Crypto Caselaw Minute #23–2/14/2019
Adequate plaintiffs, accurate promises, and judicial reconsideration: this week’s CCM covers a new lawsuit involving a payment dispute with a self-styled ICO advisor who made big promises, arguments over class action plaintiff adequacy in the Tezos litigation, and a judge revisiting a prior order in an SEC enforcement action that initially went the defendants’ way. [As always, Rosario summaries are “NMR” and Palley summaries are “SDP”]
Disclaimer: These summaries are provided for educational purposes only by Nelson Rosario [twitter: @nelsonmrosario] and Stephen Palley [twitter: @stephendpalley]. 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. (Picture credit: https://pixabay.com/en/purse-handbag-brown-country-lane-407176/; CC0 Creative Commons).
In Re Tezos Securities Litigation, 17-cv-06779-RS, N.D.Cal., Doc. # 201, 2/7/19 (“Defendants’ Arthur Breitman, Kathleen Breitman, and Dynamic Ledger Solutions. Inc.’s Response to Plaintiffs’ Motion to Substitute New Lead Plaintiff“) [SDP]
Class action litigation may seem complicated but like a lot of law it boils down to certain common-sense principles. One of the basic ideas behind this whole structure is that it’s more efficient to have one or a handful of people litigate claims on behalf of a big group of people than have thousands of people file separate lawsuits. There’s a flip side, though: you have to make sure that you choose the right class representative (and lawyers) to adequately represent the interests of the class.
Lawyers for Arthur and Kathleen Breitman and Dynamic Ledger Solutions, Inc. (“the Tezos defendants”) argue in their most recent filing in the Tezos consolidated class action that determining who adequacy is up to the Court in securities class actions, under a federal law called the Private Securities Litigation Reform Act (“PSLRA”).
They argue that while the previously selected lead plaintiff, Arman Anvari, is a demonstrable no-goodnick, lead counsel’s attempt to replace him with a new “hand-picked client” shouldn’t be allowed. Instead, they want any proposed new lead plaintiff to be approved by the Court, to file their own new lawsuit and give the DLS defendants a chance to move to dismiss. This would, of course, stay any briefing or decision on the Motion for Class Certification filed on January 10, for which a hearing was set of July 31, 2019.
A new Complaint and Motion to Dismiss would give the DLS defendants a couple of things — first, it would buy them time. Spitballing a bit, this would push class cert briefing and arguments down the road at least another six months. Second, it would give the defendants the opportunity to potentially do more discovery and reopen arguments about whether the plaintiff had “actual notice” of the contribution terms or was in the U.S. at the time he made his contribution/investment:
“regardless of who is appointed to serve as the new lead plaintiff, DLS Defendants request that the Court order the filing of a new complaint and provide DLS Defendants with an opportunity to move to dismiss. To facilitate a swift resolution of any motion to dismiss, the lead plaintiff should be required to plead facts regarding their knowledge of the Contribution Terms, and explain their residency and their location at the time they contributed to the fundraiser.”
An interesting feature of the motion is that it contains an extended discussion that alleges that Anvari wrote things that were “racist, homophobic, and anti-Semitic, some of them even directed at those involved in the Tezos Project and other Defendants.” Whether or not this is true — and I am sure that the Defendants’ counsel believes it is, or wouldn’t make the argument — doesn’t really matter, of course, if Anvari is no longer going to be lead plaintiff. It’s also irrelevant to the question of whether the so-called “contribution event” was an unregistered securities offering. So … why point this out? We have to speculate a little bit, but perhaps they think it doesn’t reflect well on counsel to propose a class representative and then withdraw him because of this sort of information. In other words, maybe it’s a credibility argument. As a rhetorical matter, it also deflects attention away from the defendants own alleged unlawful actions.
Another observation, more about tactics, is that you are often better off in litigation if your adversaries are bickering amongst themselves. Some of that is happening here too, as other law firms propose their own plaintiffs and offer themselves as class counsel. It’s usually a plaintiff who benefits from defendants fighting. In class action litigation, as in this case, it can often be the opposite. Your adversaries fight amongst themselves, everything slows down.
Finally, and unrelated to these musings about tactics — one last interesting tidbit in the briefing is the fact that there was apparently a day long mediation, which failed.
As of the date of this blog post, we don’t have a response from Anvari’s counsel. I imagine they will have something to say, and if so perhaps we’ll cover it here. The takeaway, though — the Tezos litigation may be slowed down a tetch because of plaintiff problems, depending on how the Court sees things. We don’t seem any closer to class certification, or a ruling from this Court on whether Tezzies or are not securities. That may not come for a while.
SEC v. Blockvest, S.D. Cal., 8CV2287-GPB(BLM), February 14, 2019, “Order Granting Plaintiff’s Motion for Partial Reconsideration” [SDP]
Link to opinion: https://www.scribd.com/document/399674281/Blockvest-Redux
It ain’t over till the curtain falls — this is true on Broadway and in litigation. This case is a, um, case in point. The SEC had a bad day in enforcement litigation back in November, 2018, when a federal judgement in California declined to enter a requested preliminary injunction, finding that there were fact questions at issue as to whether or not the token at issue was a security under the Howey test. [For more on this earlier opinion, see https://medium.com/crypto-caselaw-minute/crypto-caselaw-minute-12-11-29-2018-b9c4308ee8c]. Today, the same judge reconsidered its prior order and granted SEC’s Motion for Partial Reconsideration.
