Some of the law firms that ferret out possible securities claims in search of fees and recovery for investors’ harm are increasingly being coldly received by federal courts. That is very good news for the crypto industry and investors who hold tokens in legitimate blockchain companies, thinks Marc Powers, an adjunct professor at Florida International University College of Law, with a 40-year legal career, working with the SEC and with complex securities-related cases in the U.S.
Shortly following two defeats the federal courts in the Southern District of New York, the plaintiffs voluntarily agreed to dismiss five of the other actions.
So far, the only recovery obtained by the plaintiffs is a settlement, in one of the 11 lawsuits, against EOSIO developer Block.one, likely because it had previously settled with the SEC, which accused it of similar claims, and had $4 billion in the bank from its initial coin offering (ICO).
Motions to dismiss in lawsuits against Binance and Tron are pending. For Tron, at least, the plaintiffs will undoubtedly suffer the same fate as the other lawsuits and be properly dismissed by the judge assigned to that case. In the only other remaining action, against KuCoin, there was never an appearance by the exchange or its principals.
In the class action against the Bibox exchange, it was alleged that Bibox operated an exchange that traded five coins that were “securities” and its own native token, Bibox Token (BIX) — all without registration. Cote, in a detailed 33-page analysis of the BIX token and the five other tokens, found them dissimilar in characteristics. Moreover, she noted that the lead plaintiff for the case had only purchased BIX, not any of the other tokens, and he had done so on Bibox more than six months after the ICO concluded. Accordingly, the court held in its opinion, filed April 16, 2021, that the plaintiff lacked standing to represent the class of purchasers of tokens he did not also purchase. Cote also held that the one-year statute of limitations (SOL) barred the BIX token and other claims in the Second Amended Complaint.
Hellerstein took a different approach in the Bancor case. While not as detailed and analytical in his six-page opinion, dated February 22, 2021, the court noted the plaintiff alleged to have purchased 587 BNT for a total cost of $212.50 and, as of some unspecified date, had not sold those coins. Given that there were no specific allegations showing damages, the motion to dismiss for lack of standing was granted. The court also noted the defendants were based in Israel and certain promotional activities for the token — such as on websites and personal appearances worldwide in New York, Singapore, and Berlin — were insufficient for personal jurisdiction over the defendants. And to leave no doubt on his position, in summary, fashion he held that the Section 12 claim lacked privity, that under the teachings of the Supreme Court decision in Morrison v. National Australia Bank Ltd. (2010), the claims involving the purchase and sale of “securities” outside the United States on foreign exchanges involving foreign defendants should not be heard in the SDNY and that the one-year SOL requires dismissal.
Earlier, before April 2019, the SEC had brought over a half dozen lawsuits against companies and/or their principals involved in ICOs for violations of the Securities Act of 1933 for violations of Section 5, which makes it unlawful to cause a nonexempt offer and sale of securities without filing a registration statement with the SEC. This is after The DAO report by the SEC in July 2017 and numerous public speeches by SEC commissioners and officials throughout 2017 and 2018 where it was stated that ICOs were likely the offering of “securities.”
Other important defenses were whether the plaintiffs had “standing” to bring these claims. In addition, it was highlighted possible jurisdictional defenses for many of the foreign defendants that never stepped foot in the United States.
Another item of note arising from these cases is that the time for lawsuits against the thousands of companies that were involved in ICOs is closing, or has already closed, because of the SOL. Even federal claims of securities fraud are subject to a two-year SOL. Given that most ICOs had ended by 2018, those companies are safe from class actions.
At this point, the only viable remaining lawsuits, apart from those based exclusively upon state law causes of action, are U.S. federal securities claims commenced by the SEC or Department of Justice. But even those have, effectively, a five-year SOL from the last purported wrongful activities of the defendants, as there is no scienter requirement for a violation to occur. This is the teaching of the Supreme Court decision in Kokesh v. SEC (2017).
Thus, after 2022, the fear of ICO enforcement and liability will be in the rear-view mirror for the blockchain industry.
Marc Powers is currently an adjunct professor at Florida International University College of Law, where he is teaching “Blockchain, Crypto and Regulatory Considerations” and “Fintech Law.” He recently retired from practicing at an Am Law 100 law firm, where he built both its national securities litigation and regulatory enforcement practice team and its hedge fund industry practice. Marc started his legal career in the SEC’s Enforcement Division. During his 40 years in law, he was involved in representations including the Bernie Madoff Ponzi scheme, a recent presidential pardon, and the Martha Stewart insider trading trial. Powers also writes a monthly opinion column for Cointelegraph.