Podcasts

A Conversation with Stephen Palley, Partner at Anderson Kill

The following transcript is taken from episode five of The Scoop, The Block’s new podcast. Listen below and subscribe to The Scoop on Apple, Spotify, Google Play, Stitcher, or wherever you listen to podcasts. Email feedback to [email protected]. This transcript has been edited for clarity and length.

In this episode of The Scoop, Frank Chaparro and Ryan Todd interview Stephen Palley, Partner at corporate law firm Anderson Kill. Over the course of a forty-five minute long conversation, Stephen discusses the most current lawsuits in the world of blockchain and cryptocurrencies, including recent developments at Bitfinex and Tether. Stephen also shares his thoughts on projects like Maker and how he sees regulation developing.


Frank Chaparro: Hello everyone. Thanks for tuning in to The Scoop. The Block’s podcast for crypto thrill seekers and decision makers. Again today I’m joined by my colleague Ryan Todd and our guest is our very dear friend The Block’s lawyer, outside counsel and one of the most prolific writers, are we allowed to say that?

Stephen Palley: I think you can say most prolific Frank, if you’re laying it on thick.

Frank: There we go. Writer on all things law in the crypto world, I call him Palley. I don’t know if I should call him Stephen for the podcast. It just sounds so unnatural so I’ll call him Palley throughout but full name Stephen Palley (Pail-ey) at Anderson Kill.

Stephen: And I’d just like to say in case my dad is listening it’s actually Pal-ey.

Frank: Let’s let’s dive in. I know you got a piece coming out on The Block every week or so, you and Nelson put out these really interesting deep dives on the cases that come across your desk and that you find interesting. What are you working on right now?

Stephen: So this morning and as a special thing for listeners of The Scoop we’re going to tell you a little bit about what we’re publishing in today’s crypto case law minute which is number 35 by the way. Which means that Nelson and I have written up more than 100 cases. That’s published opinions and lawsuits since we started in September/October. So anyone who thinks that crypto law is sleepy is completely wrong. We never have trouble finding material. This week I found a really really interesting new opinion in the Ira Kleinman versus Craig Wright lawsuit. It’s not something that’s going to break major ground in the legal world but as a litigator as someone who’s been in probably more than a thousand depositions taking and defending them, it struck my interest. And this has the incredibly interesting name, this opinion as order regarding plaintiff’s request to redepose a defendant. And it was issued yesterday so this is breaking news. Only people who are listening to The Scoop will know about this unless they also read CCN. This new order was just issued in the ongoing and very heated Wright versus Kleiman litigation in federal court in Florida. During a deposition that took place in London last month, Mr. Wright himself objected to some of the questions that were posed to him claiming that there was a court order that had been entered in Australia regarding his wife and also saying that he wasn’t going to answer questions about his family. Now, let me give you a little bit of a lead in…

Frank: Before we dive into that let’s set up what this case is about, right? So we have Craig Wright who is involved with this Australian gentleman Kleiman who is now deceased. And his estate is suing over money he’s owed?

Stephen: Yeah. There’s like about a billion dollars or maybe more in crypto that’s involved. Wright is Australian, Kleiman is American. And his brother Ira Kleiman is filing suit. And one of the issues in this case interestingly is the identity of Satoshi and is Craig Wright actually Satoshi? Which he has one point demured on, later said he was then he wasn’t. Now he says again that he is. So there’s also parallel litigation going on in London right now is my understanding, this case is about who created Bitcoin and who’s entitled to a whole ton of it. And this lawsuit was filed over a year ago and it’s really just starting to get going.

Frank: What’s this update now, let’s let’s dig into the update

Stephen: Basically in order to understand the significance of this opinion you got to understand a little bit about litigation. So I’m going to give everyone a little bit of a civil procedure lesson, I promise it will be more interesting than the civ pro class that I had my first year in law school.

Frank: And this is for free folks. You usually have to shovel out thousands of dollars, this is legal 101 right here, right now.

