Conflict of interest may be involved in SEC v Ripple case

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Fox Business TV channel published a large-scale investigation of the case of the US Securities and Exchange Commission (SEC) against the fintech company Ripple. According to journalists, the regulator’s employees behind the filing of the lawsuit could be affiliated with Ethereum.

In December 2020, the SEC accused Ripple and its top managers of an unregistered sale of securities under the guise of XRP tokens in the amount of $ 1.3 billion.The lawsuit was later adjusted with an emphasis on the actions of the company’s co-founder Chris Larsen and CEO Brad Garlinghouse.

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Former SEC chief Jay Clayton signed the lawsuit on December 22, hours before he left office. According to FOX, the regulator’s law enforcement department unanimously supported the initiative, while opinions were divided among the commissioners – out of five people, three voted for.

As chairman, Clayton pursued an “open door” policy, consulting frequently with industry experts and industry representatives. In January 2018, he approached the venture capital firm Andreessen Horowitz (a16z) to participate in a regulatory discussion.

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The result was a conference sponsored by a16z. Reporters learned that it was attended by the people behind Ethereum and representatives of blockchain-affiliated structures, including the law firm Perkins Coie.

The latter is a member of the Enterprise Ethereum Alliance, which is promoting the second largest cryptocurrency in terms of capitalization. a16z by that time was already part of the capital of several startups focused on Ethereum and Bitcoin. Ripple representatives were not invited to the event.

In the same year, Clayton allegedly received several regulatory recommendations from the current head of the department, Gary Gensler, who at that time taught at MIT and was a special adviser to the think tank Digital Currency Initiative.

FOX sources said that Gensler recommended that the SEC take a more active role in regulating the industry, since, in his opinion, many digital assets have the properties of securities. It was he who allegedly advised to use the Howey precedent to transfer crypto companies under the jurisdiction of the Commission.

In August 2021, Gensler expressed a similar thesis, stating that “thousands” of tokens on the cryptocurrency market are unregistered securities.

Speaking to The New York Times in 2018, he stated that Ethereum and Ripple pass the Howie test and are securities. By contrast, Bitcoin is a cryptocurrency and does not fall under the jurisdiction of the SEC, he said.

A few days after talking with Gensler, Clayton appointed Bill Hinman as director of corporate finance at the SEC. At the Yahoo Finance conference, the latter stated that for various reasons, Bitcoin and Ethereum are not securities. He did not mention XRP.

Former SEC officials told FOX that the agency had warned RIpple of possible harassment due to unregistered token sales. The direct involvement of the company’s management in these operations, they said, also meant that the token “did not pass the decentralization test.”

Garlinghouse claims the opposite: XRP is operated by a separate legal entity, while Ripple was funded through venture capital investments.

According to FOX, Clayton spoke to Gensler twice more in his last weeks as chairman of the SEC. It is not known what they talked about, but the last meeting took place on December 21, 2020 – the next day, the regulator filed a lawsuit against Ripple.

When Clayton left the SEC, he returned to the law firm Sullivan & Cromwell, where he previously specialized in securities-related matters. He also served as Independent Director of Asset Manager Apollo Asset Management, Advisory Boards for Fireblocks and One River Digital Asset Management.

A few days before the Commission filed a lawsuit against Ripple, the latter announced that it would invest $ 600 million in Bitcoin and Ethereum, and by 2021 will bring the volume of investments in these assets to $ 1 billion.

In September 2021, Clayton commented on this potential conflict of interest. He stated that in the civil service he was not familiar with the activities of these companies and was “introduced to them” after his dismissal.

Earlier, the human rights organization Empower Oversight noted a potential conflict of interest in Clayton’s actions. Activists also highlighted that Hinman, who said in 2018 that Ethereum had no securities properties, “received 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 spoke a lot with CEOs from the cryptocurrency industry. In particular, in December 2017, he held several meetings with representatives of ConsenSys, which is owned by Ethereum co-founder Joseph Lubin.

In 2020, Hinman left the SEC and returned to Simpson Thacher as an advisor. He is also a consultant for the a16z crypto fund. FOX’s interlocutor, who is closely acquainted with the ex-official, said that he did not know anything about the company’s cryptocurrency investments when he worked on the Commission.

Ripple has previously managed to get Hinman to be summoned to testify in court despite the SEC’s attempts to reject the motion.

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