Jonathan Meer

In the following guest post, Jonathan Meer answers the question of how the crypto asset meltdown has translated in to D&O claims. Jonathan is a Partner in the Wilson Elser law firm’s New York office. I would like to thank Jonathan for allowing me to publish his article as a guest post on this site. I welcome guest post submissions from responsible authors on topics of interest to the blog’s readers. Please contact me directly if you would like to submit a guest post. Here is Jonathan’s article.


The instability of the crypto industry was on display as the evolving digital asset market led to a record number of enforcement actions by the SEC and state regulators in 2022. In addition, there have been roughly 200 to 300 crypto-related lawsuits from 2020 to 2022, which included actions against cryptocurrency issuers, exchanges and miners. The decreased value of most cryptocurrencies from a year ago has likely fueled this litigation. The second half of 2022 was highlighted by the collapse of crypto firm FTX. The number of lawsuits, including criminal and regulatory actions, naming FTX’s CEO Samuel Bankman-Fried as a defendant grew to at least seven as of mid-December 2022.

The negative swing of crypto has impacted more directors and officers (D&Os) than just those directly in the digital asset industry. This included those D&Os who made decisions to invest in certain cryptocurrency that did not perform as expected, as well as those D&Os in technology companies supporting the crypto industry. Examining the crypto-related lawsuits against the D&Os who are not the currency issuers, exchanges and miners demonstrates that the growing risk of exposure to this industry is wider than some think.

Litigation on Failed Crypto Investments

While the collapse of FTX and the ongoing civil, regulatory and criminal matters involving its CEO, as well as its celebrity spokespeople, will likely remain in the spotlight for the immediate future, there are two related lawsuits against the D&Os of a non-FTX company – Zuleta v. Silvergate Capital, filed on December 1, 2022, and Gonzalez v. Silvergate Bank, filed on December 12, 2022 – in the U.S. District Court, Southern District of California that warrant attention. Both cases, designated by the court as related, allege that Silvergate, its CEO Alan Lane and other D&Os at Silvergate are liable for fraud and unjust enrichment for permitting FTX to direct customer deposits to Alameda Research, a hedge fund that is a wholly owned separate entity of FTX’s former CEO Bankman-Fried.

The plaintiff class of FTX customers assert that had “Silvergate and the individual defendants complied with their KYC [Know-Your-Customer], AML [Anti–Money Laundering] and due diligence obligations, they would have known that numerous transactions sent to the Alameda Research account were not intended to go to the hedge fund, but were intended for deposit to FTX.” It was further claimed that in “making omissions of material facts, Silvergate and each of the individual Defendants intended to induce, and did induce Plaintiffs and other Class Members into funding and using the FTX exchange platforms, where their funds and assets became part of the fraud.” Both of these cases are at their early stages, with responses from the defendants not due until mid-February 2023.

Another lawsuit involving failed crypto investment is Fir Tree Value Master Fund LP v. Grayscale Investments, LLC, filed in Delaware Chancery Court on December 6, 2022. The plaintiffs in this complaint are requesting information regarding their Bitcoin investment, with concerns about potential mismanagement and conflicts of interest. It is claimed that Grayscale Bitcoin Trust was to provide institutional and accredited individual investors “with exposure to Bitcoin without the challenges and risks of trading and holding Bitcoin directly,” but that “the Trust has flagrantly disregarded its purpose and utterly failed to achieve its stated objectives.” It is asserted that Grayscale “prohibits investors from redeeming their Shares,” not allowing the investors to do something as the “Trust Share price has collapsed by 80% within the past year alone” with the decline of Bitcoin, while still collecting management fees.

Further, it is claimed that “Grayscale’s Board of Directors, which is ultimately responsible for all business and investment decisions for the Trust, consists of three conflicted insiders.” It also is alleged that “[despite] these substantial conflicts of interest,” Grayscale has not “established formal procedures to resolve all potential conflicts of interest,” which leaves “Plaintiffs and other Shareholders dependent on Grayscale to act in good faith without independent checks and balances.” The causes of action include breach of the trust agreement and requests and inspection of books and records under Delaware law. This case, too, is in its early stages, with the defendants filing their answer on January 6, 2023.

The lawsuits against Silvergate and Grayscale reflect some of the dangers for D&Os related to digital currency investment. The D&O fiduciary obligation and claims of breach of that duty are now being applied to cryptocurrency investment. With the volatility of the cryptocurrency market likely to persist for the time being, D&Os should be aware of the risks regarding such investments.

Litigation Involving the Maintenance of Crypto

The collapse of FTX and the recent volatility of digital currency was not the beginning of lawsuits against D&Os involved peripherally in this field. New Oriental Enter., PTE v. Mission Critical Sols. LLC, currently pending in U.S. District Court, Southern District of New York, involves an action against defendants Mission Critical Solutions LLC (MCS) and Transac-Trade and its owner Mark-Anthony Phillips for breach of contract, unjust enrichment and rescission regarding a dispute as to whether or not the individual defendant was a cryptocurrency broker and whether any Bitcoin in the amount of $800,000 was ever purchased and maintained in an e-wallet pursuant to the parties’ agreement. It is claimed that the “Defendants breached the contract in having failed and/or refused to deliver the Bitcoin to Plaintiff.” The Second Amended Complaint against Phillips, which was filed on April 22, 2022, is currently subject to another motion to dismiss after the previous allegations against him were dismissed as insufficient.

