District judge calls out SEC for hypocrisy in Ripple lawsuit

A federal judge in Manhattan has accused Wall Street’s top cop of "hypocrisy" over its litigation tactics in a case that’s being called the cryptocurrency trial of the century. 

The characterization comes as U.S. Magistrate Judge Sarah Netburn ruled against a motion by the Securities and Exchange Commission in its lawsuit against cross-border payments company Ripple Labs. 

The SEC has accused the crypto platform of illegally issuing an unregistered security, XRP, to build out its business and make company insiders rich.

The SEC is seeking to keep confidential documents relating to a speech given by a former SEC official in 2018 when he sought to provide clarity on the then-nascent cryptocurrency market. 

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The official, corporation finance chief William Hinman, argued in the speech that all digital coins except bitcoin and ether were possibly illegal and unregistered securities subject to SEC action. Not long after, the SEC charged Ripple with selling unregistered XRP tokens.

In arguing the case, the SEC initially stated Hinman’s speech was the opinion of one official, not designed to give market guidance by the commission. The agency has since changed its position on the nature of Hinman’s speech when Judge Netburn demanded all documents relating to the creation of the speech be handed over to the court. 

The SEC claimed the speech and its corresponding drafts were not merely Hinman’s opinion, but the opinion of the Division of Corporation Finance, so they were covered by attorney-client privilege and should remain confidential. The SEC’s evolving characterization of Hinman’s speech has irked Netburn, who ruled Tuesday that the SEC must turn over the materials to the court, denying its request for attorney-client privilege and making an unusually harsh assessment of the agency’s motives.

"The hypocrisy in arguing to the court, on the one hand, that the speech is not relevant to the market’s understanding of how or whether the SEC will regulate cryptocurrency and, on the other hand, that Hinman sought and obtained legal advice from SEC counsel in drafting his speech, suggests that the SEC is adopting its litigation positions to further its desired goal and not out of a faithful allegiance to the law," Netburn said.

An SEC spokesman had no comment. Ripple had no comment. Bill Hinman could not be reached for comment.

Ripple has argued that drafts of Hinman’s speech were sent to various members of the SEC for their input and will show the muddled thinking by the commission in bringing the case two years later, the last official act of Trump SEC chair Jay Clayton.

Clayton’s replacement, Biden appointee Gary Gensler, continues to litigate the case, which, if successful, would have far-reaching regulatory implications for the $1 trillion crypto industry.

The SEC’s statutory authority in crypto has been murky; a clear win in the Ripple case could open up avenues for further SEC enforcement. Conversely, a Ripple win would signal a major setback in Gensler’s efforts to crack down on what he’s called the "wild west" of investing.

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Ripple lawyers consider the drafts of Hinman’s speech and other related material to be crucial pieces of evidence that could also prove the SEC unfairly singled it out for enforcement action.

One thing is certain: The documents surrounding Hinman’s speech are important for both sides. SEC lawyers have been fighting to prevent Ripple from obtaining the drafts based on privilege, even as they have tweaked their exact rationale. Personal opinions are generally not subject to such strict privilege guidelines, and during Ripple’s deposition of Hinman in August 2021, he signed an affidavit stating that the speech was entirely his own opinion.   

Netburn’s most recent ruling dismissed the SEC revision to its argument that Hinman wasn’t merely stating a personal opinion, but making an argument on behalf of the government thus retaining a level of confidentiality.

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The legal tussle over the Hinman drafts began in January, when Judge Netburn ordered the SEC to turn over other documents to the court while she weighed whether Ripple could gain access to them.

The SEC is expected to appeal Judge Netburn’s ruling to Federal District Judge Analisa Torres. It has 12 days to do before the documents become part of the public record. Once an appeal is made and Ripple has filed an opposition to the appeal, Torres will make a final ruling on their release.