Media point to potential conflicts of interest in SEC case against Ripple

The Fox Business Fox Business published a wide-ranging investigation into the U.S. Securities and Exchange Commission’s (SEC) case against the fintech company Ripple. Journalists say those behind filing the suit at the regulator may have ties to Ethereum.

In December 2020 the SEC accused Ripple and its top executives of an unregistered sale of securities disguised as XRP tokens totaling $1.3 billion. Later the suit was amended with a focus on the actions of co-founder Chris Larsen and CEO Brad Garlinghouse.

Former SEC chairman Jay Clayton signed the complaint on 22 December, just hours before leaving office. According to FOX, the regulator’s enforcement division unanimously backed the move, while among the commissioners’ opinions were split — three of the five voted in favor.

As chairman, Clayton ran an ‘open-door policy’, frequently consulting with industry experts and players. In January 2018 he approached venture capital firm Andreessen Horowitz (a16z) requesting their participation in discussions on regulatory issues.

The result was a conference sponsored by a16z. Journalists learned that attendees included people behind Ethereum, and representatives of blockchain-affiliated entities, including the law firm Perkins Coie.

Perkins Coie is a participant in the Enterprise Ethereum Alliance, which promotes Ethereum, the second-largest cryptocurrency by market capitalization. By then a16z had already invested in several startups focused on Ethereum and Bitcoin. Ripple representatives were not invited to the event.

That year Clayton allegedly received several regulatory recommendations from current head Gary Gensler, who at the moment taught at MIT and served as a special adviser to the Digital Currency Initiative think tank.

FOX sources said that Gensler urged the SEC to take a more active role in regulating the sector, arguing that many digital assets possess the properties of securities. He allegedly advised using the Howey test to bring crypto companies under the Commission’s jurisdiction.

In August 2021 Gensler expressed a similar thesis, stating that ‘thousands’ of tokens traded on the crypto markets are unregistered securities.

In an interview with The New York Times in 2018 he stated that Ethereum and Ripple pass the Howey test and are securities. He said Bitcoin, by contrast, is a cryptocurrency and does not fall under SEC jurisdiction.

A few days after the discussion with Gensler, Clayton named Bill Hinman as director of the SEC’s Division of Corporate Finance. At a Yahoo Finance conference the latter stated that for various reasons Bitcoin and Ethereum are not securities. He did not mention XRP.

Former SEC staff told FOX that the agency warned Ripple of potential enforcement due to unregistered token sales. The direct involvement of the company’s leadership in these operations, they say, also indicated that the token ‘did not pass the decentralization test’.

Garlinghouse asserts the opposite: XRP is managed by a separate legal structure, and Ripple was funded through venture investments.

According to FOX, in the final weeks of his tenure as SEC chair, Clayton spoke with Gensler twice more. It is not known what they discussed, but the latest meeting occurred on 21 December 2020 — the day after the regulator filed suit against Ripple.

When Clayton left the SEC, he returned to Sullivan & Cromwell, where he previously specialised in securities matters. He also took a post as an independent director of Apollo Asset Management, and joined the advisory boards Fireblocks and One River Digital Asset Management.

A few days before the Commission filed its suit against Ripple the latter announced that it would invest $600 million in Bitcoin and Ethereum, and by 2021 would raise its investments in these assets to $1 billion.

In September 2021 Clayton commented on the potential conflicts of interest. He said that during his public service he was not acquainted with the activities of these companies and ‘was introduced to them’ after leaving.

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Clayton stated he would not comment on the Ripple case. Regarding the conflicts of interest related to his current employers, Clayton incredibly said:

“I did not know these companies while I was in the government. I was introduced to them after I exited.”

— John E Deaton (@JohnEDeaton1) November 16, 2021

Earlier Empower Oversight highlighted a potential conflict of interest in Clayton’s actions. Activists also noted that Hinman, who in 2018 said Ethereum did not possess securities properties, ‘had earned millions of dollars from his former employer, the law firm Simpson Thacher’. It was affiliated with the Enterprise Ethereum Alliance.

According to FOX, in 2017-2018 Hinman had numerous interactions with leaders of crypto industry companies. In particular, in December 2017 he had several meetings with representatives of ConsenSys, founded by Ethereum co-founder Joseph Lubin.

In 2020 Hinman left the SEC and returned to Simpson Thacher as an adviser. He also serves as a adviser to the crypto fund a16z. A FOX source close to the former official said he knew nothing about the crypto investments of the company when he worked at the Commission.

Earlier, Ripple succeeded in obtaining Hinman’s testimony in court to give testimony, despite attempts by the SEC to dismiss the motion.

In remarks at the time, Brad Garlinghouse described Ethereum’s success as the result of favorable treatment by the SEC.

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