Ripple Wins Battle For ‘Hinman Documents’ in Bitter SEC Case

By Sebastian Sinclair. May 17, 2023. (Blockworks).

Ripple has secured a small victory against the US Securities and Exchange Commission (SEC) — shutting down the agency’s motion to seal internal files known as the “Hinman Speech documents.”

Those documents consist of SEC drafts and emails relating to a speech given by William Hinman, former Director of the SEC’s Division of Corporation Finance, more than four years ago. 

Hinman’s speech reportedly indicated the agency did not consider ether a security at the time. Ripple lawyers have fought to learn more about how Hinman came to that conclusion, which could impact XRP’s own classification.

According to Tuesday’s filing, the SEC made an attempt to justify the need for confidentiality, contending their lack of relevance to the summary judgment motions and potential disclosure could significantly harm the agency’s interests.

Judge Analisa Torres disagreed in the filing, which triggered an 8% rally for XRP.

“Regardless of whether the court ultimately determines that the Hinman Speech Documents are admissible, or whether the court relies on the documents in ruling on the summary judgment motions, they are judicial documents subject to a strong presumption of public access because they are ‘relevant to the performance of the judicial function and useful in the judicial process.’”

Read the full article here.

SEC v. Ripple: Did The Government Fail To Prove Its Case?

By Hassan Tyler. January 19, 2023. (ValueWalk).

The saga for what Forbes has called “ the cryptocurrency trial of the century” looks as if it is about to enter its closing stages. Final briefs on summary judgment were filed in November of last year by the U.S. Securities and Exchange Commission (SEC) and the payments software company Ripple Labs in SEC v. Ripple .

Nearly two years of arguments are now in the hands of Judge Analisa Torres of the Southern District of New York, who is expected to rule sometime in the first quarter of this year.

SEC v. Ripple

The issue revolves around how Ripple uses the XRP token and its decentralized ledger as a tool for its cross-border payments software that it sells to international banks and money transmitters. The company and two of its executives sold large amounts of the token to exchanges starting in 2013, which fed a substantial secondary market for the cryptocurrency and an ecosphere for the XRP Ledger for businesses and individuals without the involvement or permission of Ripple.

Read the full article here.

A Question for Congress: Why Didn’t the SEC Stop FTX?

By Hal Scott and John Gulliver. January 18, 2023. (Wall Street Journal).

The Securities and Exchange Commission brought an enforcement action last week against the cryptocurrency brokerages Genesis Global Capital and Gemini Trust. As with the failure of crypto exchange FTX, the SEC is late to the game—likely too late for the 340,000 U.S. customers affected by Genesis’ decision to halt all withdrawals.

Genesis’ financial problems stem from large holdings with FTX, and it is unlikely to be the last crypto firm caught in FTX’s wake. Who is to blame and what can be done to protect U.S. retail investors in crypto?

Rep. Patrick McHenry, the new chairman of the House Financial Services Committee, can answer that question by investigating the SEC’s failure to prevent the FTX disaster. The harm to U.S. investors from the alleged theft of FTX customer assets by Sam Bankman-Fried is likely to be enormous. FTX’s global operations held more than $8 billion in customer assets, and there were 2.7 million U.S. customers of FTX’s U.S. operations alone. FTX customers have had their assets frozen in bankruptcy and now face large losses. They deserve to know why the SEC failed to be the “cop on the beat.”

In 2008, after Bernie Madoff’s Ponzi scheme was revealed, SEC Chairman Christopher Cox promptly initiated an internal investigation into the commission’s failures to uncover the fraud. Gary Gensler, the current chairman, has so far failed to do the same. Madoff’s evasion of applicable SEC regulations was a surprise. FTX’s state of nonregulation was the reddest of flags. Madoff was largely cheating rich sophisticated investors. FTX’s retail investors were left helpless.

Read the full article here.

SEC Spin Doctors Trying To Hide Crypto Regulation Disaster

By Roslyn Layton. January 8, 2022. (Forbes).

Over the last two U.S. administrations, the U.S. Securities and Exchange Commission (SEC) has promoted an all-encompassing policy of “regulation by enforcement” for U.S.-based digital asset markets like Coinbase and the enterprise blockchain industry that develops fintech solutions like Ethereum, Ripple, Stellar and Circle. Two successive chairmen – Jay Clayton and Gary Gensler – said that every digital asset except bitcoin is a security and should register at the SEC like a stock. The details end there, unless you end up on the wrong side of an SEC lawsuit. The SEC banks on a quick settlement from the parties it charges. Parties which dare to challenge the SEC need financial reserves, superstar lawyers, and years of patience for litigation to play out court. This “enforcement” produces little clarity for the market or protection of investors, which is the ostensible point of the regulatory exercise.

