By John E. Deaton, Founder and Host, CryptoLaw.
Tomorrow (Thursday 7/15), Magistrate Judge Sarah Netburn is scheduled to hold hearing to discuss whether to grant the SEC’s motion to quash the deposition of former SEC Division of Corporation Finance Director, William Hinman. The judge may even issue an order on this pivotal matter during tomorrow’s hearing.
In its motion to quash the deposition and prevent Hinman from testifying under oath, the agency argued that Ripple, and executives Brad Garlinghouse and Chris Larsen could not demonstrate the “exceptional circumstances” needed to order the testimony of a high-ranking government official. However, an examination of the facts tell a very different story. For starters, Hinman is no longer a high-ranking government official. He is a private citizen. Surely, after investing millions of dollars in Hinman while he was serving at the SEC, Simpson Thacher would give him adequate time off to answer some questions.
Here is a quick, but not exhaustive, review of what XRP holders and crypto holders and investors in general deserve to know should William Hinman be permitted to testify under oath:
- Ethereum, Simpson Thacher and Millions of Dollars in His Bank Account: Before and after his tenure at the SEC, Hinman has been a partner at the law firm of Simpson Thacher, which sits on the Enterprise Ethereum Alliance, a coalition of organizations devoted to the business case for the Ethereum blockchain. In 2018, Hinman declared, “offers and sales of ether are not securities transactions” in a speech that is still available on the SEC’s website, sending its value soaring. Hinman received millions in payments from the firm while he was at the SEC, including when he prepared and delivered those remarks. If that was not a clear conflict of interest, then he needs to explain why under oath. According to the documented evidence, Hinman’s personal financial interests were clearly connected to that speech he gave.
- Hinman’s ETH Speech and the Coinbase Listing of Ethereum Classic: Three days before the pivotal Hinman speech on ether in 2018, Coinbase announced the listing of Ethereum Classic on its exchange, an asset forked from the Ethereum blockchain that was widely anticipated to be declared a security, like ether itself. (Ether was launched in an ICO in 2014, after all.) This immediately raised questions at the time among analysts about whether the SEC had privately given advance notice to Coinbase or the Ethereum Foundation of what Hinman was about to announce. Did the SEC tip off Hinman’s Simpson Thacher colleagues before the market got his speech? Let’s hear his answers under oath.
- Hinman’s Meeting with the Ethereum Foundation After the ETH Speech: In the discovery phase, Ripple has apparently forced Hinman to admit he met with the Ethereum Foundation, Consensys and other very relevant market participants after his 2018 ETH speech. (The redactions in the July 1 filing don’t confirm it but the rest of the filing strongly points in that direction.) Why didn’t the market know about this before now? Did the man in charge of no action letters on cryptocurrency offerings discuss his ETH speech in private with these key market participants? Did they discuss rival coins? Let’s have him walk us through all of those conversations under oath.
- And About the Whole “Just a Personal Opinion and Not Policy” Nonsense: Everything about the behavior of Hinman and the SEC before, during and after that infamous ETH speech clearly indicated that they knew the speech would move markets. The headlines in major business dailies clearly indicated that a senior SEC official was declaring that ETH is not a security. Hinman never personally corrected the record in any interview with the media or public appearance that I could find, nor did the actions of Coinbase three days before the speech or Hinman’s communications with market participants after the speech point to anything other than a policy statement from the official in charge of no action letters for the SEC. Later in 2018, he very clearly said in a Georgetown University School of Law speech that his ETH speech “got a lot of attention because it was the first time we had expressed to the world that we didn’t view ether as a security.” There was no disclaimer from him at Georgetown that “we” meant William Hinman. “We” meant the SEC, pure and simple. Hinman needs to be questioned under oath extensively about all the events leading up to the ETH speech – and afterward – to clearly paint a believable picture as to how this market-shaking speech was just his opinion as a private citizen.
It’s laughable that, in their desperate effort to shield Hinman from being deposed, the SEC claimed that Hinman “does not have unique first-hand knowledge of “what was going on in the [Crypto] market.” However, these selected facts alone get to the heart of Hinman’s pivotal role in giving Ethereum the rocket fuel for its token’s trip to the moon, while he was personally collecting millions of dollars from an Ethereum-connected law firm. He and/or the SEC may have given notice to an exchange about his ETH speech in advance, while other market participants were in the dark. And now both Hinman and the SEC want us to believe the ETH speech should never have been interpreted as policy or any kind of notice about ETH’s status, in the same way that the SEC argued in the Ripple complaint in December 2020 that all of us should have known XRP was a security since 2013.
A deposition in federal court is limited to seven hours. Government documents indicate Hinman received over $15 million in payments from Simpson Thacher over the four years he worked at the SEC:
- 2017 Public Financial Disclosure Form OGE 278e
- 2018 Public Financial Disclosure Form OGE 278e
- 2019 Public Financial Disclosure Form OGE 278e
- 2020 Public Financial Disclosure Form OGE 278e
Investors lost over $15 billion in the wake of the SEC’s complaint against Ripple. Is a seven hour deposition too much to ask? Apparently, Hinman and the SEC, whose very mission is to protect investors, seem think so.
It is a big deal to subpoena a former high-ranking official for a deposition in order to answer for his actions while in office. Judge Netburn is not taking this question lightly. But when those actions were so clearly material to the central questions at dispute in a case as big and precedent-setting as SEC v. Ripple, it’s a damn good reason to reject the SEC’s attempts to shade Hinman and prevent the whole truth from coming to light.