Stephen: Right here on The Scoop, law on The Block. This will also help you understand law shows on television, to understand how this order in which the court sort of smacked Craig Wright down, why it’s important, you got to understand a little bit about litigation and how it works. And part of litigation is something called discovery and discovery is exactly what it sounds like. It allows the parties in a lawsuit to get information from each other so they can understand claims and defenses and defend themselves and also prosecute their claims. Depositions are a part of the discovery process in American litigation. You also have written requests, things called interrogatories which are written questions which have to provide answers under oath, requests for production, document requests, requests for admission which are requests that you deny or admit certain things. As a sidebar when I was a baby lawyer practicing back in St. Louis I had a picture of basically like a corpse that had its skin flayed off, it was like an ink drawing that my parents had gotten in a flea market in New York in the 1960s. And I had it on my wall, I wrote underneath it and on a yellow stick I gave it a name which was junior associate answering discovery, lawyers who are listening to this litigators will think it’s funny too. But one of the things you get to do in the discovery process is you get to take depositions and depositions are actually kind of fun if you’re taking them because you get to ask sometimes really inappropriate questions but you have pretty broad leeway. You get to ask people about their tax…

Frank: So Wright was basically pissed off about some of the questions that were being asked of him during this deposition.

Stephen: Wright was not happy about some of the questions and I actually have some of the deposition testimony sitting right in front of me.

Frank: Let’s hear it.

Stephen: There is a long section of the deposition where this lawyer for Kleinman for Mr. Kleiman is asking Mr. Wright about his family, about his wife and Wright keeps objecting and the lawyer says… And you can almost hear the frustration coming off the page, sort of frustration but also maybe he’s amused. So we do not have to go through every single question. Are you refusing to answer any questions about Ms. Lynn Black and Wright says I’m not refusing to answer questions, I have an oath that has been filed within a court in Australia and will not break oath and perjure myself or break oath. You’re asking me to break oath… Which I guess is what, like breaking bread? And unless instructed by a judge et cetera et cetera I will not do that. Okay. Lawyer carries on starts asking about his second wife and Wright objects to that line of questions by saying my wife is privileged in the UK, my marriage is privileged. You should know that as a lawyer. Are you seeking to have me breach marital privilege?

Frank: You should be doing an Australian accent.

Stephen: I would but I don’t want to embarrass you and I’d like to be asked back someday. I do a pretty good Brooklyn accent. [In Brooklyn accent] Dr. Wright, it will not be productive for us to have a conversation [end accent] I don’t think the lawyer spoke like that, about whether or not the time of when your wife’s name changed from Ang to Watts is covered by privilege but answer, I do not discuss my family. Full stop. Question: Dr. Wright you understand that you are being sued in this case? Answer: I understand perfectly well that a con man in America has made up a fraudulent claim. Yes. Now I read that and let me give you a little context. I read this testimony and I cringe a little bit because I will tell you that as a professional what you want your witness to do is answer the question. There are really only two grounds to object in a deposition. You can object to the form of the question. And in federal court you can really just say form. That means like you know from television. Objection, leading. Objection, argumentative. You’re actually objecting to the way a question is structured — once you make that objection the witness has to answer. The other is privilege. When something is privilege like attorney client privilege or subject to marital privilege, you can instruct a witness not to answer. The problem with what Mr. Wright…

Frank: That’s not privileged information?

Stephen: So whether or not you were married or what’s your wife’s name is, is not a matter of privilege and also it’s really bad form.

Frank: It’s not the same for me to go to a doctor and say as part of this case I want to know what were the illnesses your clients had. Weird example but something like that that would be priviliged

Stephen: That’s right. The first problem in my mind is it looks bad for a witness to do that. That’s the lawyer’s job and when witnesses try and argue with lawyers I will refer your attention everyone to Jack Nicholson in A Few Good Men. You will lose if the lawyer on the other side has any skill at all, arguing with them is what they want you to do. I don’t actually mind it when witnesses argue with me, I can work with that. What’s a little bit hard to work with is a witness who just answers the question truthfully, like honestly who cares. So anyway I read the question. I read the testimony and cringe. The witness clearly thinks that he is smarter than the lawyer, besting the lawyer but by arguing like an advocate and acting like an advocate I think he’s walking into a trap. If it were my client I would take him outside and say cut it out. Anyway, they go to the judge in the middle of the deposition and apparently they say whether there is marital privilege is a matter of UK and Australia law. And the judge says OK I want you guys to file briefs and then I’ll rule. So yesterday the judge ruled and the judge ruled for the most part against Mr. Wright saying the court finds that the plaintiffs proposed topic areas are reasonably designed to identify Ms Wright and Ms Watt’s knowledge of facts material to the issues in this case. They’re designed to narrow the issues in dispute, they fall squarely within the court’s intended scope for Dr Wright’s deposition. Court further finds that Dr. Wright’s objections were unfounded under Florida law. They did not elicit marital communications and therefore would not have been protected by the Florida marital privilege. The court then said something a little bit strange which is that it’s going to defer ruling on whether or not to reopen Dr. Wright’s deposition until after he responds to the court’s orders regarding his bitcoin holdings which I believe he did yesterday. So here’s the thing, it’s a small order and a small ruling but credibility with a court is like a wall, a wall of bricks and you pull out enough bricks eventually the wall will collapse. So this seems like a small loss to Wright but I think if you start adding things up

