Here at The D&O Diary, we make it our business to watch securities class action lawsuit filings as they come in, to keep an eye on filing trends as they develop. For example, recently we have been looking for coronavirus-related securities class action lawsuits. But while we were scanning the horizon for COVID-19 suits, something else unexpectedly materialized – all of the sudden, on April 3, 2020, a great big pile of cryptocurrency-related securities class action lawsuits were filed in the Southern District of New York. The filing of eleven total cryptocurrency-related securities suits in a single day is really unprecedented in my experience.


The filings were detailed in an April 6, 2020 post by Leo Cho on the Stanford Law School Securities Class Action Clearinghouse website (here), as well as in April 6, 2020 Law 360 story entitled “Investors Accuse Crypto Firms of Illicit Token Sales” (here, subscription required).


The lawsuits, all of which were filed in the Southern District of New York, target four crypto-asset exchanges and seven crypto-token issuers. The four crypto-asset exchanges are: Bianace (complaint here); Bibox (complaint here); KuCoin (complaint here); and HDR Global Trading, Ltd., the operator of BitMEX (complaint here). The seven crypto-token issuers are: Tron Foundation (complaint here); (complaint here); BProtocol Foundation (complaint here); Civic Technologies, Inc. (complaint here); KayDex Pte Ltd. (complaint here); Quantstamp, Inc. (complaint here); and Status Research & Development GmbH (complaint here).


In addition to the defendant companies, each of the complaints targets certain directors and officers of each of the defendant companies. All of the lawsuits were filed by the same two law firms, Selendy & Gay PLLC and Roche Cyrulnik Freedman LLP. Each of the lawsuits is filed on behalf of one or two individual named plaintiffs drawn from among a group of four investors: Alexander Clifford (named plaintiff in four of the eleven lawsuits) Eric Lee (one lawsuit); Chase Williams (six lawsuits); and William Zhang (four lawsuits).


Each of the lawsuits relates to separate defendant companies (and related entities), and each of the lawsuits contains distinctive allegations. However, all of the lawsuits contain certain features in common. Among other things, the lawsuits contain allegations based on Sections 5 and 12(a)(1) of the Securities Act of 1933 that the defendants engaged in the sale of unregistered securities.


The complaints against the crypto-asset exchanges also contain allegations that each of the defendant organizations conducted business as an unregistered broker-dealer in violation of Sections 15(a)(1) and 29(b) of the Securities and Exchange Act of 1934.


The complaints against the crypto-token issuers contain allegations that the defendant organizations violated various state blue sky laws. The complaint against HDR Global Trading Ltd. also contains allegations that the organization violated the Commodities Exchange Act.


The various lawsuits essentially allege that the defendant companies sought to exploit the opportunities available for initial coin offerings in 2017 and 2018, before the SEC’s April 2019 guidance on cryptocurrencies and crypto tokens. Several of the complaints refer to the SEC’s September 29, 2019 action in which it levied a $24 million civil penalty against Block.One for conducting an unregistered Initial Coin Offering between June 2017 and June 2018.


The complaints essentially allege that the various defendant companies promoted their tokens or trading exchanges while providing investors with only limited information in “whitepapers” listed on the firms’ websites. The whitepapers often omitted critical information such as risk factors associated with the assets and even what the defendant organizations intended to do with the proceeds of the initial asset offerings. Many of the whitepapers affirmatively denied that the digital assets were securities within the meaning of the applicable law. The complaints allege that the defendant companies misled investors about the promises that these assets offering and the risks involved, leaving investors with losses after the initial trading frenzy subsided.


The Law 360 article to which I linked above quotes Philippe Selendy of the Selendy & Gay law firm as saying that “The crypto-asset market has explore in the last few years with ICOs that make great promises but deny investors critical information on the securities sold. The lawsuits we filed seek to restore integrity and transparency to these new financial markets.”


All of the defendant companies are alleged to have engaged in the trading of what are in effect virtual assets; the virtual aspect of the various companies’ operations makes the question of where these companies are located an interesting question. However, several of the companies are alleged to have been organized under the laws of or even to be physically located in jurisdictions outside the United States.


For example, defendants Tron Foundation, KuCoin and KayDex are alleged to be based in or organized under the laws of Singapore; defendants Status Research and BProtocol Foundation are alleged to be based in or organized under the laws of Switzerland; Binance is alleged to be based in Malta; HDR Global Trading is alleged to be based in or organized under the laws of Seychelles; Block.One is alleged to based in or organized under the laws of the Cayman Islands; and Bibox is alleged to be based in or organized under the laws of Estonia.


Before the arrival in a single day of this wave of crypto-currency related lawsuits, I had been speculating that the number of securities class action lawsuit filings this year might actually dip relative to the most recent years. I had been thinking that the total numbers might slip as a result of the market turbulence, which has at least for now has significantly reduced M&A, IPO, and other financial transaction activity of the kind that often contributes to securities suit filings. Of course, I had also been wondering whether a rise in coronavirus-related suits might offset any decline in suits caused by the reduction in the number of financial transactions. However, the arrival of this slug of crypto-related securities suits by itself could significantly offset a substantial part of any securities suit filing decline resulting from the reduction in the number of financial transactions.


Just to check in on where we stand in terms of number of securities suit filings YTD compared to last year’s record levels, as of April 7, 2019, there were exactly 100 securities suit filings. Unofficially, through April 7, 2020, and taking the eleven new cryptocurrency lawsuits into account, there have been 115 securities class action lawsuit filings this year. In other words, at least to this point in the year, we are ahead of last year’s record pace, even without taking the eleven new cryptocurrency-related lawsuits into account.


One final statistical note about the new cryptocurrency-related lawsuits. Leo Cho reports on the Stanford Law School Securities Class Action Clearinghouse website that with the recent filing of these eleven lawsuits, the total number of cryptocurrency-related lawsuit filings over the period 2018 to the present now stands at 33. There were only three cryptocurrency-relates suit filings in 2019, the remainder were all filed in 2018.


The bottom line is that it is always worth keeping an eye out for what is happening because even midst of a global pandemic, there are still other interesting things going on.


More About the Delaware Supreme Court’s Landmark Decision on Federal Forum Provisions: As I detailed in a post at the time, on March 19, 2020, the Delaware Supreme Court held in the Sciabaccuchi decision that provisions in company’s articles of incorporation designating a federal court forum for liability actions under the ’33 Act are facially valid.


In an interesting April 6, 2020 post on the Harvard Law School Forum on Corporate Governance entitled “Federal Forum Provision Possible Impact on D&O Insurance” (here), Boris Feldman of the Wilson Sonsini law firm take a detailed look at the Delaware Supreme Court’s decision and analyzes the decision’s possible D&O insurance implications. Boris makes a number of interesting points and his article is well worth a read.