OneCoin operations harm allegedly 'exceeds $4 billion'

Disclaimer: These summaries are provided for educational purposes only by Nelson Rosario and Stephen Palley. They are not legal advice. These are our opinions only, aren’t authorized by any past, present or future client or employer. Also we might change our minds. We contain multitudes.

As always, Rosario summaries are “NMR” and Palley summaries are “SDP".

[related id=1]Grablis v. OneCoin Ltd. et al., Case №1:19-cv-04074 (S.D. NY, filed May 7, 2019)[NMR]

Some cases have something for everyone. This newly filed class action complaint includes allegations that regular readers of the Crypto Caselaw Minute should be familiar with at this point. Those allegations include four counts of securities fraud, breach of contract, unjust enrichment, fraudulent inducement, fraudulent misrepresentation, negligent misrepresentation, conversion, and civil conspiracy. Looking over those allegations you see the common themes covered in the CCM, fraud, lying, securities violations, and so on. What you don’t see from the allegations listed above, but what allegedly occurred, and makes this case, umm, different from others, is that the OneCoin operation supposedly caused financial harm that “exceeds Four Billion Dollars ($4,000,000,000.00).” That’s a big number.

The plaintiff in this case is Christine Grablis, a resident of Murfreesboro TN, and a one time alleged member of the OneCoin network. Grablis allegedly paid $15,800 to obtain membership in the OneCoin multi-level marketing scheme, and “[a]s of the date of this filing, Plaintiff GRABALIS’ out-of-pocket investment loss at ONECOIN LTD. totals approximately $130,000.00.” Now, $130,000 is not chump change, but it isn’t as large a number as we’ve seen in other lawsuits. So, how do you go from $130k to $4,000,000,000? Well, like anything else, you gotta scale.

OneCoin was founded in 2014 in Sophia, Bulgaria, with operations in Dubai, and Belize. OneCoin “market[ed] a purported digital cryptocurrency called “OneCoin” through a global multi-level marketing (“MLM”) network of OneCoin members.” Members could purchase trader packages, which the plaintiff did, and were incentivized to get new members to join. This was allegedly the basis of a pyramid scheme setup to induce people to join whose membership fees were used to payout old members making it also a Ponzi scheme. The trader packages and other educational materials you could purchase from OneCoin were allegedly copied and pasted from free sources, such as Wikipedia. Additionally, allegedly, “an investor who purchased the educational materials and “tokens” did not directly receive OneCoins; rather, the investor had to submit his/her “tokens” for mining of OneCoins.”

The scale of this case is hard to fathom. Allegedly, “[b]etween the fourth quarter of 2014 and the third quarter of 2016 alone, OneCoin Ltd. generated €3.353 billion in sales revenue and earned “profits” of €2.232 billion.” To further show the vastness of the operation, allegedly, back in December 2016, OneCoin was claiming fairly large adoption with “over 2.7 million users, OneCoin has one of the biggest user bases.” When you are dealing with this people, and this amount of money in any endeavor, legal or otherwise, you need serious institutional help, especially, if the money has to cross borders, and that is what one of the named defendants was arrested for last year.

According to the filing a core of individuals were integral to the alleged fraudulent and criminal scheme. There are four named defendants in this lawsuit that had various leadership roles in OneCoin. Two of those defendants have been arrested by US law enforcement, and one remains at large, whereabouts unknown. Defendant Mark Scott is one of the arrested defendants, and was a partner at the law firm Locke Lorde, which maintains offices around the US, and in Hong Kong and London. Scott was indicted in September of 2018 for attempting to launder $400 million in connection with his alleged role at OneCoin. Allegedly, Scott helped setup hedge funds and other investment vehicles in places like Ireland, the British Virgin Islands, and other locales.

The rest of the complaint covers familiar ground, albeit with much larger numbers at play. Given that there are two co-pending criminal investigations related to this case, and this lawsuit is seeking class certification, this is going to be a very interesting lawsuit to follow. If nothing else, this is the most expensive crypto related lawsuit to date.

The Block is pleased to bring you expert cryptocurrency legal analysis courtesy of Stephen Palley (@stephendpalley) and Nelson M. Rosario (@nelsonmrosario). They summarize three cryptocurrency-related cases on a weekly basis and have given The Block permission to republish their commentary and analysis in full. Part III of this week's analysis, Crypto Caselaw Minute, is above.