Casey Wagner

The DeFi Education Fund recently utilized the Freedom of Information Act to file a request for additional information regarding the Securities and Exchange Commission&#8217;s decision not to provide clarity on the classification of syndicated loans as securities.



In March 2023, the United States Court of Appeals for the Second Circuit requested the SEC to provide its perspective on the case of Kirschner v. JPMorgan Chase Bank, N.A. This case deals with the classification of syndicated loans. 



The SEC filed motions to extend their deadline to submit, which was originally April 13, 2023, three separate times. On July 18, the SEC wrote to the court saying that it would not be filing an amicus brief. 



In the letter, SEC General Counsel Megan Barbero wrote that the agency “is unfortunately not in a position” to weigh in. 



“For a securities regulator who is seemingly determined to classify nearly all crypto tokens as securities, it is curious that the agency decided not to provide its logic on whether a more traditional financial instrument is also a security,” Amanda Tuminelli, chief legal officer at the DEF, said. 



In 2020, a federal court sided with JPMorgan and other banks, ruling that term loans arranged as part of the bankruptcy of Kirschner’s Millennium Laboratories LLC were not securities. Kirschner alleged in his complaint that the banks had violated Blue Sky Laws — state securities laws — with the loan offering. 



Kirschner filed an appeal in the Second Circuit in 2021, the decision of which could set the precedent for how syndicated loans are treated within courts in the circuit going forward. If the appellate court rules syndicated loans are securities, it poses an “existential threat” to the entire industry, attorneys surveyed by the <a href="https://www.natlawreview.com/article/are-loans-securities-kirschner-case-update">National Law Review</a> noted.&nbsp;



The SEC is in between a rock and a hard place, Tuminelli said. If the agency sides with Kirschner, not only are they going against a long standing precedent and thus disrupting a multitrillion-dollar market, they are opening the door for cryptocurrencies to be analyzed in a new way. 



“They&#8217;re extremely conscious of the eyes on them by the crypto industry of how they&#8217;re analyzing securities,” she added. “They&#8217;re sort of afraid either way, and I think why that ultimately matters is because they don&#8217;t want [Administrative Procedure Act] challenges.”&nbsp;



Under the APA, federal agencies can be sued if the agency is enforcing a rule, through enforcement actions or otherwise. It’s a law <a href="https://www.coinbase.com/blog/coinbase-takes-another-formal-step-to-seek-regulatory-clarity-from-sec-for">Coinbase has cited</a> in <a href="https://blockworks.co/news/coinbase-sec-rulemaking-petition">their lawsuit against the SEC for its alleged refusal to create policies</a> for the industry, and the DEF plans to file an APA suit too, Tuminelli said.&nbsp;



“I think they don&#8217;t want to put it in an amicus so that then I can say ‘look, this is how the SEC is analyzing whether something is a security and we want to challenge that,’” she added. 



The SEC does not have to respond to the DEF by a given date, nor do they necessarily have to hand over any internal communications or documents, per FOIA.&nbsp;



“If the SEC is holding back solely because they are concerned about losing in court, it is unfair to the American investing public who deserves transparency,” Tuminelli said. “We are determined to get to the bottom of it.”



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DeFi Education Fund seeks FOIA amid SEC inaction on securities dispute

<div id="highlights-block_6255d8e219aeb" class="highlights">
 <ul>
 <li>SEC motion to clarify emails and speech relating to ethereum is denied by district judge</li>
 <li>Emails show former SEC director was warned about potential conflicts of interest over his relationship with his prior employer</li>
 </ul>
 
</div>



Days after hundreds of emails between SEC top officials were released, a judge has ruled the regulator cannot edit or clarify the contents for the upcoming Ripple Labs trial.&nbsp;



The contents of the emails could prove crucial if they show the SEC acted inconsistently by accusing Ripple Labs executives of securities violations for issuing the XRP token after ruling that rival cryptocurrency ether was not a security.