Read the full article here.

The FTX Scandal: Accountability and Regulatory Clarity Are What We Need Now

By John E Deaton

I started CryptoLaw to provide everyday investors with a “clearinghouse of information, news and analysis on key U.S. legal and regulatory developments for digital asset holders”. After the massive fraud at FTX was exposed, something that unfolded right under the nose of the Securities and Exchange Commission (SEC), I am only more passionate about continuing this work for the digital asset holders.

It still seems that we don’t have anyone protecting us. Now more than ever we need to press Congress to hold bad actors and government agencies accountable for what they’ve done and what they failed to do.

Sam Bankman-Fried defrauded millions of customers and investors of billions of dollars while he was the toast of Washington. SEC Chairman Gary Gensler has been claiming “the rules are clear” on crypto and that his agency has the authority to regulate the whole space. He said FTX should have been registered, and that would have somehow prevented this from happening. But when lawmakers from his own political party ask him what compliance and registration actually means, they get no answers, only more talking points.

Gensler repeats over and over that for retail holders and investors, like those defrauded by Bankman-Fried, the solution is for exchanges to “come in and register” but the details end there. If Gensler is telling the truth that the “rules are clear”, then he failed miserably at enforcing them. His Enforcement Division has spent much of its resources suing Ripple and LBRY in long, non-fraud cases that failed to protect a single investor while the FTX fraud was happening right under its nose.

Through the “decentralized justice” of hundreds of digital asset holders investigating government documents, we learned that Gensler and the SEC met with Bankman-Fried at least three times. Good journalists and Congressional offices took that information and discovered that the subject of those meetings was a regulatory deal that would recognize FTX as a sanctioned crypto exchange. Gensler refuses to answer questions or release notes and documents from those meetings that will clarify what was discussed, or why the fraud was never detected.

Bankman-Fried is a fraud. He’s been arrested and will face prosecution and likely a long prison sentence. But that’s only part of what went wrong here. The SEC’s mission statement is “to protect investors; maintain fair, orderly, and efficient markets; and facilitate capital formation.”. In this instance, and in the crypto overall, Chairman Gensler and the SEC failed on every point.

Accountability and regulatory clarity are the two most important things that we need now. The bipartisan hearing of the House Financial Services Committee on December 13 was a positive step forward, where it seemed most of the committee members agreed that they have to step in and write the rules that Gensler has refused to produce. The also promised to investigate Gensler’s repeated misfires and distractions that do little or nothing to protect anyone. Those lawmakers need our support, collaboration and pressure to get it done.

Ripple, SEC make final bids for a quick win in XRP lawsuit

By Jody Godoy. December 5, 2022. (Reuters).

Ripple and the U.S. Securities and Exchange Commission accused one another of stretching the law, as they argued for a ruling on whether the XRP, the world’s seventh-largest cryptocurrency, is a security.

Both sides urged U.S. District Judge Analisa Torres to rule in their favor without sending the case to trial in papers filed on Friday.

The final round of briefs seeking summary judgment brings the case closer to a ruling that could further define what digital assets are considered securities in the U.S.

The judge could grant either side a win without a trial, or decide to narrow the issues that go before a jury.

Ripple’s founders created XRP in 2012. The SEC sued the San Francisco-based company and its current and former chief executives in December 2020, alleging they have been conducting a $1.3 billion unregistered securities offering since the token’s creation.

Ripple argued in its brief that the SEC was seeking a ruling that XRP was an investment contract, but “without any contract, without any investor rights, and without any issuer obligations.”

Read the full article here.

Gary Gensler’s Bad Performance Review

By WSJ Editorial Board. October 26, 2022. (Wall Street Journal)

Businesses have been warning that Securities and Exchange Commission Chair Gary Gensler’s fast-and-furious regulation could cause damage across the economy. Now agency officials and Democratic Senators are raising alarms too.

The SEC Office of Inspector General this month issued a withering review of Mr. Gensler’s leadership that would probably get a CEO of a public company sacked. Agency division managers told the IG that his move-fast-and-break-things agenda is overwhelming staff and taking resources from investor protection.

The number of rule-makings on the SEC agenda increased by nearly two-thirds between spring 2017 and 2022. In the first eight months of 2022, the SEC proposed 26 new rules, twice as many as in 2020 and 2021. Unlike predecessor Jay Clayton’s rules that focused on investor protection, Mr. Gensler is sprinting to impose new burdens on business in line with the progressive desire to achieve via regulation that Democrats can’t get through Congress. Investor protection is an afterthought.

