Top crypto exchanges, token issuers named in Friday barrage of U.S. class-action lawsuits

Well-known crypto market players and companies were hit by a barrage of new lawsuits filed Friday in New York federal court. 

Eleven new putative class actions were filed on April 3 by the Roche Freedman law firm in the Southern District of New York. They separately name Binance, Civic, BProtocol, Status, Block.one, KayDex, Quantstamp, BiBox, TRON Foundation, KuCoin, HDR Global Trading (that is, the BitMEX exchange), and many of their principals, including crypto notables such as Brendan Blumer, Dan Larimer, Vinny Lingham, Binance founder Changpeng ("CZ") Zhao, and BitMEX co-founder and CEO Arthur Hayes. 

The astute observer may recall this firm for the work in lawsuits against Craig Wright and the Bitfinex exchange.  These filings were first noted by the website OffShoreAlert, which described this event as the cryptocurrency industry's "own Red Wedding" in reference to the bloody nuptials featured in George R. R. Martin's A Song of Ice and Fire series. 

The plaintiffs include Chase Williams, Alexander Clifford, and Eric Lee. The lawsuits allege violations of U.S. federal and state securities laws against the issuers of digital tokens and against the crypto exchanges that sold them to persons based in the United States.  The claims against individuals are under a "control person" liability theory, which imposes personal liability for corporate securities law claims. This path is usually taken against officers and directors of the company on the assumption that they have control of the entity responsible for the primary violation.

The claims are against dozens of parties, many of whom are outside the United States. Arguments about jurisdiction will surely be hard-fought. Of course, it's hard to summarize 11 detailed complaints but the key issue at play is the nature of these tokens as securities and their availability for purchase to U.S. persons.

Offshore exchanges may well argue that they are not proper parties because they excluded U.S. persons from their platforms. These issues have already been litigated in the crypto context and the issue here will likely turn on the scope and extent of these efforts. Additionally, exchanges may face liability for sale of securities as unlicensed broker-dealers if these tokens are ultimately determined to be securities.

Thus, for example, the KuCoin lawsuit said it is filed on behalf of investors who purchased ten digital tokens that KuCoin sold since September 2017 without registering as broker-dealers or national exchanges, including EOS, SNT, QSP, KNC, TRX, LEND, ELF, CVC and TOMO. 

If the court finds that any of these were in fact securities and were sold without a registration by KuCoin (which was, of course, not registered as a broker-dealer) it may face not only hefty damages but further scrutiny from state and federal securities regulators who will surely be following these cases. Similar allegations are made against Binance that the listing agreements it made with token issuers were all made in violation of Section 5 of the Exchange Act and also without registering as broker-dealers.

Similarly, a lawsuit against the Tron Foundation challenges the notion that TRX is anything like Bitcoin and says that it was issued and controlled by the defendants in an entirely centralized fashion:

"...the creation of TRX tokens thus occurred through a centralized process, in contrast to Bitcoin and Ethereum. This, however, would not have been apparent at issuance to a reasonable investor. Rather, it was only after the passage of time and disclosure of additional information about the issuer’s intent, process of management, and success in allowing decentralization to arise that a reasonable purchaser could know that he or she had acquired a security. Purchasers were thereby misled into believing that TRX was something other than a security, when it was a security."

These lawsuits will be dismissed by the defendants in press releases as ambulance-chasing lawsuit trolling, but it's not quite that black and white upon closer inspection.

A judge in the Southern District of New York has already ruled in a preliminary injunction order that Telegram’s "gram" tokens are likely securities that should have been registered. Without judging the merits of each case, I personally find it hard to believe that it will be too hard to prove that a substantial number of these tokens were, in fact, securities under U.S. law. 

The initial fighting questions will be whether jurisdiction can be asserted over non-U.S. defendants and the applicability of arbitration clauses. Some of the non-U.S. defendants will also need be served outside of the United States via the Hague Convention. In some cases, service-of-process and issuance-of-summons will likely be further delayed by the COVID-19 pandemic and related disruption to the judicial system.

In short, my assessment at the outset is that the merits of these cases are non-trivial.  Time will tell, and it will take some time for them to be resolved, but that will certainly happen. This development, any event, will likely keep a large number of lawyers busy for years to come and could be a harbinger of similar lawsuits to come.

Embedded versions of the complaints can be found below:

Chase vs Bitmex by MichaelPatrickMcSweeney on Scribd

binance 120-cv-02803 by MichaelPatrickMcSweeney on Scribd

Status Research by fleckalecka on Scribd

BiBox by fleckalecka on Scribd

Block.one by fleckalecka on Scribd

Hdr by fleckalecka on Scribd

Status by fleckalecka on Scribd

KayDex by fleckalecka on Scribd

b Protocol by fleckalecka on Scribd

Civic by fleckalecka on Scribd