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.

CONFIRMED: SEC Inspector General in “Final Stages” of Investigation on Crypto Conflicts Referred by Empower Oversight

By Empower Oversight. February 15, 2024.

The Securities and Exchange Commission (SEC) has disclosed that its Office of Inspector General (OIG) is nearing the end of an investigation related to financial conflict of interest issues identified and referred to the OIG by Empower Oversight in May 2022. It’s the first acknowledgment of an open probe on the matter by the agency’s internal watchdog.

According to the SEC, “OIG has authorized us to inform you that OIG has an open investigation into the matter that they are in the final stages of completing.” Empower Oversight’s referral cited records it obtained through the Freedom of Information Act (FOIA) raising serious questions about the failures of SEC’s Ethics Office and a senior SEC official, William Hinman, to ensure that he avoided participating in matters where he had a financial interest—including a controversial speech declaring that certain digital assets were not securities subject to SEC enforcement.

Click here for the full article.

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.