Following 16 months of intense pre-trial litigation, countless hours in court and over 600,000 documents reviewed by both sides, the case that’s being billed as "the cryptocurrency trial of the century" could all come down to one speech made by a former Securities and Exchange Commission official four years ago.
That case, of course, is the lawsuit brought in late 2020 by the SEC against payment settlement company, Ripple. The SEC says Ripple violated securities laws when it failed to register with the agency sales of its native cryptocurrency token, XRP, that helped finance its platform and facilitate payments on Ripple’s network.
At the heart of the commission’s case is a contention that XRP was being sold by Ripple and its top executives as an illegal and unregistered security. The commission is seeking billions of dollars in damages.
Ripple’s lawyers — including high-powered and expensive legal minds such as former SEC Chair and Southern District U.S. Attorney Mary Jo White — contend that sales of XRP were compliant with the law and not materially different from sales of the digital coin ether by the operators of the ethereum blockchain. SEC officials had previously cleared ether’s sale as a legally unregistered digital coin.
On Tuesday afternoon, federal Judge Sarah Netburn will hold an in-person conference at the Daniel P. Moynihan Courthouse in Manhattan to discuss the release of documents that Ripple says are necessary to prove it did nothing wrong and that the SEC is picking winners and losers in the trillion-dollar crypto business.
The documents Ripple wants to obtain — and the SEC is looking to keep confidential — center on a speech given in June 2018 by the SEC’s former director of corporation finance, Bill Hinman.
Ripple officials believe the documents will show disagreement among various top officials at the agency over declaring XRP a security, and undercut the SEC’s argument.
Hinman left the SEC after the election of President Biden and his nomination of Gary Gensler as SEC chairman, replacing Trump appointee, Jay Clayton. The Ripple case was signed off by Clayton just hours before he resigned from the post. Both he and Hinman are practicing attorneys who now work in the crypto space.
Hinman and Clayton declined to comment, as did an SEC press official. In the past, Hinman has said that the 2018 speech was designed to explain the agency’s thinking in terms of regulating the then-nascent cryptocurrency market, and why many digital coins are seen by the commission as securities that need to be registered while others, including the two largest and most popular tokens, bitcoin and ether, are not.
While it’s clear from court records and oral arguments why Ripple wants access to the speech-related documents (a spokeswoman for the company had no immediate comment for this report), the SEC has been less transparent in seeking to keep them secret.
The SEC has argued without elaboration that releasing the documents would breach "attorney-client" privilege because Hinman was technically a client of the commission as well as an official at the time he made his public statements.
"If the judge accepts the SEC’s argument that every single draft, document, email and comment made about the Hinman speech… the last year of litigation including her rulings are meaningless," said John Deaton, a class action attorney who represents over 67,000 XRP holders who have filed their own suit against the SEC seeking damages for sharp declines in the digital coin after the case against Ripple was filed.
But if the communications are released, it could show how Ripple was unfairly singled out, and the SEC could be forced to settle with Ripple on terms favorable to the company, Deaton says.
If not, lawyers close to the case tell FOX Business that the protracted legal battle will likely run into 2023 and could drag on even longer if the judge decides to let the case go to trial.
Another reason why the Hinman speech documents are so important is that they could address the credibility of one of the more explosive charges made by Ripple: that the SEC was influenced to give ethereum’s ether digital coin a free pass as a non-security.
After the bitcoin token, ether is the second largest crypto worth $215 billion at the time of this printing.
In court documents, Ripple’s lawyers point out that both Clayton and Hinman have had ongoing business dealings with firms that support the adoption of ethereum since they left the SEC. Evidence from depositions shows that top executives of a company that has ties to ethereum met with key SEC officials, including Hinman himself, as the commission was developing its regulatory approach to crypto and weighing the Ripple lawsuit.
While both Clayton and Hinman have declined requests for comment, in depositions and in past comments they have vehemently denied any wrongdoing. Both have said their decision to sue Ripple was based on the law — namely the Supreme Court’s 1946 Howey Test that is used to determine what makes something an investment contract, aka, a security.
