In his thought-provoking book, Skin in the Game, Nassim Taleb argues that when decision-makers bear the consequences of their actions, they tend to make better decisions. Unfortunately, this doesn’t apply to federal regulators. The Federal Tort Claims Act (FTCA), exempts them from liability for all damages they inflict on Americans by intentional and demonstrably harmful acts.
This exemption – rooted in the hoary doctrine of the “divine right of kings” – gives no recourse to average citizens, feeds a culture of broad deference to federal agencies, and allows wrongdoing by high officials to be largely ignored. For institutions already suffering from plummeting public trust, this should not continue.
Consider, for example, the long series of poor decisions by the Securities and Exchange Commission (SEC) in its attempt to regulate cryptocurrencies. For years, the SEC issued erratic, contradictory, and positively misleading guidance about the legal status of digital assets. Indeed, William Hinman, then the SEC Director of Corporation Finance, appears to have had serious conflicts of interest that may have caused him to mislead investors and fintech companies.
The Hinman/SEC scandal began in June 2018 when Hinman delivered a speech at the Yahoo! Finance All Markets Summit, featuring guidance about how the SEC would regulate digital assets. He explained how one cryptocurrency, Ether (ETH), was “sufficiently decentralized,” that, “we believe current offers and sales of Ether are not securities transactions.” In fact, this was not the actual position of the SEC. The market impact of Hinman’s guidance was dramatic. The price of ETH immediately skyrocketed and continued to soar by over 500%.
For the next two years, the SEC’s official position on crypto-as-securities remained a secret, as did Hinman’s conflict of interest. During that time, many fintech companies like Ripple took his speech as regulatory guidance. So too did many thousands of investors in Ripples flagship token, XRP. The token soared and continued to grow as one of the major competitors to ETH.
Then, in 2020, the SEC shook crypto markets. It sued Ripple and its two top executives, alleging that XRP was an illegal and unregistered security. The SEC sought disgorgement of $1.3 billion and even harsher remedies, such as permanent exclusion of Ripple and its executives from cryptocurrency markets.
Ripple argued the SEC lawsuit caused $15 billion in losses to retail XRP holders. Former SEC Commissioner, Joseph Grundfest, foresaw this result when he warned that suing over XRP, “. . . will impose substantial harm on innocent holders of XRP, regardless of the ultimate resolution.” A group of XRP holders agreed, advising the court that Hinman’s speech led them to believe that XRP, like ETH, was not a security and the SEC lawsuit had harmed their interests.
In July 2023, after Ripple had spent over $100 million in legal fees, the SEC lost. A U.S. District Court found that none of the XRP sales to retail holders on exchanges were unregistered securities. But that outcome did not remedy the billions in damages that retail XRP holders had already suffered. Nor could Ripple somehow recover their attorney’s fees.
The District Court’s ruling did not, however, end the scandal. It was just the beginning.
During the litigation, the SEC had desperately tried to cover-up its internal emails about Hinman’s speech. Nevertheless, the Court forced the SEC to disclose them to a shocked industry. In emails editing a draft of Hinman’s speech, he was cautioned not to say ETH was not a “security” because the SEC might well take a different position in the future. Commentators noted his guidance about ETH was made against the, “. . . express wishes of the SEC Office of General Counsel . . .”
Further, during the litigation, savvy investors in XRP had found and posted documents showing Hinman received millions from law firm, Simpson Thacher & Bartlett (STB), before and after his speech and that STB was promoting ETH as a member of the Enterprise Ethereum Alliance. An appalled commentator stated, “Hinman had a clear financial interest in any regulatory action by the SEC related to cryptocurrencies – while he was serving in a top SEC position!”
Empower Oversight, a government watchdog organization, took up the investor’s cause and sued the SEC to force disclosure of yet more internal SEC emails about Hinman’s conflict. In these emails, the SEC’s ethics counsel warned Hinman he should not meet with STB because it would comprise “criminal financial conflict.” Despite this warning, Hinman met with STB partners, Josh Bonnie and Chris Lin.
Not surprisingly, commentators wondered whether Hinman’s regulatory free pass to ETH was driven by his apparent conflict of interest and whether the harm to ETH’s rival token XRP had been intentional. Empower Oversight went on to provide an evidence referral to the SEC Inspector General on this matter, which recently confirmed its investigation is nearing a completion.
Regardless of the outcome of the SEC Inspector General report, neither Hinman nor the SEC can be sued by anyone harmed by his official actions. Why? Because the FTCA exempts federal bureaucrats and the SEC from being sued for intentional wrongdoing – including serious torts that like fraud, malicious prosecution or abuse of process. Therefore, the IG investigation, such as it is, remains the only way an aggrieved public can demand even limited accountability.
When executives at the tobacco company, Phillip Morris, made allegedly false statements about the harmlessness of tobacco use and covered-up their actual, internal beliefs, it cost them and Phillip Morris billions in damages to the people injured. Why do the SEC and officials like Hinman skate by in what seem to be a somewhat similar situation?
This returns us to our original problem. Federal bureaucrats can make bad decisions with little consequence because they have no skin in the game. One way to resolve this would be to reform the Federal Tort Claims Act to allow liability for intentional wrongdoing by the federal bureaucracy. By holding bureaucrats accountable, we might well rein in the actions of rogue agencies and prevent further erosion of public trust in government.
Frank Francone is a former Policy Fellow at the Centennial Institute and a California attorney admitted to practice before the United States Supreme Court. Disclosure: The author owns small amounts of various cryptocurrencies but does not and has never owned XRP.
