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SEC vs. Ripple: The Search for Hinman

By June 25, 2021No Comments


Hello and welcome to Legal Briefs – this is attorney Jeremy Hogan and this is the XRP only  edition because there was some Juicy Juicy stuff filed in the SEC v. Ripple case yesterday.

And if you don’t know, soon you will know.

SO, in our ongoing saga, we now know that Ripple had scheduled and subpoenaed Former SEC Director William Hinman to be deposed in the case and the SEC yesterday filed a Motion with the Court to Stop that from happening. Juicy stuff since Director Hinman publicly stated that Ethereum was not a security back in 2018 all the while apparently receiving money from his old firm which was heavily involved in…yep, Ethereum . Hmmm.. His pension was 7 times his salary.

This practice is known as a golden parachute where you leave a company to join the government and still receive a pension from your former employer.  Except Director Hinman went a step further and then Re-Joined his firm AFTER leaving the SEC which I will heretofore call a Golden — on the public.  What, you can’t say that on Youtube?

Listen, I have no problem with private contracts or people moving from the private to public sector or vice versa.  I just think when things become too blatant we should at least do something like this – just to make ourselves feel better:

We will call it the Crony Capitalism Walk of Shame – Except we’d definitely want them to have their clothes on.

I wanted to play Shame Shame by the Foo Fighters but we got copyrighted by Youtube so I had to go with Game of Thrones. Sorry.

In any case, lots of juicy Legal stuff to geek out about today.  The SEC filed its motion to stop the Hinman deposition from taking place and for me there are some super interesting legal issues in there and I think we can get a good idea of what the judge is likely to do but also we get a look at some very interesting documents that were attached to the motion as Exhibits and I am going to point some things out to you in those documents that you will want to see. I can’t wait.

Remember, please do not take anything I say as legal advice – I bought a Betamax back in the day for Pete’s sake. Instead I would recommend you call one of this gentlemen’s call centers – his main office is here in Orlando just ten minutes up the street from mine:

Who is he? Legal Briefs bonus points if you drop his name in the comments.

Okay, so Ripple had subpoenaed Mr. William Hinman to testify at deposition on June 30 – five days from now.  Deposition testimony is under oath and it’s just like you are in court testifying. The transcript or even video of the deposition can be submitted to the Court and offered just like you were in court. I’ve done hundreds of them and I usually show my clients this lil Wayne deposition to show them how to do it:

“Objection: that’s a stupid ass question.” Classic.

Okay, so the legal question is – will Mr. Hinman be forced to testify or not.  Let’s take a look and find out. In its Motion to Stop the Deposition, the SEC lays out its argument in the 2nd paragraph and here it is:

“To depose a former high-ranking government official like  Director Hinman, Defendants bear the burden of showing “exceptional circumstances” justifying the deposition.

This is actually a two-part test: first, the person you want to depose must be a “high-ranking” official – not just any official and second, there must be “exceptional circumstances”   – in other words, President Biden is the head of the executive branch but we can’t be having him deposed every time the FDA is sued for not approving a drug – you have to show why you NEED to specifically depose him. And a quick shout-out to SEC attorney Ladan Stewart – the motion letter was very well done. Props.

So, that’s the arena we will be playing in here and normally I would wait until we see Ripple’s Reply Brief but we don’t have to because in the Exhibits we have a letter from Ripple to the SEC which will essentially become Ripple’s Reply Brief. It’s Exhibit D and it was a letter to the SEC attorney explaining why the deposition should take place and this is something I’ve noticed with Ripple’s attorneys, they are ALWAYS a step ahead.  I mean, they knew back in January they were going to depose Hinman, they knew the SEC would fight it, and this informal letter is already written like a legal brief – you can almost cut/paste it as a Reply Brief.

And it starts where my mind initially went to, which is: if Hinman no longer works for the SEC, the SEC does not represent him.  What right do they have to object to him being deposed? That’s the first thing Ripple mentions in the first paragraph:

“During our meet-and-confer on Friday ,June 4, 2021, the SEC acknowledged that it does not-and cannot-represent Mr.Hinman” ….”the law confers standing on the SEC to seek a protective order precluding Mr. Hinman’s deposition only upon a showing of good cause.”

Next, the letter addresses our two part test – it argues first that Mr. Hinman was NOT a high-ranking government official but just the head of one of 29 Divisions reporting to the Chair of the SEC. That’s at the top of page 2 of the letter:

The letter then of course goes on to argue that there are essentially “Exceptional Circumstances” here which require his testimony.  And normally at this point I would take a look at the arguments and do my best guess at what the Judge would rule but NO, today I have gone a step further because our Judge, Judge Netburn has actually ruled on this issue before and I have gotten my dirty little hands on those rulings so let’s see how she approaches this herself.

It was a lawsuit against Saudi Arabia for the 9/11 attacks and the officials to be deposed were foreign nationals but the analysis was exactly the same.