In continuing the litigation, SEC attorneys working for Genlser have made the same argument: That the XRP sales were clearly linked to the buildout of Ripple’s platform, classifying them as an investment contract with Ripple itself.
One thing is certain, legal experts say: The outcome of the case will set the stage for crypto regulation moving forward. For starters, it could settle the turf war between regulatory agencies like the Commodities Futures Trading Commission, the Consumer Financial Protection Bureau and the SEC, all vying for jurisdiction in the space.
An SEC win could mean the agency will further delve into crypto regulation, a move Gensler has hinted at in speeches where he referred to the business as the "Wild West" of investing. The commission could argue that bitcoin and ethereum will face SEC regulation given the blurred lines between what is considered a security and what is legally defined as a commodity.
Gensler has been careful not to express absolute views on the status of any individual cryptocurrency tokens — leaving open the possibility of a broader crackdown if the SEC prevails over Ripple. Last month during his testimony at a hearing before a subcommittee of the House Appropriations Committee, Gensler said bitcoin could be a legally unregistered crypto, but didn’t elaborate. Gensler, during his tenure as chairman, has so far declined to reveal whether he believes that ether should be registered as a securities token or not.
But the case has proved challenging for the commission given Ripple’s insistence to fight, rather than settle. A loss for the SEC would also thwart Gensler’s expansive enforcement agenda in the crypto space.
It could also mean that XRP would likely be declared a commodity or a currency, relisted on U.S. exchanges and the price, which cratered after the SEC filed its suit, could surge. Ripple will have side-stepped a major regulatory obstacle that could clear the way for it to fully resume its U.S. operations that have been hamstrung by the lawsuit.
With so much riding on the case, both sides have been battling mainly through pre-trial motions and records requests to gain any edge possible. The biggest of those legal battles concerns the particulars surrounding Hinman’s speech, including confidential internal emails and meeting notes that reveal how the speech was developed along with the thinking of top agency officials at the time.
The SEC has at various times argued that the speech — classifying bitcoin and ether as legally unregistered securities — was Hinman’s opinion, a move legal experts say to contest that the agency has a specific ruling on XRP’s competing cryptos, bitcoin and ether.
However, as the lawsuit has progressed, documents show that SEC attorneys had a much bigger hand in writing the speech than was previously known.
According, to documents reviewed by the court and by FOX Business, no fewer than 68 drafts of Hinman’s speech were written before it was delivered. New documents obtained recently by Washington, D.C.-based whistleblower group Empower Oversight revealed the recipients of those drafts to be around 30 people, including staffers in the Office of the General Counsel, the department of Enforcement, Hinman’s own Division of Corporation Finance and staffers in the office of Chairman Jay Clayton, among others.
Not included in speech drafts were the other four members of the five-member commission: Hester Peirce, Michael Piwowar, Kara Stein and Robert Jackson. When asked by Ripple lawyers why the other four commissioners were not included, Hinman said he didn’t feel that their input would be worth the extra delay. Ripple lawyers were quick to raise questions as to why the full commission wasn’t invited to weigh in on such a significant topic.
As the case has progressed, Judge Netburn has largely sided with Ripple’s requests for documents from the commission. In January, she ordered the SEC to release drafts of the speech and internal emails relating to it because Hinman’s "opinion" is not covered by attorney-client privilege.
That’s when the SEC reversed course on what Hinman’s speech should be considered. It stated in a motion for reconsideration that the speech should be protected by "attorney-client" privilege because he consulted with SEC staff to obtain legal advice before giving the speech. He was therefore a "client" of the SEC lawyers.
So why the change? The SEC declined to comment. But legal experts say the change underscores some of the difficulties the SEC faces in winning the case.
"Hinman’s speech was not an official Commission level view, but it was hardly a personal opinion," says J.W. Verret, associate professor of securities law at George Mason University. "Securities practitioners know that the line between no-action letters and Director speeches is not as sharp as the SEC suggests through their inconsistent positions in the Ripple litigation."