Frank: It’s not going to be good for him in the long run. I’m more curious looking at this case from a macro level. The constant examples of Wright saying that he’s going to sue people who come out against him on the Satoshi thing. How can he do that? Like how is that libelous for someone to say, I don’t think you’re this anonymous person. On what grounds can he sue people for that?

Stephen: I can’t speak to UK law which is much more favorable for a plaintiff in a defamation case. In the United States if I were to say I do not believe that you’re Satoshi, that is an expression of opinion. Don’t believe there’s anything defamatory about it. I’m not saying that a case filed a defamation claim in the US would necessarily be deemed frivolous but it would be pretty close. Anyway if he went into court in the United States and sued somebody for saying that he wasn’t Satoshi, I don’t think that that case would survive motion practice. It’s a little bit harder in the U.K…

Frank: At the very least in the UK, at least this is the impression I’m getting from your answer, you could get it far enough that it would be an annoyance for whomever is on the other side of it. No one’s gonna get in trouble though for saying that he’s not Satoshi. You know it would be like someone trying to sue me if I said they weren’t Santa Claus or something, it doesn’t make any sense to me.

Stephen: So truth is always gonna be a defense. But the problem is in part, I would say how people may have gone about it. It’s one thing to say I do not believe you are Satoshi it’s maybe another thing to say, I can curse on a podcast right? Maybe I shouldn’t it’s a family podcast.

Frank: My kids are listening… I don’ have any kids

Stephen: I’ll keep it clean because my wife will also yell at me if I use foul language. It’s another thing entirely to say you’re a scammer and a crook and a criminal and to use words of that nature. Even actually in the United States,if you call someone a fraud by the way I should say none of this is legal advice. If you’re listening to this unless you’re my client I’m not your lawyer. In the US if you call someone a fraud, there’s case law that says that unless you imply that you have secret knowledge about someone’s fraudulent information it’s basically rhetorical hyperbole. It’s an expression of opinion. My understanding from speaking to UK lawyers is it’s different there. But the problem with litigation is it’s expensive and judging from the docket in the Kleiman case these folks are not being shy about filing things so they are filing every motion they can file. It’s expensive. I don’t think that they mind the notion of having to have another deposition even if it involves flying a bunch of lawyers to England. Clearly there is money behind it and that’s the flip side of suing people for saying he’s not Satoshi is also that’s even if you’re right and when someone sues you it’s expensive and people bank on that and it’s not necessarily fair but that’s the nature of the game and it appears that Wright has the means either his own or someone else’s to vigorously prosecute his claims and to defend claims.

Frank: Let’s unpack for a second the Bitfinex case because that’s another headline, hot topic, tons of confusion like even basic things like, is this a lawsuit? What jurisdiction does the New York Attorney General’s Office have over issuing something like this over Bitfinex which is based overseas? What’s going to happen next? There’s a lot of different agencies even looking at this thing like apparently the CFTC has its own investigation and the DOJ and there’s also the the Southern District of New York is looking at Reginald Fowler and that whole aspect with Crypto Capital. There’s so much to unpack here especially from the legal perspective and at the end of the day I would contend, I’m sure you would do that this is a major legal story not just a crypto story.

Stephen: It’s like those Russian dolls, it’s a matter of public record. I’m going to disclose it again because if I don’t somebody is gonna go on Twitter and say Palley’s biased. I do represent Bitfinex who is a well-known and by some reviled blogger who has been talking about Bitfinex and Tether for some time. If anybody thinks that means I’m biased you can please feel free to skip ahead of this next section. So they are not involved as a party in the current proceedings in New York state and are not involved to the party obviously in any of the criminal proceedings. But anyway with that disclaimer in place I mean I can certainly talk a little bit about the process and procedure. One of the questions that I’ve been asked is what’s actually going on in court in New York, is there a lawsuit? It’s an interesting proceeding available under New York law basically the attorney general under something called the Martin Act has very broad power to oversee, investigate, sue, prosecute people for fraud in the sale of securities or commodities. It’s one of the broadest laws of its kind in the United States — it’s been around I believe since the late 1920s it predates the Securities Act and the Exchange Act. There is an interesting procedure in it though, if the attorney general believes that they have cause to sue somebody for relief under the Martin Act they are entitled to investigate them first and in the course of that investigation can actually go to court and seek an order from a judge ordering that certain information be provided.