In her Order in this case, Judge Netburn drew a very bright line between current officials and former officials and was much more lenient in allowing FORMER officials to be deposed. In fact, she gave “Former Officials” there very own section. Under that section, as to the first part of the test, whether they were “high-ranking” officials, she was very liberal.  For example, on page 32 she held that the Saudi Arabian Deputy Consul in Los Angeles was a High-Ranking official.

 I’m honestly not sure what a “Deputy Consul is, but it doesn’t sound very high to me – but he was for Judge Netburn. In fact, the ONLY individual that Judge Netburn found was NOT a high ranking official was Mr. Mazyed Ibrahim Al Mazyed who was a Cultural Attache.  I have no idea what that is either.  But in any case,  I think Ripple will probably lose on the High-ranking official argument.

BUT, Judge Netburn was much easier on the “exceptional circumstances’ part of the test.  In fact, I didn’t see any analysis involving former officials where she held that the deposition would not be allowed to go forward and in fact, she allowed ALL the depositions to go forward in the Saudo Arabia case with this caveat:

“Plaintiffs may therefore ask questions about false representations made regarding the accreditation of Saudi propagators as long as those questions do not concern the officials’ decision making performed in the exercise of official functions.”

In other words, applying that rationale to the Ripple case, she will rule that Ripple cannot ask Hinman about the deliberative process of arriving at the conclusion that Ethereum was not a Security.

So yes, I think she will allow the deposition to move forward subject to proper objections by the SEC at deposition.  But a deposition I think there will be!

Which might be a small problem for the SEC because the speech itself which is the subject of all the hoopla was ALL ABOUT his deliberative process – so I don’t know how you object to privilege when the whole speech at issue is out there on the internet.  And here is Mr. Hinman’s deliberative process right on page 3 of Exhibit C in the Motion to Quash:

“And putting aside the fundraising that accompanied the creation of Ether, based on my understanding of the present state of Ether, the Ethereum network and its decentralized structure, current offers and sales of Ether are not securities transactions. ‘

  That is straight from his apeech, that is public record and now, thanks to this Motion we have a legal record as well because the SEC went out and got a declaration under oath from Mr. Hinman , an affidavit to support their motion. And as I read the affidavit, I just kept thinking back to when I was teaching ESL and I would use flashcards to teach idioms and this is the one I kept thinking of:

Digging your own grave for our foreign Englishers is when you keep trying to do something but you just make the situation worse with your efforts.  Take a look at this wonderous paragraph from Mr. Hinman – paragraph 13:

“The Speech was intended to express my own personal views. During my preparation   of the Speech, I discussed my thoughts with other Commission employees, as part of the Commission’s ongoing deliberations about whether offers and sales of Ether constituted securities transactions. To the best of my knowledge, the Commission had not taken at that time, and still has not taken, any position or expressed a view as to whether offers and sales of Ether constituted offers  and sales of securities.”

SOOOO… it was just his own personal view, that he happened to arrive at in collaboration with other people at the SEC, and which the SEC has STILL not arrived at an “official” position on. 

Which is all just splendidly confusing and makes you wonder what crypto “market participants” could have taken away from his speech and when we as market participants leave the “High ranking” SEC officials big speech scratching our heads – is that Fair Notice?

Well, let’s say we figure it out.  It’s his own personal views.  Got it.  So we go home and turn on the television and there’s Mr. Hinman being interviewed and we watch this:

Notice the pronoun he was using?  “We” “we feel and “we” think.   Remember, nothing gets by me.  So, if these are his personal views, who is the “we” he’s talking about?  Is he referring to him and  his wife and their discussion over dinner about crypto securities laws?  Or is he saying “we” the SEC.  Or, to give him the benefit of the doubt, perhaps the “we” is just his Department that he heads.

Fair enough but the Corporate Finance Department which he was the head of is THE department of the SEC which provides No-action letters – which makes determinations about what is okay to do and what is NOT okay to do.

And so this affidavit, even IF the deposition is not allowed to go forward, is out there as Exhibit A to the Fair Notice motion for Ripple – think of it like Rudolph’s cute little nose, bravely leading Santa’s sleigh through the harsh blinding snow.

And it’s a great lesson in how legal cases are like a game of chess – it’s all about having a strategy and thinking further ahead than the other player.  Back in early March, look who we can see in Exhibit “E” to the Motion that Ripple listed as a person who would have knowledge about the case

No. 8 there – Mr. William Hinman and Ripple says in this disclosure that he would have notice of “The determination that bitcoin and ether were not securities.”

I saw that and thought …well well Ripple Attorney Garry Kasparov – you probably knew back in January that you would end up in front of Judge Netburn arguing a Motion to Quash a Deposition.  Well played. Well played indeed.

Thank you always for watching. In farewell, Allow me to quote from the Notorious B.I.G.

“You know very well” Who you are. Don’t let them hold you down. Reach for the stars”

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