Tag: William Hinman

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

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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

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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.

Stop Ignoring the SEC’s Malfeasance on Crypto

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By Roslyn Layton. (RealClear Policy). December 14, 2023.

Securities and Exchange Commission (SEC) Chairmen of both parties, Jay Clayton and Gary Gensler, have asserted regulatory power over digital assets and blockchain. They pursued a ruinous “regulation by enforcement” policy to punish innovators like Ripple, LBRY, Grayscale and Coinbase, while they coddled criminals like Sam Bankman-Fried.  Courts have pushed back, but only in those cases where litigants have the resources to fight the SEC, but there is no recourse for victim companies or individuals. The SEC is still immune to civil liability (what US House Rep. Todd Tiahrt calls “appalling bad faith”). Only Congress or the White House can stop the SEC’s illegal runaway regulatory train.

Publicly available evidence points to rampant conflicts of interest and ethical questions around senior SEC officials. Clayton and former Director of Corporation Finance William Hinman were revealed to have financial incentives to favor Ethereum over the rival network XRP, and the two officials moved to give the former a regulatory pass and file a blockbuster lawsuit against the latter on Clayton’s final day in office (Full disclosure: I filed a legal motion to compel the release of some of those documents which exposed Hinman’s conflicts.) 

Read more here: RealClear Policy.

Danger for U.S. Crypto Markets Rises As SEC’s Credibility Falls

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By Hassan Tyler. (RealClear Markets). November 30, 2023.

The conviction of Sam Bankman-Fried for the fraud that destroyed the once mighty digital asset exchange FTX may have been a low point for public opinion on the cryptocurrency industry. But a potentially game-changing upside event for crypto could be coming soon which could bring trillions of dollars in reliable capital into the emerging industry. Bloomberg’s James Seyffart reports a high likelihood that the first spot exchange-traded fund (ETF) for cryptocurrencies in the United States could be approved by January.

This story of two extremes is reflexive of the federal agency tasked with regulating it and calls into question whether the Securities and Exchange Commission (SEC) can act appropriately and carry out its mission under current leadership.

SEC Chairman Gary Gensler, according to his public schedule, met with Bankman-Fried and his top brass several times to discuss regulation. Rep. Tom Emmer (R-MN), a senior Republican on the House Financial Services Committee, said his office has received reports that Gensler “was helping SBF and FTX work on legal loopholes to obtain a regulatory monopoly.” According to the court record, Bankman-Fried’s fraud and theft of customer funds was in full bloom at the time of those meetings. But Gensler was too busy at the time waging an all-out war on crypto companies like LBRY, Ripple, and Coinbase, none of whom are accused of fraud.

Gensler inherited an SEC that was covered in doubts on its crypto regulation in the previous administration. The agency under his predecessor, Jay Clayton, put out guidance on crypto trading that gave a free regulatory pass for the trading of Ethereum’s native token, ether. William Hinman, Clayton’s director of corporation finance, gave a high-profile speech in 2018 laying out the SEC’s reasoning why “we believe that current offers and sales of ether are not securities transactions”. But on his last day in office, Clayton filed the Ripple lawsuit despite Hinman’s guidance applying to XRP as well as ether. Instead of clarity, it caused confusion and fear.

Read the full piece by Hassan Tyler here: RealClear Markets.

The SEC Chooses to ‘Regulate’ Cryptocurrencies Via Lawsuit

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By Hassan Tyler. (RealClear Markets). September 5, 2023.

Over the last two Administrations, successive chairmen of the Securities and Exchange Commission (SEC), from both political parties, have led the agency through an erratic and confusing approach to regulating cryptocurrencies. What both chairmen had in common was a decision to not use rulemaking and public engagement to write a clear playbook for market participants, but to aim discretionary lawsuits at specific crypto companies and crypto trading exchanges to regulate the market instead.

Unfortunately, one of the SEC’s highest profile crypto lawsuits has backfired by pulling back the curtain to show several officials ignoring the law and apparent conflicts of interest as they picked winners and losers in the nascent industry.

Last month, Ripple Labs notched a landmark legal victory against a December 2020 SEC enforcement action where the agency alleged the cryptocurrency XRP qualifies as an investment contract in Ripple and that all sales, including on the secondary markets, are unregistered securities. Judge Analisa Torres ruled that only early institutional sales of the XRP token that were specifically packaged as investment contracts fall under the SEC’s jurisdiction. 

Read the full piece by Hassan Tyler here: Real Clear Markets: “The SEC Chooses to ‘Regulate’ Cryptocurrencies Via Lawsuit”

The Hinman Documents Reveal a Deceitful SEC

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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.

To Read the Full Article, click here.

Why the XRP Army Keeps Fighting

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By Jeff Wilser. June 13, 2023. (CoinDesk).

XRP’s uber-passionate supporters believe the SEC unfairly targeted Ripple for securities violations while mysteriously giving Ethereum a free pass. Do they have a point?