Frank: OK. OK. So this lawsuit is more so a way for them to get a court to give them a stamp of approval, a green light to get more information out of the company for an ongoing investigation.

Stephen: Something like that yes. It’s basically a way to sort of freeze the status quo. And one of the questions that people asked too is well they’ve asked for you know they’ve got an ex parte temporary restraining order, ex parte TRO, Temporary Restraining Order. What is that? Ex parte means that it was done without notice to the other side, in the private litigation context where one private litigant is suing another, it’s very unusual to get an ex parte TRO. There are due process concerns and considerations, the reasons why you’re sometimes able to get that and I get it easier if you’re a regulator is there is a concern that and I’m not saying this is or is not true in this case but there may be a concern that the other side will destroy documents, hide things. So what they did here was the A.G. went to a judge in New York, got an ex parte, temporary restraining order and what Bitfinex slash Tether did when they found out about it was they went to court and they filed pleadings saying judge this is outrageous and it should be modified or vacated — the A.G. said no, totally not. And they had a hearing, I was not present at the hearing, I did read about it.

Frank: They basically wanted to pump the brakes on everything and say that you can’t move forward with freezing what we’re doing. And you don’t have the authority to do so.

Ryan Todd: To just freeze the credit line.

Stephen: Well and also part of the order was ordering the other side to produce certain documents. The statute also gives the attorney general the authority to take depositions. We were just talking about depositions a few minutes ago so I feel like having given that civil procedure lesson, I’ve actually laid some groundwork for talking about this as well. I would tell people that on the one hand this is true in both state and federal and regulatory investigations — a court is going to give a regulator a lot of leeway. The language of the statute at issue here actually gives the court a lot of leeway, a lot of discretion, a lot of ability to get stuff. There is public policy interest at stake here. This is not a class action lawyer trying to get a lot of money. This is a regulator who’s presumed to be acting in the public interest. On the other hand regulators just like private litigants sometimes overreach.

Frank: And if it’s not money it’s fame or attention or …

Stephen: That’s kind of what the other side said. The judge said both sides seem reasonable, see if you can work out something that maybe limits the scope. Now I read a headline somewhere that said judge critical of the attorney general’s actions. I don’t really think that that’s a fair take. If you’ve been involved in any sort of litigation whether as a private litigant or as a lawyer who handles cases you know that people go to judges all the time and say judge they asked for too much the other side says no we didn’t ask for too much.

Frank: Well you even said before we sort of hopped on the podcast that while, just to preface, I think when people look at this case and they think about everything that Bitfinex has done, 74 percent is backed when they marketed it to clients and their investors as it being fully backed and co-mingling funds to cover up the loss from Crypto Capital. You would think you would see all that, all this stuff that’s operationally murky and crazy from most people’s perspective especially if you’re coming from traditional finance and think well maybe that ridiculousness translates into their legal team but your impression is that they’ve actually done a pretty good job representing and defending themselves.

Stephen: Bitfinex and Tether have good lawyers. I read their briefs, they made good arguments but whether or not they’re going to win is another subject…

Frank: What’s their argument, what’s their side? Part of it is that the A.G. doesn’t have the authority to sort of carry on…

Ryan: It’s a jurisdiction issue

Stephen: I’m not necessarily wild about that argument though I might have made it too, I probably would have. And also we have enough money. And if we don’t get money then it’ll be bad for consumers and banks use fractional reserve all the time. The problem is that they’re not a bank but setting that aside they did do a pretty good job briefing those issues. What’s interesting to me is the judge. One of the things particular people who are in the software business, you know many people in crypto have a software background don’t understand is there’s an old saying among lawyers, it’s good to know the law, it’s good to know the facts — it’s better to know the judge. Now I don’t know the judge personally and I don’t know that either side does but I did look the judge up. This judge has been on the bench for a year, practiced as a commercial litigator for 30 years at a White Shoe New York firm and is going to understand commercial litigation, a year or two ago could have been somebody who was involved in a case like this. My prediction is that the judge will probably reach the right conclusion that the order that was initially entered is probably going to be narrowed. I don’t think this will go away and my guess, incidentally if I had any inside information here I wouldn’t share it — I happen not to. My expectation is that the A.G. will continue and even if the order were vacated in its entirety that would not prevent the A.G. from moving forward with a full on Martin Act lawsuit. We see sometimes regulars incidentally as an aside there was a big splash in the West Coast, the S.E.C. sued a company, I think was Blockfast and initially their requests for a TRO or an injunction was denied and people made a big deal about it and then actually three months later the judge came back on another motion and actually granted it. These things are like, each hearing, each brief — it’s like a little battle. It’s a mistake to read too much into these things, you have to look at the whole field of play.