Empower Oversight, a nonprofit whistleblower organization, last week released more than 200 emails between current and former SEC employees. It claims the emails prove there were conflicts of interest associated with how the SEC selected enforcement actions against digital asset companies, specifically the agency’s decision not to view ethereum the same as XRP.&nbsp;&nbsp;



The emails, which Empower Oversight received from a Freedom of Information Act request, specifically relate to William Hinman. Hinman served as director of the SEC’s division of corporate finance from May 2017 to December 2020.



Prior to his SEC appointment, Hinman worked at Simpson Thacher, a law firm that sits on the Enterprise Ethereum Alliance, which is dedicated to promoting the commercial use of Ethereum. Since leaving the SEC, Hinman has returned to Simpson Thatcher.



The <a href="https://empowr.us/wp-content/uploads/2022/04/2022-03-25-SEC-Responsive-Records-compressed.pdf" target="_blank" rel="noreferrer noopener">emails</a>, mostly from Shira Pavis Minton, the designated agency ethics official at the SEC, warn Hinman that he is not to engage in any SEC matters that could impact Simpson Thacher due to his financial interest in the firm. He was also advised not to meet with anyone from Simpson Thacher.



Hinman met with Josh Bonnie, a partner at Simpson Thacher, several times after being warned about the conflict of interest, Empower Oversight said in a <a href="https://empowr.us/empower-oversight-obtains-additional-documents-shedding-light-on-potential-cryptocurrency-conflicts-of-interest-within-the-sec/" target="_blank" rel="noreferrer noopener">statement</a>. The former SEC director also met with the co-founders of and investors in Ethereum ahead of the speech he gave in 2018 declaring ether a token, not a security. The speech had a strong positive impact on the price of ether and potentially benefited Simpson Thacher as a result, Empower Oversight argues.



“This raises questions as to whether Hinman fully disclosed Simpson Thacher’s role in Ethereum from SEC ethics officials and whether they would have approved the meetings or his speech if he had,” Empower Oversight’s statement said. 



If the Ripple Labs team can prove that leaders at the SEC had an interest in promoting and protecting ether over other, similar tokens, it could lead to a win, some speculate.



“This type of conflict of interest within a critical financial industry regulator is highly volatile in terms of undermining an already rocky public trust of government administration,” said Michael Fasanello, chief compliance officer of financial services firm LVL. “Doubt raised from these internal documents could affect not just the Ripple case, but other cases involving digital assets as well.”



The team at Empower Oversight agrees. The nonprofit filed a lawsuit against the SEC in December 2021 over Hinman’s conflict of interest with Simpson Thacher. The suit also mentions that Marc Berger, the former head of the SEC enforcement division and a main initiator of the lawsuit against Ripple Labs, also left the SEC for Simpson Thacher.



Others are less certain about how the emails might play into the ongoing Ripple suit, if at all.



“The SEC always picks and chooses. It can&#8217;t sue everyone all at once,” David Tawil, president of crypto hedge fund firm ProChain Capital, said. “There has to be more evidence relating to Ripple specifically.”



Regardless, the contents of the emails and Hinman’s infamous 2018 speech will be fair game in the upcoming trail. A judge has denied the SEC’s motion to review or clarify contents from the emails and speech, XRP attorney James K. Filan <a href="https://twitter.com/FilanLaw/status/1513647538074800130?s=20&amp;t=WeX-XWuxf0QKteO1J7zeHw">announced on Twitter</a> Wednesday.



“The SEC’s assertion that the Speech was intended to communicate [the SEC division of corporation finance’s] approach to regulating digital asset offerings is inconsistent with the SEC’s and Hinman’s previous position that the Speech was intended to and did reflect his personal views,” District Judge Analisa Torres’ decision read. 



“The SEC seeks to have it both ways, but the Speech was either intended to reflect agency policy or it was not. Having insisted that it reflected Hinman’s personal views, the SEC cannot now reject its own position.”



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