Brad Kimes is a professional drummer. For 30 years he played in various bands — rock, funk, blues, R&B, you name it. Between gigs, he worked as an aspiring entrepreneur, and he invented a baby playpen that you could use on the beach. He found suppliers in China. Kimes soon became a global importer, and to make cross-border payments, he was forced to use the clunky international banking system called “SWIFT.”

SWIFT was not swift. It was slow and costly. “There’s no tracking ID,” says Kimes. “And when the payment gets there six days later, you find out there’s a currency manipulation that had taken place. And you have to pay the difference.”

To Read the Full Article, click here.

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

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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 Crypto Litigation Ventures Into Dangerous Legal Territory

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By John E. Deaton.

The US Supreme Court issued the landmark SEC V. Howey decision in 1946, laying out a specific definition of what constitutes a security. Those justices couldn’t have guessed how complex digital commerce over encrypted lines of computer code would fit in almost a century later.

The Securities and Exchange Commission under Chairman Gary Gensler has its own idea of how cryptocurrencies should be regulated today, but bears little resemblance to that decision—and it’s straying into dangerous legal territory in court.

The Howey case involved orange groves sold by a Florida resort to tourists in a scheme where the investors earned passive income from the resort’s management and commercialization of the oranges. The so-called Howey test says a transaction is a security if it is an investment of money, in a common enterprise, with a reasonable expectation of profit derived from the efforts of others. All three prongs of the test must be met.

Hundreds of federal cases that followed found unregistered securities in the packaging and sales of whiskey, condos, chinchillas, oil and gas, and beavers. A scheme to sell any asset, including cryptocurrencies, could easily fit into this test. All modern securities law is built on it.

Ripple and XRP

But this isn’t what the SEC has been arguing for two years in the biggest unregistered securities enforcement action to date against a crypto company. The suit was filed against US software company Ripple Labs, which sells a digital payment solution for banks, and includes cryptocurrency XRP as a bridge asset to settle cross-border payments in seconds for almost no cost.

Since 2013, the company has also sold billions of XRP tokens it holds to various crypto exchanges who resold them on the secondary markets to millions of retail holders.

Over the last decade, the XRP ledger grew as a decentralized permissionless distributed ledger with a variety of uses by other companies and individuals. The XRP token eventually rose to having the third-highest market cap for any cryptocurrency in the world.

I am an XRP holder and trial lawyer, so I read the SEC’s complaint as soon as I heard about it. I expected to see the SEC pointing to a scheme of specific early sales by Ripple of XRP, which met the Howey test. That would’ve made sense. But I was shocked to read that the SEC was arguing that all sales of XRP have always been and would always be securities, because “the very nature” of the digital asset is to be a security and nothing else. The token itself is “the embodiment” of an investment contract in Ripple, they argue, even on the secondary markets with no involvement of the company, including mine.

This goes beyond anything the 1933 Securities Act and over 250 federal appellate and Supreme Court decisions about securities law ever imagined. The SEC’s argument is the equivalent of the oranges in Howey being “the embodiment” of the scheme to sell the groves. If that’s the case, how does a corner grocer register an orange with the SEC?

All US exchanges immediately suspended XRP trading in fear of SEC reprisal, locking up the tokens of innocent retail holders as the value plummeted by $15 billion. The collateral damage done to these holders that the SEC claimed to be defending was staggering.

I organized a class of over 75,000 retail XRP holders and gained amicus curiae status in the case. Our reasons are pretty logical. The vast majority attest they’d never heard of Ripple Labs when they acquired the token for their own purposes.

These lines of computer code they obtained can’t be an investment contract or a common enterprise with a company they’d never heard of, and nothing in the law—before or after Howey—supports that idea.

Judge Analisa Torres in the Southern District of New York is taking her time with a ruling in the Ripple case because she must understand the stakes, particularly on appeal. The questions to be decided go to the foundations of modern securities law, and what assets can and can’t be included in it. Torres also knows the current US Supreme Court has been knocking down regulators that overreach the powers Congress specifically granted them.

Similar Suits Follow

Other crypto companies from Coinbase to LBRY started facing similar SEC lawsuits. Gensler’s public statements on crypto grew sharper. The larger objectives became clear. He inherited the Ripple case from his predecessor, but he’s made its legal theory the centerpiece of an expansion of regulatory power in court, not through rulemaking or legislation. That has drawn Congress’ ire.

I’m all for clear rules and regulations to protect people. But the SEC is exploiting legal uncertainty about crypto to radically redefine what constitutes an investment contract and a common enterprise in the US. The legal and economic consequences could be enormous and that will only harm people.

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.

Author Information

John Deaton is an American attorney acting as amicus counsel for retail digital asset holders in a number of high-profile federal SEC enforcement cases on crypto, most notably SEC v. Ripple (SDNY) and SEC v. LBRY (DNH).

Reproduced with permission. Published May 2, 2023. Copyright 2023 Bloomberg Industry Group 800-372-1033. For further use please visit https://www.bloombergindustry.com/copyright-and-usage-guidelines-copyright/  

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

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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.