The U.S. Securities and Exchange Commission (SEC) and Ripple Labs are jousting — yet again — over discovery in the SEC v. Ripple lawsuit. This time, the SEC wants to block Ripple from calling Silicon Valley lawyer William Hinman, the former director of the SEC’s Division of Corporation Finance, to testify, according to a new legal filing.
The SEC has filed a motion seeking to quash Ripple’s request to have Hinman testify at a deposition on June 30.
Ripple says Hinman likely has information about the SEC’s policies regarding digital assets, its views on Bitcoin and Ether, and communications with Ripple and third parties about the regulatory status of XRP. The information could prove critical for Ripple as it seeks to bolster its fair notice defense.
“Other than the five Commissioners themselves, no SEC officers have more significant responsibilities or a higher rank than the directors of the SEC’s six divisions,” wrote SEC counsel Ladan Stewart in a letter to U.S. Magistrate Judge Sarah Netburn, who is overseeing discovery for the lawsuit.
In her letter, Stewart called for the subpoena to be voided, arguing that Hinman had no first-hand knowledge of the facts underlying the litigation and Ripple could not meet the burden of showing “exceptional circumstances” that justified deposing a former high-ranking government official like Hinman.
“In the alternative, the Court should quash the Subpoena without prejudice until after Judge Torres’s ruling on the SEC’s motion to strike Ripple’s fair notice defense,” Stewart wrote. “If the Court grants the SEC’s motion, Ripple’s principal basis for seeking to depose Director Hinman would no longer exist. If the Court does not, its interpretation of the defense may nevertheless determine whether Director Hinman has any first-hand knowledge of facts sufficient to meet the ‘exceptional circumstances’ test.”
“Subjecting former officials’ decision-making processes to judicial scrutiny and the possibility of continued participation in lawsuits years after leaving public office would serve as a significant deterrent to qualified candidates for public service,” Stewart said.
See related article: Ripple asks court to ignore 70+ SEC actions against cryptos before XRP
Who is William Hinman?
Hinman served as director of the SEC’s division of corporation finance from May 10, 2017 to Dec. 11, 2020 and held a position of critical importance to the SEC’s operations, Stewart wrote. The SEC filed its lawsuit against Ripple days later on Dec. 22, 2020, alleging that its sale of XRP was an unregistered securities offering worth over US$1.38 billion. The SEC also named Ripple’s CEO Brad Garlinghouse and executive chairman Chris Larsen as co-defendants for allegedly aiding and abetting Ripple’s violations.
Before serving at the SEC, Hinman was a partner and practiced in the corporate finance group in the Silicon Valley office of Simpson Thacher & Bartlett LLP, where he played a role in the initial public offerings of major tech companies, including Alibaba, Facebook, Google and Square. He has returned to the law firm as a senior advisor.
In May, Hinman joined &vest, an investment platform founded in 2019 focused on SPACs and private investments, as a partner. This week, Silicon Valley venture capital firm Andreessen Horowitz (a16z) announced its new US$2.2 billion crypto fund and that Hinman was joining a16z crypto as an advisory partner. “Bill will provide valuable insights to us and our portfolio companies as well as play a key role in shaping the future regulatory environment in which we and they operate,” according to a16z’s statement.
Hinman has been frequently cited in the litigation because of a speech he made in 2018 titled “Digital Asset Transactions: When Howey Met Gary (Plastic)” where he said Bitcoin and Ether were not securities. Ripple has said that it had understood those remarks to indicate that the SEC “would permit present-day sales of virtual currencies given the current market conditions for XRP.”
Now Hinman is distancing his remarks from the SEC. In his declaration filed in support of the SEC’s motion to squash the deposition subpoena, Hinman said: “I began the speech with the following disclaimer: ‘My remarks are mine alone, not necessarily those of the Commission, the Commissioners, or the staff.’ The text of the Speech, which is publically available on the Commission’s website, contains a similar disclaimer: ‘The Securities and Exchange Commission disclaims responsibility for any private publication or statement of any SEC employee or Commissioner. This speech expresses the author’s views and does not necessarily reflect those of the Commission, the Commissioners or other members of the staff.’”
But James Filan, a defense lawyer and former federal prosecutor who frequently comments on developments in SEC v. Ripple lawsuit, tweeted: Former SEC chair Jay “Clayton used Hinman’s speech as an example of how transparent the SEC has been in its treatment of digital assets but now Hinman is tap-dancing in that declaration.”
See related article: Court grants Ripple access to SEC’s internal trading policies on XRP
How will the court rule?
In April, Judge Netburn, referring to the “high-stakes litigation,” ruled to allow Ripple access to the SEC’s internal communications about Bitcoin, Ether and XRP, saying: “the discovery related to Bitcoin and Ether is relevant. I think it is relevant to the Court’s eventual analysis with respect to the Howey factors, but I also think it is relevant as to the objective review of defendants’ understanding in thinking about the aiding and abetting charge or aiding and abetting count. I also think it is relevant to the fair notice defense that Ripple is raising.”
At the hearing, she sought clarification from the SEC regarding Hinman’s speech and was advised by then-SEC counsel Durgan Bliss — who has since left the SEC’s employ — that the “[SEC] has not taken an official position. There is no action that it took to say Bitcoin is not a security, Ether is not a security.”
In a letter to the SEC, Ripple attorney Reid Figel wrote: “Judge Netburn never predicated Ripple’s right to obtain relevant discovery on the success of its fair notice defense. To the contrary: she accepted several other bases to support Ripple’s right to discovery of the type of evidence that Ripple seeks from Mr. Himnan.”
“Ripple has the right to seek evidence that tends to show that the SEC either approved, or adopted, Mr. Hinman’s speech,” Figel wrote. “Potentially relevant facts include whether the speech was reviewed or approved by the Chair or other Commissioners before it was delivered and the circumstances surrounding the transmission of the speech to Congress, accompanied by a note indicating that it set forth the criteria the SEC uses to determine whether a digital asset is offered or sold as an investment contract.”