Ryan: What are your thoughts on Cohen’s decision to define a temporal scope?

Frank: What does that mean for regular people like me?

Ryan: So the injunction I guess was undefined…

Frank: What does injunction mean?

Stephen: An injunction is an order by a court to do or not do something.

Frank: OK so go ahead.

Ryan: So my understanding is that the injunction didn’t have a defined timeline of how long not to do something rules in place [laughs] What are your thoughts on that?

Stephen: It kind of makes sense. An injunction without any time limit, particularly in the context of, it’s not quite a discovery dispute but it’s an enforcement action, it’s sort of a pre lawsuit enforcement action related to discovery, setting the status quo. Maybe it does make some sense to provide a temporal scope. You can say this is gonna be for a month, three months, six months and then later come back and make it permanent but at this stage having an ex parte temporary restraining order that has absolutely no time limit; I can understand how a judge might say Well I’m sympathetic to the A.G. and they get a lot of deference. We do need to put some limitations into it and we can always revisit that. That doesn’t seem unreasonable to me.

Frank: Let’s pivot now to, I think I think we covered everything on the Bitfinex front unless there’s any any rocks left unturned… Stones? What’s the expression? I’m really bad at metaphors.

Stephen: It’s good we can move on. I’m gonna pivot. I just turned around in my chair for the folks playing along at home.

Frank: Now he’s put on a wig. We’re gonna call him Pail-lena for the rest of the interview [laughs]

Stephen: By the way so I think your podcast name should be Frankie Chaps, is that kind of a dad joke?

Frank: Frankie Chaps, like ass-less chaps?

Stephen: Oh God.

Frank: We’ll cut that out [laughs] I think on one podcast I spoke about my uncle Nino doing illegal things on the podcast and I was like I don’t think…

Stephen: I’m sure he loves you now.

Frank: Oh my God. Right.

Stephen: You were talking about wire fraud?

Frank: Something like that. Well that’s a great transition to what I wanted to move on to which was this academic paper that I don’t even know how Ryan found it, I think he just Googles my name every morning when he wakes up but this insider trading — Ryan explain it because you’re the one that found it but it’s basically about me in an article I wrote while I was at Business Insider that insinuates that I could have taken a 74 million dollar short position after or before reporting that Goldman was re prioritizing its crypto strategy.

Stephen: So you’re buying lunch today. I have very expensive tastes, I’m just letting you know.

Frank: Talk about this thing. What’s this all about Ryan?

Ryan: I came across this draft law paper written by Andrew Verstein (sorry if I’m not pronouncing the name right). I’m sure he would. The paper’s titled crypto assets and insider trading law’s domain and it’s trying to walk through a framework to evaluate whether traditional insider trading law should apply to crypto assets like bitcoin or or even utility tokens, what have you. And it lays out a framework that I guess makes a case that insider trading laws should apply.

Frank: But they don’t because…

Ryan: It’s different across jurisdictions and there’s a lot of stuff that’s up in the air, I don’t know if Palley, you can walk us through that.

Frank: Yea but how is this stuff connected back to me? What does this have to do with me?

Stephen: You’re going away to the big house. For the folks who are listening at home, where can they find this article?

Ryan: We can attach it in the notes.

Frank: Yeah we can.

Stephen: You should. I’d like to read it in full too. I just took a quick skim of it before we went on.

Ryan: So this paper highlights examples of potential insider trading. Let’s say front running an exchange listing of a coin. A classic example is the Coinbase, Bitcoin Cash debacle which I guess they did an investigation and came back negative. But another example they gave is media coverage specifically journalists that either trade in their own PA or tip others off prior to writing a market moving piece. And the example this author provides is a Business Insider journalist, unnamed, who wrote about Goldman Sachs abandoning the crypto currency desk.