Read the full article here.

Ripple accuses SEC of ‘shameful’ conduct after obtaining key Ethereum emails

By Jeff John Roberts. October 24, 2022. (Fortune)

Ripple provided a lively end to an otherwise sleepy week in crypto when its CEO and general counsel took to Twitter to tweak the Securities and Exchange Commission after the company obtained confidential emails the agency had fought to keep secret. The emails concern a 2018 speech in which a former senior official at the SEC declared that Ethereum was not a security on the basis of a novel legal test—a test the agency chose not to apply when it sued Ripple in late 2020.

We still don’t know the content of those emails, but the fact that the agency fought hard to conceal them suggests they contain unflattering information related to the SEC’s erratic and arbitrary behavior when it comes to the crypto industry. Ripple’s executives, who have seen the emails, used even harsher language to describe the agency, saying “the shamefulness…will shock you” and implying it has been operating in bad faith.

Read the full article here.

Calendar of former official provides insight into SEC regulatory intent, Satoshi stumble

By Eleanor Terrett , Charlie Gasparino. September 29, 2022. (Fox Business)

The meeting schedule of a former official of the Securities and Exchange Commission provides a detailed roadmap into the agency’s thinking as it began to weigh how best to reign in the burgeoning digital-asset business, but it could also buttress the growing sentiment that Wall Street’s top cop unfairly targeted a leading crypto outfit in its crackdown.

The itinerary of former SEC Director of Corporation Finance William Hinman hasn’t been reported before, and it shows the SEC casting a wide net in seeking advice from key crypto officials, including the person they thought was crypto’s founding father, the elusive Satoshi Nakamoto, FOX Business has learned.

From 2017 through 2020, Hinman was at the center of the agency’s crypto regulation efforts under former SEC chair and Trump appointee Jay Clayton. During those years, the commission began to navigate its regulatory authority over the business, which was growing exponentially and posing problems for government officials worried the anonymous nature of the blockchain would finance illicit activities. 

Read the full article here.

An Open Letter to the Members of the House Financial Services Committee and of the U.S. Securities and Exchange Commission

By John E. Deaton.

I write to you on this public platform hoping you will truly understand the damage being inflicted on innocent holders of XRP. I represent 68,700 of those holders.

We are users, developers, small businesses, content providers and investors in the digital asset XRP. In 2015, XRP became the first regulated cryptocurrency in the United States, when the Department of Justice Civil Division and the Financial Crimes Enforcement Network (FinCEN) settled with Ripple, declaring XRP a “convertible virtual currency.”

After FinCEN declared XRP a virtual currency, forcing sales to comply with U.S. banking laws (not securities laws), foreign governments, including the U.K, Japan, Switzerland, Singapore and the United Arab Emirates, followed suit – all declaring XRP a non-security.

On December 22, 2020, five years after FinCEN classified XRP a virtual currency and seven and a half years after XRP had been publicly traded in the U.S., on SEC Chairman Jay Clayton’s last day, the SEC filed suit against Ripple alleging XRP to be an investment contract (aka a security) with Ripple.

As you all know, any commodity, asset or product can be packaged, marketed, and schemed into an offer and sale of an unregistered security. In fact, some of the different assets or products that have been packaged or schemed into an offer and sale of an unregistered security are:

  • Orange groves;
  • Whiskey;
  • Beavers;
  • Chinchillas;
  • Oil and gas;
  • Condos; and
  • Bitcoin;

to name a few.

The Supreme Court has never found the underlying asset, itself, to be the security. Whiskey is still whiskey, and beavers are still beavers.

In the Howey decision, the Court didn’t find the oranges to be securities, but found the scheme behind the offer and sale of the orange groves to be the security. Usually, the SEC argues a specific transfer at a specific time, by Ripple or its executives, would have constituted the sale of an unregistered security.

But in SEC v. Ripple, the SEC is alleging XRP itself is a security. The SEC claims all sales of XRP are illegal. Period. It is the most reckless and dangerous argument the SEC could make. Because of this unprecedented argument, over 68,000 XRP holders decided to fight back.

I’ve been granted amici curiae status for the benefit of XRP holders. The SEC, however, isn’t too happy about it. They attacked me personally and continue to take shots at the very people they claim they are protecting while prosecuting this case espousing an outrageous theory.

