Could the SEC case against Ripple falter over a conflict of interest?

Newly discovered documents could pose a major roadblock for the Securities and Exchange Commission (SEC) in its case against Ripple if they prove a former commission official had a conflict of interest.

The SEC has been embroiled in a legal battle against blockchain company Ripple (XRP) since 2020 in which the crypto company and senior executives Brad Garlinghouse and Christian Larsen were charged with selling XRP tokens as unregistered securities.

In a May 10 announcement, corruption watchdog Empower Oversight claimed that documents obtained under a Freedom Of Information request suggested former SEC Director of Corporate Finance William Hinman had a conflict of interest and should not have made a speech in 2018 in which he stated that Ether (ETH) and its transactions are not securities.

Empower Oversight Requests SEC-OIG Conduct Investigation into the Failure of the SEC’s Ethics Office to Prevent Cryptocurrency Conflicts of Interest by Senior Staffhttps://t.co/fMRPTUN0ov#cryptotrading#crypto#Bitcoin$BTC$ETH$XRP

— Empower Oversight (@EMPOWR_us) May 10, 2022

According to the non-profit watchdog, Hinman should have recused himself from speaking about Ethereum due to his undisclosed “direct financial interest” with the Simpson Thacher & Bartlett law firm that is a member of the Enterprise Ethereum Alliance (EEA).

The EEA promotes the use of blockchain technology on the Ethereum blockchain.

Founder of legal news outlet Crypto Law lawyer John Deaton told his 198,000 Twitter followers on May 11 that Hinman’s potential compliance failure could jeopardize the SEC’s entire case against Ripple. If the conflict exists, Deaton said the case could be “game set and match” for Ripple.

@EMPOWR_us and @JsnFostr retrieved the emails below. If Hinman didn’t submit the speech to conflicts screening it is game set & match. The Ethics Office is going to be pissed and want to throw him under the bus if we force this investigation through letters from Congress. pic.twitter.com/8j9Nwb0OZn

— John E Deaton (@JohnEDeaton1) May 11, 2022

According to Law360, a legal news outlet, Hinman worked at Simpson Thacher before joining the SEC, then rejoined the firm in 2021.

Empower Oversight said that Hinman was receiving $1.5 million in retirement benefits from the law firm annually while he worked at the SEC, and alleged that he “had repeated contact with the law firm’s personnel.” The organization noted that the SEC’s “Ethics Office explicitly told him not to have any contact with Simpson Thacher personnel.”

The organization requested the Office of the Inspector General of the SEC conduct a “comprehensive review of the SEC’s ethics officials” to determine whether Hinman had a conflict of interests. That review would include the following considerations:

“(1) Understand the degree to which the conflict involving this former official exacerbated the perception that the SEC’s enforcement actions have selectively targeted some cryptocurrencies while giving others a free pass;

(2) Explain to the public how the SEC’s Ethics Office failed to effectively ensure compliance with its clear directives; and (3) Evaluate the SEC’s policies and procedures to identify ways to more effectively monitor compliance with ethics guidance.”

(3) Evaluate the SEC’s policies and procedures to identify ways to more effectively monitor compliance with ethics guidance.”

This latest development in the case is an unexpected twist on top of former SEC official Joseph Hall’s February prediction that the commission will lose to Ripple based on the merits of the case.

Many in the crypto industry have been watching this case closely because the outcome will likely have massive implications. If Ripple wins, it would force the SEC to back off from its aggressive stance towards crypto. If the commission wins, it would almost certainly open the field to a bevy of new litigation against crypto companies.

Related: Chairmen from the SEC and CFTC talk crypto regulation at ISDA meeting

XRP is 19.2% down over the past 24 hours, trading at $0.41 according to CoinGecko data.