 2022. (Empowr)

WASHINGTON — Empower Oversight sent a letter to the Office of the Inspector General of the Securities and Exchange Commission (SEC-OIG) requesting a comprehensive review of the SEC’s ethics officials to properly manage SEC official William Hinman’s potential conflict of interest regarding cryptocurrency issues. The letter describes in detail instructions that the SEC’s Ethics Office provided to Mr. Hinman and actions by Mr. Hinman that are inconsistent with the instructions.

Specifically, records that were disclosed to Empower Oversight in response to an August 12, 2021, FOIA request show that the SEC’s Ethics Office cautioned Mr. Hinman that he had a direct financial interest in his former law firm, Simpson Thacher, and thus, he needed to recuse himself from any matters that would affect the firm; and, lest he may have misunderstood its position, the Ethics Office explicitly told him not to have any contact with Simpson Thacher personnel. Further, the Ethics Office provided Mr. Hinman with a draft memorandum, which was to be issued under his name, that established a screening arrangement to ensure that he complied with his obligation to recuse himself from certain matters with which he had a financial interest, or a personal or business relationship.

Read the full article here.