Ripple investors sue former SEC execs Hinman and Clayton over conflict of interest

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Emails obtained in a Freedom of Information Act (FOIA) request suggest that former Securities and Exchange Commission (SEC) Director William Hinman had a conflict of interest when he proclaimed during his tenure that Ethereum transactions were not securities. Lawyers defending Ripple (XRP) could use these emails to aid their defense against the SEC’s ongoing lawsuit which began in 2020.

In response to the emails, past controversies, and growing calls from the Ripple community, attorney Fred Rispoli filed a lawsuit against Hinman and former SEC chairman Jay Clayton on Wednesday, on behalf of Ripple (XRP) investor Shannon O’Leary and “all XRP Ledger users.”

During his chairman position, Clayton caused a controversially large spike in Bitcoin’s price by declaring the crypto was not a security. Clayton’s tenure at the SEC began in 2017 ended in 2020 — the SEC’s lawsuit against Ripple was launched in this time.

  • The SEC claims Ripple and two co-founders conducted an illegal offering of unregistered securities.
  • In December 2020, the SEC accused Ripple of violating registration requirements while selling $1.3 billion worth of XRP over a seven-year period.
  • The SEC is suing for billions in disgorgement, interest, and fees.

As part of its legal defense, Ripple claimed that the SEC failed to give proper notice of alleged securities violations. In March 2022, the judge presiding over the lawsuit rebuffed a motion by the SEC to dismiss Ripple’s claim.

In a lengthy Twitter thread, Rispoli announced the lawsuit against Ripple.

Hinman’s SEC conflicts of interest

Government whistleblower and research non-profit Empower Oversight issued the FOIA request as part of an ongoing investigation into Hinman and Clayton. It received nearly 200 pages of emails showing that Hinman may have violated rules by meeting with a pro-Ethereum firm he used to work for while proclaiming onstage that offers and sales of Ethereum were not securities transactions.

The emails imply that Hinman was still financially involved in the firm when he started working for the SEC. This was a conflict of interest because Simpson Thacher & Bartlett previously worked with the Enterprise Ethereum Alliance and promoted Ethereum. Hinman was warned by the SEC’s Ethics Committee to recuse himself.

However, according to information received through the FOIA request, Hinman ignored the SEC Ethics Committee’s warnings and met with a partner at the law firm at least three times.

Empower Oversight publishes FOIA request emails.

During Hinman’s onboarding as an SEC director, Designated Agency Ethics Official Shira Pavis Minton asked Hinman in an email to confirm that he had ended his relationship with Simpson Thacher & Bartlett. Minton also asked about any financial interest that Hinman still had in the law firm.

In reply, Hinman said he planned to divest once he started his job at the SEC in order to qualify for a deferral of capital gains tax. He also provided information about his investments to Minton.

Emails raise more questions than they answer

Empower Oversight had been asking the SEC for more information about Director William Hinman, but the SEC did not respond to its initial requests. The SEC did provide approximately 1,000 pages of documents, but most of these were duplicates or blank. In February 2022, the SEC requested more time to respond. Soon, Empower Oversight sued to force the SEC to comply.

Empower Oversight expressed concern about former senior SEC officials’ relationship with the crypto industry and their conflicts of interest. It especially noted Clayton’s joining of One River Asset Management, a hedge fund specializing in Bitcoin and Ethereum.

Although Director William Hinman’s conflict of interest may not directly impact today’s SEC v. Ripple case, Empower Oversight Founder Jason Foster said that the documents “raise more questions than they answer.”

Foster said that Empower Oversight will continue working on obtaining more information from the SEC through FOIA requests.

SEC Chairman Gary Gensler has previously said that Ethereum might have violated securities regulations, although the SEC has not pursued enforcement actions against Ethereum nor its creators.

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Out now: the first four episodes of our ongoing investigative podcast series Innovated: Blockchain City.

Edit 17:00 UTC, Apr 19: Removed reference to SEC chairperson Gary Gensler in paragraph 12, corrected to former SEC chairman Jay Clayton.