Although it laments amici’s presence in this case, the SEC has only itself to blame for amici’s involvement. In short, if the SEC had clarified its theory regarding XRP, it would’ve prevented amici’s involvement entirely and could have pursued Ripple without involving us. Nine days after the SEC filed the excessively broad complaint, in the interests of present-day XRP holders, I petitioned for a Writ of Mandamus requesting the SEC “amend its complaint against Ripple to exclude present-day XRP, purchased by investors with no connection to Ripple.”

The SEC’s sweeping allegations regarding XRP have been at issue since the filing of this case. In the Complaint and during the litigation of this case, the SEC has repeatedly used conclusory language and allegations suggesting XRP itself – is ALWAYS a security.

At its core, the Writ challenged the SEC’s good faith basis alleging that XRP is a security per se.

Within the Complaint:

  • Paragraph 1 labels XRP “a digital asset security”;
  • Paragraph 265 says “Because XRP is fungible”;
  • Paragraph 267 says “The nature of XRP itself”;
  • Paragraph 327 says “The very nature of XRP”; etc.

In fact during the very first hearing, Magistrate Judge Sarah Netburn confronted the SEC and challenged the implausible theory that “every individual in the world who is selling XRP [is] committing a Section 5 violation.”

The SEC’s response to the judge’s comment says everything. The SEC didn’t dispute the premise of the Judge’s question. The SEC instead claimed that XRP transactions by the rest of the world would likely be exempt under Section 4. (An exchange or any issuer would NOT be exempt.)

The SEC’s response was disingenuous at best and downright misleading at worst. Section 4 exemptions ONLY apply to a security subject to registration under Section 5. In sum, the SEC confirmed that regardless of the seller or circumstances of the sale – XRP is a security per se.

Why is this so dangerous and why has SEC Chairman Gary Gensler allowed it to be argued? Because if this premise is accepted by the Court, it would empower the SEC to regulate a vast number of parties not included in this case, including digital asset exchanges, vendors, and retail holders.

The SEC’s overreach threatens the interests of not only XRP holders, but the exchanges and businesses utilizing XRP and it implicates all other crypto assets. The ability for retail holders and small businesses to transact in XRP (and other crypto) could be greatly impaired.

The majority of XRP holders were unaware of a company called Ripple when they first acquired XRP. Tens of thousands of XRP holders acquired it for non-investment purposes. Many acquired the minimum amount to establish a trust line with the XRP Ledger in order to send money home. Many acquired it as a form of payment. Content providers like Time magazine accept XRP as a form of payment. Thus, Time isn’t an investor and Howey doesn’t apply. XRP is used as payroll currency. All of these non-investment uses get swept into the SEC’s overly broad theory.

XRP holders never imagined being implicated in an enforcement action against Ripple and its two executives. We take no position whether Ripple, Brad Garlinghouse or Chris Larsen violated Section 5 of the Securities Act when they offered and sold XRP during 2013 or yesterday. The SEC could have completely avoided amici’s involvement by simply stipulating secondary market sales of XRP, independent of Ripple, are not securities. It should’ve been an easy stipulation considering it would be consistent with SEC guidance and 76 years of legal precedent.

Had the SEC so stipulated, amici’s involvement in this case would have ended before it began. In fact, even Ripple was clear in communicating its position that amici’s interest would be minimal, if the SEC clarified it was not attempting to establish XRP as a security per se.

Similarly, in responding to the Mandamus Writ, the SEC could have confirmed its suit is not intended to affect the secondary retail market for XRP in the United States. But the SEC refused to make such a concession. The SEC’s enforcement lawyers won’t give up this outrageous claim.

The SEC’s sweeping and illegitimate theory is: “The XRP traded, even in the secondary market, is the embodiment of those facts, circumstances, promises, and expectations and today represents that investment contract.” This is from page 24 of SEC’s opposition to my motion to intervene, where the SEC attempts to split proverbial legal hairs by conceding XRP is not a security per se (“this case presents no such question”), while simultaneously arguing all XRP, including XRP traded in today’s “secondary market … represents” a security.

Remarkably, the SEC claims it is not arguing XRP is a security per se, but instead, arguing XRP is a representation of a security.

What does that even mean?

When does an asset transform from being an asset (whiskey, an orange, a beaver or a bitcoin) to also “representing” an investment contract?

The SEC must prove XRP is an investment contract. But the SEC unilaterally changed its burden to proving only a “representation” of an investment contract. The SEC doesn’t get to make up the law in order to satisfy a political desire to regulate a new evolving asset class.