Also pending is the class action Sarcuni v. bZx DAO, initially filed on May 2, 2022, in the U.S. District Court, Southern District of California. This action for negligence against the defendants and their managers, Tom Bean and Kyle Kistner, claims that they breached their duty in allowing a malicious cyberattack that caused the loss of funds in cryptocurrency that were on deposit. It is specifically alleged that the “bZx protocol and its partners owed Plaintiffs a duty to maintain the security of the funds deposited using the bZx protocol, including but not limited to putting in place procedures such that a phishing attack on a single developer would not result in a multimillion-dollar theft; it breached that duty; and Defendants’ actions in breaching their duty were the proximate and but-for cause of an injury – namely, the loss of funds deposited with the bZx protocol.” In response with their motion to dismiss, the defendants, including the individuals, have asserted that they “had nothing to do with this crime, aside from being victimized by it themselves.” They also have asserted that “Bean and Kistner did anything but act within the scope of their employment, making any corporate-veil piercing inappropriate.” This motion to dismiss also remains pending.

The D&Os in these matters are subject to scrutiny regarding gaining and maintaining the cryptocurrency. Whether these individuals owe a fiduciary duty at all to the plaintiffs is the focus of these litigations. These issues of whether a fiduciary duty is owed to a third party are not unique to litigations involving digital currency, but are just another example of D&Os being named as defendants in litigations.

Litigation against Crypto-Related Business

With the potential boom and bust for many in the crypto industry, legal exposure is not limited to those that handle crypto investments but extends to companies that service the industry. Examples of such exposure include the various litigations against NVIDIA, a technology company that developed graphic processing units and other related software used for cryptocurrency mining.

The In re NVIDIA Corporation Securities Litigation, filed in the U.S. District Court, Northern District of California, alleged that the corporation’s D&Os breached their fiduciary duties and violated the various provisions of the Securities Exchange Act of 1934 by making “false and misleading statements indicating that the Company could withstand the volatility of the cryptocurrency market, specifically through their computer gaming customer demand.” The court in its March 2, 2021, order granted the defendants’ motion to dismiss without leave to amend, finding that the individual defendants’ statements were insufficient to be construed as a misleading statement and lacked scienter.

Around that same time – on February 10, 2020 – the action regarding City of Westland Police & Fire Ret. Sys. v. NVIDIA Corp. was initially filed in the Delaware Court of Chancery seeking an inspection of certain books and records of NVIDIA. The plaintiffs claimed that “certain NVIDIA executives knowingly made false or misleading statements during Company earnings calls that artificially inflated NVIDIA’s stock price, and then those same executives sold their stock at inflated prices.” The Delaware Supreme Court on July 19, 2022, affirmed the lower court’s decision allowing the shareholders to inspect the corporate books and records. In that decision, the court allowed for the shareholders to use “reliable” hearsay as a basis for their demand on the company, but also held that the company must be given an opportunity to rebut that hearsay evidence.

While theses litigations against NVIDIA were dismissed, on May 6, 2022, the SEC announced a $5.5 million settlement with NVIDIA for inadequate disclosures concerning the impact of cryptocurrency mining on the company’s gaming business. The SEC alleged that in 2018, NVIDIA failed to disclose that cryptocurrency mining was a “significant element” of its revenue growth from its chips designed for gaming. The SEC argued that the company’s decision to withhold information would have “clearly pointed to cryptocurrency mining as the driving force behind the surge in gaming revenue.”

The various forms of the litigation involving NVIDIA, including the actions that contained specific assertions against the company’s D&Os, reflect the ongoing exposure that corporate leaders may face when performance or stock prices are affected by the volatility of the digital currency market. NVIDIA is not a currency miner or an exchange, but its D&Os still were subject to litigation related to the crypto market downturn. The litigations with NVIDIA did not focus on market volatility in 2022, but rather market issues from more than five years ago in 2017. Thus, corporations that are servicing the cryptocurrency industry now and are experiencing a decline due to recent market volatility may find their D&Os subject to similar litigations.

What Will Happen in 2023?

The epic collapse of FTX and the litigations against its former CEO Bankman-Fried contribute to the flashy news emphasizing the changing nature of the digital currency market – but exchanges, currency issuers and miners are not the whole picture of this industry. There are many other companies that are not as directly involved in the crypto industry that have felt the impact of the recent volatility and have seen their D&Os named as defendants in litigations. This arguably has led to the greater importance of D&O insurance overall, which may provide coverage for third-party claims made against corporate officers and directors for wrongful acts while acting in such capacity.

As noted above, the claims against the D&Os related to crypto can be broad, such as breach of duty, a negligent act or error, or a misstatement, misleading statement or omission by such person. The dramatic growth of digital currency in the past decade reflects that there may be a place for it in society, but its overall scope and its potential to overlap into various different businesses are yet to be determined. The above-referenced litigations may reflect the “tip of the iceberg” of D&O exposure when the crypto market takes a negative turn.

However, the issues facing D&Os when they facilitate, invest in or service cryptocurrency are not atypical of D&Os’ liability unrelated to digital currency; it is just exposure coming from a new place. The digital asset market will likely have these ups and downs as it becomes more established, and the recent litigations are reflecting current growing pains of an industry that will likely remain part of our lives in some capacity for years to come.