Frank: Which isn’t what the story said.

Ryan: And that story was written by you Frank [laughs]

Frank: It raises really interesting questions about insider trading rules as they apply to crypto. Because my understanding is that if Bitcoin is a commodity which it’s basically understood to be under CFTC in the US. Insider trading laws don’t, not that they don’t exist in commodities but there’s only been I think one or two lawsuits, it’s very hard to bring an insider trading case to court in the United States with commodities. At least it’s my understanding because insider trading is sort of part of how commodity markets work, right? Like if I’m a grain farmer and I know that a disease has gotten to my crops and half my supply is going to be wiped out. I can hedge that by buying futures in the futures market, making a bet on the other side that the price of those grains will go up because there’ll be less of them. So it’s almost like, at least my understanding is that the idea of insider trading is baked into commodities. That being said the question at hand is, does that make sense to have that same type of framework apply for bitcoin? … I probably said like a thousand wrong things.

Stephen: No no no it’s okay. Generally and I’m not saying you did by the way [laughs] so securities fraud sort of broadly speaking you are not allowed to engage in deceit misrepresentation or other fraud in the sale of securities and those terms have been defined by case law by regs and the CFTC has also taken the position that you can’t lie cheat or steal in connection with spot market trading of commodities. There’s some question about, there are some courts that have disagreed with that position but certainly with respect to futures…

Frank: There’s something about breach of duty, right?

Stephen: There’s a question of whether or not you possess something that is material and non-public and whether you have an obligation to withhold that information or refrain from trading on it. There’s also another statute that’s at issue, that isn’t really SEC or CFTC. I was actually on a panel about 10 months ago at an ABA Conference on legal ethics and cryptocurrency and on the panel was another lawyer, there was a fellow from the S.E.C. and we also had a legal ethics professor. One of the questions I had was as a lawyer, what sort of prohibitions are there both in terms of the ethics rules and otherwise on a lawyer trading on information that they have about a crypto asset? The ethics professor pointed out 18 USC Section 13 43 which is the federal wire fraud statute which is really broad. Now I personally of course would never trade on information about markets that I got from a client but I hold a very small immaterial amount of bitcoin, probably worth less than 100 bucks and I’ve forgotten what the private keys are in part because I do sometimes know things that there would at least be an appearance of impropriety if I knew these things and I engaged in any sort of trading. So the worry that I would have about trading on inside information where you have an obligation not to or not just the S.E.C. the CFTC… Oh by the way there is the FTC and they’re also the state regulators. I also worry broadly about the federal wire fraud statute because it’s really really broad. Shall I read from it or would that be too boring? Might be kind of boring to read from it.

Frank: Just give us the cliff notes. What’s the main theme?

Stephen: Whoever having devised or intending devise any scheme or artifice to defraud or for obtaining money or property by means of false or fraudulent pretenses, representations or promises transmits or causes to be transmitted by means of wire radio or television communication, by the way kids that includes the inner webs yada yada yada, you broke the law and we’re going to send you to prison for a long time and find you, I believe it says 20 years imprisonment. So like that wire fraud statute is really broad

Frank: So it kind of captures the insider trading…

Stephen: Sure, it doesn’t even have to be insider trading necessarily but if you do something for your own benefit to move a market that falls within something that seems fraudulent you might get in trouble.

Ryan: Do you share the opinion that, it was discussed in this paper but even though Bitcoin doesn’t have say periodic information events like you see in equities. With new information that is held by senior management or people that are privileged with that information, regardless of that there’s still opportunities for fraud in insider trading.

Stephen: Well let me give you an example. I’m gonna give you a hypothetical — I’m going to use Marmot coin again which is my favorite coin. Let’s say because I’m friends with Preston Byrne. I know that PETA is going to be launching an investigation in coordination with federal Animal Cruelty advocates against Marmot coin and Marmot coin is listed, I believe coin based just listed them. If I knew about that and it was told to me in confidence let’s say that I’m obviously, let’s say like Preston was indisposed and I’m Marmot coins general counsel and I have large Marmot coin holdings and I find this out and I have reason to believe that’s going to move a market, if I dumped my holdings before the news goes public and the Marmot coin regulators find out, I think I might be in a shit ton of trouble.

Ryan: Even if it’s a quote unquote utility token.