The SEC’s theory regarding XRP is the functional equivalent of arguing the oranges in Howey were not only oranges but also “represented” the embodiment of the investment contract with the W.J. Howey Company. The SEC’s argument is tantamount to legal gobbledygook.

Current SEC Commissioner Hester Peirce seems to agree. The SEC’s precarious expansion of Howey, as applied to XRP, is so intellectually dishonest that Commissioner Peirce publicly criticized the SEC’s theory when she stated: “What we’ve done now is said the orange groves are kind of like the security.”

Personally, I believe the SEC lawyers have crossed an ethical line and lack the good faith required to make such an absurd argument. Their theory is certainly not supported by caselaw because a glaring omission from the SEC’s brief is a single cite supporting its outlandish theory. The SEC cites no legal authority whatsoever supporting the radical departure from needing to prove an actual investment contract to proving a representation of an investment contract (whatever the heck that means).

But what makes the SEC’s argument in the XRP case even more egregious is that it completely contradicts statements made by the SEC itself. The SEC’s farfetched XRP theory is a direct contradiction of public guidance provided by the SEC itself. In fact, as stated, according to the SEC (and 76 years of case law) any asset or commodity can be utilized as a security whether that asset is an orange, whiskey, a beaver or even a bitcoin.

Until the filing of this case, the SEC had never made a material distinction between bitcoin, ether or XRP. The SEC as a regulator made very clear that: “Whether a cryptocurrency is considered a security will depend on the characteristics and use of the cryptocurrency.” The emails from the SEC’s Office of Investor Education and Advocacy consistently provided the same exact guidance regardless of whether it was discussing bitcoin, ether or XRP. The SEC’s theory regarding XRP also contravenes proclamations made from the most senior officials at the SEC.

Read the 2018 speech by then-SEC Director of Corporation Finance William Hinman, where he says: “The token – or coin or whatever the digital information packet is called – all by itself is not a security, just as the orange groves in Howey were not.” Hinman noted that when dealing with digital assets like bitcoin, ether and XRP: “The digital asset itself is simply code.” Hinman also emphasized “that the analysis of whether something is a security is not static and does not strictly inhere to the instrument.”

Then SEC-Chairman Clayton agreed when he wrote to Congressman Ted Budd (R-NC): “I agree [with Director Hinman] that the analysis of whether a digital asset is offered or sold as a security is not static and does not strictly inhere to the instrument.”

“A digital asset may be offered and sold initially as a security because it meets the definition of an investment contract, but that designation may change over time if the digital asset later is offered and sold in such a way that it will no longer meet that definition,” Clayton wrote.

The SEC’s XRP theory clearly contradicts the SEC’s public statements. Relevant caselaw offers the SEC zero support. In SEC v. Shavers, bitcoin was utilized in a scheme that the federal Eastern District Court of Texas found constituted an illegal securities offering. Bitcoin itself was not considered the security.

In addition, we have the Telegram decision explicitly holding, as Hinman stated, that the token itself is never the security: “The security in this case is not simply the Gram, which is little more than alphanumeric cryptographic sequence.” Telegram was an ICO and, unlike this case, involved contracts signed by the Gram purchasers. Thus, if there ever existed a case where the token itself constituted the security, it would be Telegram. Yet, Judge Castel held that ““the ‘security’ was neither the Gram Purchase Agreement nor the Gram but the entire scheme that comprised the Gram Purchase Agreements and the accompanying understandings and undertakings made by Telegram.”

The only conceivable way to attempt to prove the extraordinary claim that XRP itself represents a security is to prove secondary market sales, independent of Ripple, were acquired by investors who entered into a common enterprise w/ Ripple, and all other XRP holders, based on the promises and inducements offered by Ripple, which caused those secondary market acquirers to expect profits from Ripple’s efforts. Yet, as stated, the majority of XRP holders were completely unaware of the company Ripple when they first acquired XRP.

Thousands of XRP holders acquired XRP for non-investment reasons. There are several XRP debit cards that allow you to use XRP as a substitute for fiat currency. Some XRP holders get paid in XRP. These use cases don’t even satisfy the first prong of Howey (an investment).

Tens of thousands of XRP holders stake their XRP for interest or collateralize their XRP to secure a fiat loan – thus obtaining a financial benefit completely independent of Ripple (this fails the common enterprise factor as well as relying on the efforts of Ripple factor).

While the skilled lawyers from both sides strategize their next move in order to gain a competitive litigation advantage, innocent users, developers, investors and holders of XRP, with no connection to these Defendants, fretfully await the outcome.

Will you do anything about it?