You can read a summary of the case in our prior post, but here’s some quick context: the SEC sued defendants alleging that they were offering and selling unregistered securities in the form of something called BLV tokens. Defendants claimed that their ICO had been approved by the SEC, CFTC and National Futures Association, and had their logos on their site. They also made up an agency called the “BEC” and put that on their site for good measure.
While Federal Judges usually don’t change their mind, you can ask, and that’s what the SEC did here. A motion for reconsideration is granted if there’s new evidence, the decision was clearly wrong/manifestly unjust, or the law changed. The Court said here that reconsideration made sense based on a showing of the Defendants’ prior securities violations and new evidence showing they might violate the law in the future. A(s we’ll see below, a judge might also change their mind if it looks like the Defendants’ own lawyers thing they are up to no good).
Under the three-pronged Howey test, the Court concluded that promotional materials on Defendants’ website, along with their whitepaper and social media accounts constituted an offer of unregistered securities, even if no sale was consummated.
First, the invitation to potential investors “to provide digital currency in return for BLV tokens satisfies the ‘investment of money’ prong of Howey. Second, the website promoted a “common enterprise” because it said that funds raised would be pooled and a profit-sharing formula would be used for payouts. Third, and finally, promotional materials said investors would be “passive” and would receive “passive income.” Thus, under Howey, the Court said that this is a security.
The Court also concluded that website and whitepaper materials made available to the general public were enough to show that there was an offer, even if performance wasn’t necessarily possible. In short, this was, per the Court, enough to demonstrate a “prima facie” (on its face) violation of securities law — an offer to sell unregistered securities.
Defendants argued that, even if this were all true, an injunction wasn’t necessary because it concluded it was unlikely the wrong would be repeated because Defendant had hired counsel, admitted that mistakes had been made, and promised not to do an ICO. The Court disagreed. It questioned Defendants’ creation of a fake agency (“the BEC”) used to mark the token on their website and, further, noted that Defendants’ lawyers had moved to withdraw from the case because they didn’t like things their clients wanted them to file (Rule 11 concerns, to be precise).
Also, the Court said Defendants had apparently tried to file things electronically under the pretense that they were doing so as defense counsel, but the filings were rejected. The Court said that it had “concerns about whether Defendants will resume their prior alleged fraudulent conduct.” It doesn’t take a whole lot of tea leave reading to conclude that the Court was particularly bothered by defense counsel’s departure, and the reasons for it. (If you liked the prior opinion maybe you might take the position that bad defendants make bad law).
Bottom line — this decision was heralded by some as an important SEC loss. Turns out … not so much.
Choice Trade Holdings, Inc. v. Thomas Renna, (Superior Court of NJ, Law Division, Middlesex County, February 4, 2019) [NMR]
Another CCM, and another lawsuit related to promises and expectations. A good rule of thumb is to be honest with people. Admit your faults, don’t promise what you can’t deliver. Everyone knows these things, but we’re all human and sometimes we don’t follow those rules. In the same vein, you really should try and avoid lying about people. You just might get sued over it, and that happens to be an interesting component to this case.
The plaintiffs, Choice Trade Holdings, and defendant, Thomas Renna, entered into an agreement on October 15, 2018. Choice Trade would pay Renna to help them promote a crypto fundraising effort they were undertaking. Allegedly, Renna made multiple representations to Choice Trade about the strength of his network, and his reach and ability to find potential investors on their behalf. Supposedly he said, and I quote, “getting your revenue to $30 million is not going to be an issue; that’s the easy part.” Naturally, Choice Trade was enthusiastic about the prospect of working with someone with access to so much capital who would help them with their fundraising event. They paid Renna a $30,000 signing bonus, and agreed to pay him $10,000 a month moving forward. Almost immediately things started to go wrong.
Allegedly, right after the agreement was signed the defendant told the plaintiffs that they were not ready to go through with their intended raise. Instead, as alleged in the complaint the defendant told them “you need to get your message right. Once you do that, you will raise the $700,000 in a few days. It’s not a lot of money.” The complaint continues “having said that, defendant claimed that he would ‘ work on the message’ . Defendant claimed that he was working 18-hour days, seven days a week. Despite this, defendant produced few results.”
Over the next couple of months the plaintiffs asked for deliverables and updates, and the defendant’s responses were unsatisfactory to the plaintiffs. On January 10, the plaintiffs sent a letter terminating their relationship with the defendant, that is when things get weird.
Up to this point this case looked like a lot of other lawsuits we cover at the CCM. Blockchain consultant promises the world, client is disappointed, and well, maybe there’s some fraud or something. Here, after their business relationship ended Renna felt that he was still owed $10,000 dollars and allegedly thought it would be a good idea to go and trash the plaintiff’s company on a blog post. This blog post included information that was not true about the plaintiffs, and in fact the defendant had agreed in his contract to not even discuss the plaintiff in any way whatsoever online. As the complaint states:
“Defendant’s posting of the “Smoke and Mirrors” blog was a violation of the provisions of the parties’ agreement that “Renna …. has no authority whatsoever … to … use the name of Company” and “Renna shall not publish or use any advertisement, including information on Web sites … …… regarding Company or securities offered through the Company”.
You can’t just go and do that, because putting out false information that harms someone’s reputation is defamation, and yet, here we are. Plus, people tend to notice that kind of thing and respond accordingly.
As if the online postings were not bad enough, Renna also allegedly sent messages to the plaintiffs claiming that he had contacted federal authorities, the IRS and SEC, for example, who were very interested in investigating them. I mean, what? If these allegations are true the defendant will quickly learn that sometimes talk is not in fact cheap.
