Crypto Lawyers Believe In Class Actions As A Market Slide (1) – Bloomberg Law | Jewelry Dukan

As the Biden administration ramps up its scrutiny of the cryptocurrency industry, a handful of small litigants are piling up class action lawsuits against crypto exchanges and digital token issuers, pursuing theories that could affect the application of decades-old laws to the burgeoning field.

Led by partners from boutique firms, according to a. Filed 58 securities class-action lawsuits against crypto companies since 2016 report by the consulting firm Cornerstone Research and Stanford Law School.

More than a third landed in the last two years, and the pace accelerated in the first six months of 2022, when the industry does market capitalization fell $2 trillion before stabilizing.

Many of the complaints — aimed at companies like Coinbase and Binance, two of the world’s largest crypto exchanges — allege that the trading platforms, coin issuers, and other firms are shirking disclosure requirements mandated by federal securities laws and that they are on the alert for investors should’ losses.

“There was a crash and a lot of the excesses and abuses came out,” said John Jasnoch, a partner at Scott & Scott, which is hearing seven proposed crypto class-action lawsuits.

It is still unclear whether the lawsuit will violate a broad legal basis. Most of a series of crypto class-action lawsuits filed by two firms in April 2020 ultimately fizzled due to statutes of limitations and jurisdictional issues.

“In a way, the space has a ‘more money, more problems’ thing where it’s mature enough to attract the attention of class action attorneys, whether that attention is warranted or not,” said Jason Gottlieb, a Morrison Cohen Attorney who maintains a crypto litigation tracker and whose firm represents defendants in two class action lawsuits.

“It’s very easy to copy and paste a complaint from one company to another,” he said.

Lawsuits that have weathered challenges so far include one by Roche Freedman against crypto exchange Bitfinex and subsidiary Tether, the company behind the Tether stablecoin. The lawsuit accuses the companies of defrauding investors and causing billions of dollars in losses.

In another case, in early September, a California judge provisionally denied blockchain platform Dfinity’s motion to dismiss a proposed securities class action lawsuit filed by Scott & Scott.

Meanwhile, a New York federal judge is considering whether to give the green light to a lawsuit brought by Selendy Gay Elsberg and Silver Golub. The lawsuit alleges that Coinbase facilitated the transactions of 79 digital tokens it claims are unregistered securities.

If the lawsuit is successful, Coinbase could potentially face billions of dollars in damages. It would also undermine the company’s stance that no asset traded on its platform is a security or an “investment contract” where one person can expect profits to come from the efforts of others.

In a motion to dismiss the lawsuit, Skadden’s attorneys representing Coinbase called the lawsuit Selendy’s recent attempt to “manufacture” securities laws.

But James Cox, a Duke University law professor who reviewed the complaint for Bloomberg Law, said the main allegation — that Coinbase failed to register as a broker-dealer or securities exchange — “has some really strong points.”

“The fact that there were dozens of different coins wouldn’t prevent the grade from being certified,” Cox said.

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“Cop on the Beat”

The surge in private litigation comes from SEC Chairman Gary Gensler accept The agency will be a “cop on the beat” and protect investors in the digital asset space.

The agency filed 20 enforcement actions against crypto companies in 2021 — Gensler was confirmed in April this year — 80% over alleged sales of unregistered securities, Cornerstone found.

The SEC then made waves in July by launching an insider trading lawsuit against a former Coinbase employee, in which it identified several tokens traded on the platform as securities.

Last week, in a series of reports, the Biden administration called on federal regulators to redouble their investigations into illegal practices in the industry. The aggressive push should give class action lawyers more ammunition, company lawyers say.

However, most litigants are still waiting for courts to resolve fundamental issues such as whether certain cryptocurrencies are similar to traditional stocks and bonds and should meet securities disclosure requirements.

If Congress doesn’t pass new legislation — a bipartisan regulatory bill is currently making its way through the Senate — the decisions could weigh heavily not only on the industry, but also on how both the SEC and plaintiffs in the years to come take action on this matter.

Gensler said his agency has authority over “crypto security tokens” and has repeatedly urged companies to comply with securities laws, claiming that most tokens are securities.

Industry advocates have argued that space needs a clearer regulatory framework. Exchanges like Coinbase have repeatedly declined to offer securities on their platforms.

The law firms acquiring these companies are not among the plaintiffs’ familiar stores, which often constitute a proposed class in a traditional securities lawsuit, in part because of so few institutional investors in crypto, said Kayvan Sadeghi, a Jenner & Block company’s defense attorney.

This has left the door open for emerging firms to take senior positions in some of the largest cases.

Other small deals are making a big splash outside of securities.

Gerstein Harrow, a two-person civil rights law firm founded in Los Angeles in 2021, has established a crypto consumer protection practice. The firm has filed two lawsuits targeting decentralized finance operators, or organizations that exclude banks and other third parties from financial transactions.

The lawsuits target crypto company PoolTogether for allegedly operating an illegal lottery and decentralized finance platform bZx for alleged neglect that caused a $55 million theft on its platform. (Both have disputed the claims and moved to have them dismissed.)

“We took the time to study the technology and concluded that [decentralized autonomous organizations] have operated in an area that they believe is free from American government regulations,” said founding partner Charlie Gerstein. “Many of them harm consumers. Second, we found that a great deal of money was changing hands. That was an obvious financial opportunity.”

Lesser known players

Firms like Selendy say they act as a “complementary” force to the SEC’s auditors and other regulators, which employ broader scrutiny.

The firm was founded by Quinn Emanuel in 2018 by 10 expats and splits their time between plaintiff and defense matters.

Philippe Selendy and Jordan Goldstein, both involved in the company’s crypto work, helped the Federal Housing Finance Agency win more than $25 billion in payouts from Wall Street banks following the mortgage-backed security crisis over a dozen years ago.

Goldstein said he sees parallels between this work and his new focus on suspected crypto scams.

“We saw an opportunity to create a litigation boutique focused on cutting-edge matters that not only benefit our clients, but also promote the public interest where possible,” he said. “The crypto market seemed to offer an opportunity to benefit investors through the legal system.”

Roche Freedman, founded in 2019 by lawyers from well-known law firm Boies Schiller, has been the most active firm in the crypto class action space, filing more than a dozen lawsuits and serving as lead counsel in many of them.

Part of that work has come under close observation amid allegations – fueled by the leak of secret records in August – that founding partner Kyle Roche worked with crypto startup Ava Labs to attack competitors through litigation. Roche denied the allegation, but has since withdrawn from the firm’s class action lawsuit practice and has withdrawn from various cases, according to court filings.

The firm, meanwhile, is struggling to remain the lead counsel in its lawsuit against Bitfinex and Tether.

Recent years have shown that the industry is also investing in legal means to combat these measures, suggesting that many cases, both public and private, face a long road to resolution.

Crypto firm Ripple Labs has aggressively defended itself against the SEC in response to a 2020 enforcement lawsuit that claimed its XRP token was an unregistered digital asset. The case is one of the most important ongoing matters that could help define the broader crypto litigation and regulatory landscape.

Despite some of the recent turmoil, Wall Street has shown greater interest in crypto this year, creating the double screen of increasing litigation involving an industry still aggressively pushing to become more mainstream. And while the downturn appeared to be flattening out over the summer, still-heavy losses from the peak are causing crypto-class action space figures to become crowded.

There wasn’t much interest in crypto from plaintiff firms “as long as the market kept going up,” said Carol Goforth, a law professor at Arkansas University. “Now plaintiffs are coming out of the woods and theories out of the market.”

(Updated to include comments from Gerstein Harrow Partner Charlie Gerstein.)

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