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Lead Plaintiff in Blockchain Class Action Found Not Representative

The United States District Court for the Southern District of New York recently dismissed a proposed settlement of a securities class action lawsuit involving digital token purchasers.Judge Louis A. Kaplan Williams vs Brock One Federal securities laws do not appear to apply equally to all class members’ token purchases, and the lead plaintiff claims that his purchases were subject to (or were covered by) securities laws in a similar proportion to other class members. Member’s purchase that he or she has not provided evidence that the Member was outside the

of Williams The ruling highlights the complexities of applying the Supreme Court’s transaction test to determine the applicability of securities laws to blockchain transactions. The complexity of these facts can add to the difficulty of filing or settling securities law class action lawsuits involving classes of digital coin purchasers.

legal background

For decades until the Supreme Court ruled in 2010, Morrison v National Australia Bankunder some versions of the “act or effect” test, courts have ruled that a securities plaintiff may make a claim under federal securities law regardless of where the securities transaction took place or the plaintiff’s domicile or nationality. The test examined whether it was a serious misconduct action In connection with a non-U.S. securities transaction, whether it occurred in the U.S. or whether fraudulent activity outside the U.S. resulted in material harm; effect For the US market or investors.

In 2010, the Supreme Court repealed the “act or effect” test and introduced a new “transaction” test for determining the scope of federal securities law. Morrison It held that the Securities Act only applies to misrepresentations or omissions alleged to have been made “in connection with the purchase or sale of.” [i] securities listed on an American stock exchange; and [ii] Purchase or sale of other securities in the United States. Most of the lawsuits that followed involved his second prong regarding trading in unlisted securities. In 2012, in its widely adopted ruling, the Second Circuit Court Absolute Activist Value Master Fund Ltd. vs. Ficeto Trading in unlisted securities is “domestic if irrevocable liability arises or ownership transfers within the United States.”

factual background

of Williams Plaintiffs asserted federal securities law claims against defendants in connection with Block.one’s initial coin offering. Plaintiffs allege that Block.one’s tokens are securities and that Defendant violated securities laws by not registering the securities with the SEC and generally making false or misleading statements. Defendants argued that the tokens were not securities and were intended to prevent direct purchase by U.S. investors (although the court said “the ban was easily circumvented”).

The parties reached a proposed settlement while defendants’ motions to dismiss were pending.The settlement covered all purchasers of Block.one’s tokens during the class and provided a shared cash payment proportionately among all Class Members, regardless of whether federal securities laws apply to individual Class Members’ token purchases.

The Court has preliminarily approved the proposed settlement, but after receiving further briefings, it has determined that the percentage of major plaintiffs’ and class members’ token purchases are subject to federal securities laws and not subject to federal securities laws. Requested additional information Morrison When absolute activist. The court ultimately refused to approve the proposed settlement. This is because it concluded that the plaintiffs had not demonstrated that they could adequately represent the class in light of the question regarding the percentage of tokens purchased domestically. Law and Liability for Damages – Percentage and Comparison of Domestic Purchases by Absent Class Members.”

court decision

To determine whether the lead plaintiff could adequately represent the class, the court first had to consider which token purchases were or were not covered by securities law.

The easier part of that analysis is MorrisonThe first prong of a listed security. The court noted that the SEC has determined that at least one of the cryptocurrency exchanges (Poloniex) on which Block.one’s tokens were traded is a domestic stock exchange.Therefore, class members who have purchased tokens “on domestic exchanges such as Poloniex” Might be so You can recover damages under federal securities laws.

As always, more difficult questions are included Morrisonsecond prong of: token or not No Items purchased on a domestic stock exchange may be subject to securities laws as domestic transactions. That question turned to whether “irrevocable liability” between buyer and seller occurred in the United States. The court expressed its view that “a transaction-by-transaction approach appears appropriate for determining whether a domestic or foreign exchange blockchain transaction is domestic or foreign.” Morrison“Generally, ‘irrevocable liability’ occurs when a transaction is validated by at least one separate node of the blockchain. Therefore, the location of the node that validated the particular transaction in question is It should be controlled by the circuit. MorrisonThe second prong of interpreted as absolute activist

However, the Court found that the lead plaintiff “provided little or no information . could not determine whether it could be represented by

The court ruled that lead plaintiffs “may have an incentive to accept settlement proposals that are lower than the amount purchased by absent class members, given the proportion of investments made in domestic and foreign transactions.” I was worried about that. Mainly domestic transactions. Thus, the principal plaintiffs “may have had incentives to take larger ‘haircuts’ to the total settlement price than exist for class members with a higher proportion of domestic purchases. This potential Due to the intra-class dispute, the lead plaintiff was unable to adequately represent the class.


of Williams This decision raises at least two issues that may play out in future litigation. One is the issue of the applicability of securities laws to blockchain transactions, and the other is the construction of presumed classes for litigation or settlement purposes.

The court did not rule decisively on substantive securities law issues, but how Morrison When absolute activist It should be applied to blockchain transactions. The court criticized other decisions that focused on the buyer’s location at the time of the transaction. This is because, in Second Circuit case law, “the location of the purchaser does not determine the status of the transaction in a non-blockchain transaction.” The court also argued that blockchain transactions become irrevocable “only after being verified by a network of global ‘nodes’,” and that if that network of global nodes is “in the United States, in any other country.” Williams Court Opinion, “Each Blockchain Transaction Becomes Irrevocable” for buyers and sellers When a transaction has been cryptographically verified by a single node. Therefore, “the location of other nodes on the blockchain that may later accept transactions does not adequately affect when and where “irrevocable liability” between buyer and seller occurs. ” This debate may continue in future blockchain cases.

For procedural matters, Williams This decision emphasizes the importance of ensuring that the interests of the lead plaintiff are consistent with and not potentially in conflict with those of other class members. Perhaps the court’s concerns could have been mitigated if the class was represented by multiple major plaintiffs with vastly different proportions of token trading between the US and non-US. The court Petrobras The securities class action lawsuit, which also included domestic and non-US transactions, named three plaintiffs, each represented by a different attorney. Two of these plaintiffs, who purchased only in domestic transactions, did not object to equal treatment of class members who purchased in non-U.S. transactions. That acquiescence alleviated concerns about intra-class disputes between domestic and non-domestic purchasers.However Williams The court ruled that non-U.S. plaintiffs’ transactions Petrobras Only made up about 2% of the settler class. Deminimis amount. therefore, Petrobras Even if domestic and non-U.S. purchasers have separate attorneys, decisions may be distinguishable when non-U.S. transactions make up a significant proportion of the class. Furthermore, the court Williams case, whole class Petrobras The settlement “does not appear to have been reduced to account for the existence of foreign claims”. Gender issues continue to require careful attention and, depending on the facts, may require appropriate subclassification to protect the differing interests of all group members.

© 2022 Proscauer Rose LLP. National Law Review, Vol. XII, No. 228


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