In the recent Advisen quarterly claims webinar, when asked to make a claim prediction for 2018, I said that I thought we would see more cryptocurrency-related regulatory action, enforcement action, and litigation this year. Some might say I was not really going out on a limb with this prediction. After all, earlier this week, Jay Clayton, the Chair of the SEC, and J. Christopher Giancarlo, the head of the CFTC, took to the editorial pages of the Wall Street Journal to make the point that their respective agencies are closely monitoring cryptocurrency activities and that the agencies will take action when warranted. That same day, the CFTC announced its third fraud enforcement action in a week.
My prediction that there would be cryptocurrency-related litigation activity in 2018 arguably was not a stretch, either. As I have previously noted, in the final weeks of 2017, there was a flurry of cryptocurrency and initial coin offering (ICO) securities litigation activity as well. There is a pretty good likelihood that we will see more of this kind of litigation this year.
As if to prove my point, on January 24, 2018, plaintiffs filed yet another cytptocurrency-related lawsuit in the Southern District of Florida. The complaint, which can be found here, was filed on behalf of a class of persons who invested in cryptocurrencies with BitConnnect, a U.K. company that promised traders outsized-returns of up to 40% per month and minimum 1% gains on a daily basis. The company and its affiliates relied on a Ponzi-like scheme to recruit additional investors and to pump promised returns. At its peak, the company had a market cap of over $2 billion. However, when the company shut down operations on January 17, 2018, investors experienced a decline of over 90% in their holdings.
The investors’ complaint is written in a rather flamboyant style (among things, the complaint quotes a Broadway show tune in its opening paragraph). The complaint asserts several substantive claims, including their allegations that the defendants sold unregistered securities, including BitConnect securities, in violation of Section 5 of the Securities Act of 1933. The complaint also alleges fraud in the purchase or sale of the securities in violation of Section 17 of the Securities Act. The complaint also alleges on behalf of a subclass of Florida investors allegations that the defendants violated the equivalent provisions of the Florida securities laws. The complaint also asserts claims for alleged common law torts, including fraud, misrepresentation and conspiracy.
In a sense, it comes as no surprise that BitConnect has drawn a lawsuit. As I noted in an earlier post, the company had already attracted an enforcement action from Texas securities regulators. The company’s high profile collapse on January 17 drew media attention; many of the media reports repeated allegations that the company had been conducting a Ponzi-like scheme.
BitConnect surely will not be the last cryptocurrency company to become involved in securities litigation. The one thing that can be said for the recent enforcement and litigation activity is that as these various proceedings arise, the characteristics of the companies that are attracting scrutiny and drawing lawsuits are becoming clearer. Clearly, as the BitConnect example shows, cryptocurrency companies that promise outsided returns and that employ questionable sales techniques are going to attract attention.
It will be interesting to see if the recent flurry of regulatory and enforcement action changes behavior. Will the regulators succeed in getting reining some of the excesses in the marketplace? Will cryptocurrency sponsors draw a more careful regulatory line? These are some of the other issues to watch in 2018, beyond just monitoring my prediction about increased numbers of enforcement and litigation actions in 2018.