A federal judge has granted permission to fintech startup Ripple Labs to question a former Securities and Exchange Commission official about the agency’s policy decisions as the company fights accusations of misleading investors about its cryptocurrency.
The decision gives Ripple the ability to depose the former director of the SEC’s Division of Corporate Finance, William H. Hinman, as part of its defense of a high-profile SEC lawsuit. In 2018, Hinman gave a speech stating that cryptocurrencies such as Bitcoin and Etherium are not considered securities. If he testifies, it could bolster Ripple’s case against the SEC, which is claiming that Ripple created a situation in which it could sell XRP cryptocurrency with only the information it chose to share.
The SEC strongly opposes the subpoena, saying the questioning “would subject high-level government officials to depositions regarding every law, regulation, or policy they consulted on or spoke about and that later underlay an enforcement action,” Bloomberg reported. The SEC said that the subpoena would “disrupt the functioning of government agencies by discouraging qualified people from public service given the near certainty that their tenures would ensnare them in litigation.”
U.S. Magistrate Judge Sarah Netburn ordered Hinman to sit for a deposition after a hearing last Thursday, saying that as a “high-ranking official” who led one of the six divisions of the SEC, he held “substantial authority in a very important federal agency.”
“This is not a run-of-the-mill SEC enforcement case,” Netburn said during a conference call to announce her decision. She said the case “involves significant policy decisions in our markets, the amount in controversy is substantial and the public’s interest in this case is significant.”
Security or Currency?
The SEC filed the action against Ripple Labs and two of its executives, who are also significant security holders, in December, 2020, alleging that they raised over $1.3 billion through an unregistered, ongoing digital asset securities offering.
According to the SEC’s complaint, Ripple; Christian Larsen, the company’s co-founder, executive chairman of its board; and Bradley Garlinghouse, the company’s CEO, raised capital to finance the company’s business. The complaint alleges that Ripple raised funds, beginning in 2013, through the sale of digital assets known as XRP in an unregistered securities offering to investors in the United States and worldwide.
For its part, Ripple labs has argued that the cryptocurrency should be subject to the same securities laws, since XRP holders do not benefit directly from the performance of Ripple Labs and the market value of XRP does not correlate directly with the profitability of Ripple Labs.
Hinman’s deposition could happen as early as this week. Cryptocurrency companies and many others are watching the case closely, since it could set important precedent on the regulatory requirements of such digital offerings. The case, which is being heard by U.S. District Court for the Southern District of New York, could be settled as early as this fall, but it likely to take far longer is it ends up going to trial. 
Michael McGee is assistant editor at Compliance Chief 360°