Stephen: Every time you say utility token I’m going to throw something at you. It’s actually featured, the word utility token is in another lawsuit that we covered in CCN this week. Every single week there is a utility token lawsuit. But anyway, I think part of the problem is the wire fraud statute. There are also ethical issues with a lawyer trading on information that their client gives them not intending for them… Like, clients don’t give us information so that we’ll trade on it. They give us information so that we’ll advise on it so as a fiduciary I may have different obligations then someone else but that’s maybe the problem. Using private stuff, maybe it’s not quote unquote insider trading but it’s stuff I’m not really supposed to use, I’m only supposed to use for purpose X and I use it for purpose Y in a way that is deceitful. Makes sense?

Frank: And something that can be profitable. There was this really interesting Bloomberg article from April 22nd, not about crypto but it’s about how some of these hackers get press releases on earnings calls before they’re put out and then they basically trade on this information.

Ryan: Matt Levine talks about this, hackers that will go short something and then purposely hack a company to drive share price down. Is that considered insider trading?

Frank: Here’s the background on it, from 2010 to 2015, this is directly quoting the article: criminals breach newswire services to access earnings announcements before they are published. They use brokerage accounts to trade off the information taking long and short positions using options and other derivatives hours before it was release. And they also sold the data to other individuals on the black market. All in all booking profits of more than 100 million dollars. That’s fucking crazy.

Stephen: Yeah. So there’s the Computer Fraud Abuse Act which that would be in violation of. It sounds like it might be a violation of the of the Securities Act. Part of the problem is like you broke in to steal shit and then you traded on it. Yeah. So I think you got like 2 federal statutes broken for price of one

Frank: What haven’t we covered?

Ryan: I want to talk about something interesting. We talk about it a lot at The Block but Maker DAO. And I know this is something that’s dear to your heart.

Stephen: Never understood it, first time I saw it three years ago.

Ryan: I think the interesting question that I’ve heard you talk about with various people is like what would the court of law classify it as if say someone filed a suit against the Maker DAO?

Stephen: Well it could be like those weekly governance calls? What are those? Who are those people? It sounds kind of like, I said this on the Twitter before, it’s really hard to sue a protocol. If you suddenly start to have governance calls and those governance calls have an impact on an asset and have an impact on interest rates it starts to look like maybe you’re a general partnership, an association and then maybe you’ve got joint several liability. As soon as people start working together for some sort of common interest for common business purpose — a court is going to probably look at that as some sort of default entity. Now if I were a plaintiff’s lawyer suing them, I’m not saying I’m going to, in fact I’m not I don’t have any plans to do that at the moment. So I think if you’re a plaintiff’s attorney and let’s say you represent someone who loses a lot of money…

Ryan: Well let’s say you have a borrower that for whatever reason thought rates weren’t going to rise.

Stephen: I would probably allege some sort of John Doe defendants on a personal basis. Probably allege that there is an association of general partnership, there’s a foundation to, there’s an actual Maker DAO foundation…

Frank: And that they’re in the process of spinning off a profit making entity associated with…

Stephen: They’re really a nonprofit? That’s kind of…

Frank: I don’t know if they’re registered.

Ryan: The schism was between people that wanted to be fully decentralized…

Stephen: Well look, what I come back to I know it sounds like I’m being lighthearted but it’s really true, if you want to be protected from liability by a protocol, pure protocol that can’t be changed by people — that has some downsides like sometimes you want to change things like a protocol that can’t be changed by people that once you put it in place it runs, it’s very hard to sue that. As soon as you start adding human discretion that’s when you need governance and that’s when you start looking at plaintiffs lawyers saying sounds like a loan, maybe Truth and Lending applies, the Truth and Lending Act applies — there was just an article about that. Was it your article?

Frank: Yes I’m actually speaking with their general counsel.

Stephen: My view as a sort of conservative lawyer notwithstanding my wonderful accents and podcast presence, I would just upfront the risks if I were putting together. But if you want to avoid the risks entirely — decentralized protocol but actually a protocol, as soon as you start having the ability to make discretionary changes you’re exposed and if you’re exposed, just deal with that or Google joint several liability and see if you can live with it. Weekly governance calls where people are identified in the notes. It’s insane. And so a lot of them are right here in New York right? Right here in the United States. I’m not wishing any lawsuits on anyone in fact the opposite but I think people who do that thinking but crypto are in for some cold water in their face unfortunately.

Frank: And it’s not just to pick on Maker it’s a question that hangs over the entire so-called decentralized finance space where from my perspective I see things like we’re going to tokenize the S&P 500 or we are going to offer a synthetic way to track different stocks. And there is a whole slew of legal issues that they’re just ignoring because it’s crypto or at least they’re like yea we’ll figure it out later — like tokenizing the S&P 500, the S&P 500 index is trademarked. You can’t just tell people that this is what you’re offering, the same product that exists somewhere else.

Stephen: So young such a state of shill [laughs].

Frank: The point I’m making is that these people are trying to be bold brazen and sometimes that involves doing things where we have situations like Uber, right? It’s an incredible product for some people and to get to where they got today they had to dance around many different laws.

Stephen: So maybe they’re being bold. Maybe they’re being I don’t know what but a lot of the changing the world business is just fancy talk all around making a lot of money. I got no problem with people doing that but sometimes I look at it and it’s you know where there is smoke there’s either fire or a steaming pile of bullshit. It’s mostly people going after money, which is OK but like why don’t you just admit it and stop pretending like it’s anything other than meet the new boss, same as the old boss. That’s what I find occasionally really frustrating.

Frank: That’s a very pessimistic view.

Stephen: No it’s not it’s just realistic. I think bitcoin is incredibly cool and I’m still bullish on its future. And listen if you look at any startup market 95 percent of startups fail, crypto shouldn’t be any different and the fact that a lot of people will fail isn’t a knock on the technology, it’s a reflection of reality.

Frank: Well we got to wrap this up Stephen so… No but seriously something that’s been on my mind I think it’d be a good way to sort of close things out because it’s going to involve you doing some prognosticating but I remember a year ago speaking to the CEO or no he was president at the time […] at CBOE, The Exchange. And his prediction for the end of 2018 was that we would see the rise of class action lawsuits against some of these ICOs and we really haven’t seen any. I was expecting funds to sort of sprout out around these suits and … At first glance it looks like a lot of these folks are going to get away with operating securities.

Stephen: Statutes of limitations are long, I see new lawsuits being filed every day. Just the other case that we filed today involves people who put two and a half million dollars into a SAFT for some sort of decentralized exchange where it looks like they allegedly raised 33 million dollars and didn’t provide anything. And then claimed it was a utility token and they provided a utility that was nothing. My good friend David Silver just filed a class action from New York earlier this week related to the One Coin.

Ryan: That’s a pretty crazy case.

Stephen: One of the optical issues of course is class action lawyers work on spec, they take a third or 25 percent and class actions take a long time, they can take a couple of years, three four five.

Ryan: What’s spec?

Stephen: They work on contingency so if there’s no recovery they don’t get paid. You’ve got to have a good case and you’ve got to be able to see that you’re going to collect the money. So if you don’t have a plaintiff…

Frank: You can end up working three years and…

Stephen: And not getting bupkis. And bupkis is a nice word but it doesn’t actually buy bialys, right? I think part of the issue is economic, financial. You need people who have got expertise, who can find the right plaintiff, see the right recovery like the […] class action is a really interesting case in point. It appears that so far, I think people have actually made money who bought into the ICO, so that there’s like a standing damages issue there for a class action lawyer. On the one hand you have some successful token sales where it might be hard to find a plaintiff, you’ve got people outside the United States, recovery’s uncertain. On the other hand you might have ICOs where all the money is gone and if all the money is gone regulators might come after folks and I would expect, I actually expect to see a ton of regulatory enforcement action later this year and going into next year.

Ryan: That’s just because they’ve just been working on it?

Stephen: They’ve been working on it, the SEC and they’ve done this before, what they’ll do is they’ll get a formula together and they’ll just start filing. They have a formula for the investigation, they do the investigation. If people are willing to play ball there’ll be a consent order issue that will have some sort of basic remedy that the other side agrees to. If not, they can either file before an administrative law judge or go to a federal judge, an Article Three judge. That stuff is just going to take a little bit more time to work its way out. But what people don’t understand who haven’t been exposed to litigation regulators is it takes time, you’ll actually see enforcement actions where there was a recent fence in enforcement action. The underlying facts that were at issue, 2015 2016 three four years ago so give it time. I don’t know how much successful plaintiffs class action work there will be, there might be more private one on one litigation but I think we’re going to see a ton more of it and I think the regulatory enforcement stuff is going to… I think we’re going to see a ton of it in the next year. That’s my take. That’s Palley’s prediction from law on The Block.

Frank: Love it. And what a great way to end. Oh my goodness what a fun episode. Thanks everyone for tuning in. Catch you next time.

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